Coronavirus update 5 – 2 April 2020
The Coronavirus Job Retention Scheme

GENERAL

This newsletter concentrates on the new Coronavirus Job Retention Scheme (CJRS), as a lot more detail was published last Thursday. We now have a far better idea of how this will work, although we do not yet have the actual mechanism to claim the grant in place.

I will say that this has been the most difficult newsletter to write so far! Hence, it has also taken longer to do. There is far more guidance on this scheme, but there are still a lot of unanswered questions. We are totally reliant on the published guidance from the government, as there is no legislation to refer back to. It is not even clear if any will be produced! And trying to write something that will answer all the questions is impossible – so if, after reading this, you are still not sure how to apply this scheme to your individual circumstances, please do ask.

Additionally, if you are to operate this scheme, you are almost certainly going to be involved with agreeing changes to contracts of employment. We cannot advise you on this area, so we strongly recommend that you take legal advice from a suitably qualified employment lawyer. We are more than happy to recommend someone suitable.

I mentioned in our last newsletter (on the self-employed scheme), that there is negligible support for those clients who operate through limited companies, where they just take a nominal salary, with the rest of their income taken in dividends. The only help provided to those individuals is the CJRS, unless they qualify for the grants that relate to premises which are subject to business rates.

For those clients, I would recommend you look at Universal Credit to see if you qualify. This is a state benefit, and nothing to do with tax, and accountants historically do not get involved with benefits. But I want to add to my knowledge on this, so I have added this to my list of research projects, and that will inspire yet another newsletter for the future! But if you want to look into this yourself, start here https://www.understandinguniversalcredit.gov.uk/coronavirus/ and the links through to Universal Credit are half way down the page.

WHAT IS THE CJRS?

In essence, the government want to enable employers to keep employees on their payroll, rather than making employees redundant. The government have therefore promised to pay the employer up to 80% of the employee’s gross pay (subject to a maximum limit of £2,500 per month) whilst that employee is off work – furlough is the new buzz word to describe this employment position.

The scheme is being introduced for an initial period of 3 months, running from 1 March to 31 May 2020. And whilst it was not actually announced until late on Friday 20 March, it is backdated for a limited class of employees – see below. The government have said that they will extend the scheme beyond 31 May if necessary.

And please note – it is a grant, not a loan. You do not need to repay it, as long as you claim the right amount, of course!

DO WE QUALIFY?

So these are the conditions:

1. The employer must have a PAYE scheme that was registered and active on 28 February 2020, and it must still be active.
2. The employer must be a UK organisation with employees, so that covers all businesses, charities, agencies (where workers are paid via PAYE) and public sector organisations.
3. The employees that you are furloughing must have been employed on 28 February.
4. The employees that you are furloughing must not work for you at all whilst they are furloughed.
5. To qualify for the grant, each employee must be furloughed continuously for at least three weeks. If they return to work, but are then re-furloughed, the three week clock has to be restarted.
6. If you made an employee redundant or put them on unpaid leave after 28 February, and wish to furlough them instead, then you can do so. These are the only circumstances where you can backdate furloughing to a date before the scheme was announced on 20 March.

A few comments on the rules:

• Point 1 and elsewhere: The guidance really does say 28th – that is not my typo; perhaps the poor civil servant who wrote this forgot that we are in a leap year!
• Point 2: From the definition above, it would seem that personal employers may not be covered – so if you employ any domestic staff or a nanny, you may not qualify. So this seems very harsh, particularly on nannies, who really cannot continue to work in many circumstances now. However, I do have some genuine doubts about this, as the guidance is contradictory. On the guidance for employers and businesses, it talks about “organisations” (but it is clear that the list above is not supposed to be exhaustive), but then on the guidance for employees it says “any UK employer”. Can an organisation be a parent? Very unclear, so this needs more guidance.
• Point 3: This is really bad for those employees who had been offered a job before 28 February, and possibly had resigned before that date too, but were not starting their new job until March. Equally it is bad news for employers – they cannot furlough them; the employee is new and will need training, but others cannot get within 2 metres of them; immediate redundancy may be the only solution. Very sad for anyone in that situation.
• Points 4 and 5: This is one of the main issues that clients are raising with us, particularly in connection with Directors, on which I comment further below. But as far as employees are concerned, you will need to be very careful to not accidentally cause an employee to work for you – the definition is that an employee must not be: making money for your employer providing services to your employer
  - The only exception to this point, is that the employee can undertake training or prepare for exams etc.
  - If the employee does do work for you within the first three weeks of furlough, then you cannot make a claim for that employee. If they work after the first three weeks, then that will bring the furlough period (and the employer’s claim) to an end. Some businesses are looking to split their workforce in two, and then do three weeks on, three weeks furloughed. This will be fine, but each group must remain off work for at least three weeks at a time, to enable the employer to claim the grant.
• • Point 6: If you are in this situation, speak to us! We will also be suggesting that you take legal advice as well.

WHAT CAN WE CLAIM?

Employers can claim:
- 80% of the normal gross pay for each employee furloughed, up to a maximum of £2,500 per month.
- In addition, the employer can claim an amount equal to the Employer’s National Insurance cost on the 80% gross pay figure (not 80% of the Employer’s NI on the full salary – that is more!)
- And also the employer can claim the minimum (3%) statutory auto-enrolment employer pension contributions that apply to the 80% gross pay figure, over and above the lower limit for qualifying earnings (£512 per month in March 2020, and then £520 per month from April 2020).
The guidance is silent on benefits in kind, so one must presume that you cannot recover any costs relating to benefits that are provided (e.g. a company car or medical insurance). Additionally, if you pay pension contributions in excess of the 3% minimum, you cannot claim the excess.

So, to take a simple example:
Jonny Walker earns £24,000 a year and was laid off by the pub that he worked for, after the government announced the closure of all pubs, restaurants etc. on Friday 20 March. His employer pays the standard auto-enrolment contributions of 3%. Jonny works 5 days a week, Wednesday to Sunday, and he and his employer agree that he should be furloughed immediately, and he will be paid 80% of his normal salary.

So, for April, the calculation is quite straightforward, and I have used the new 2020/21 rates here – 80% of Jonny’s salary is £1,600 per month. The employer’s NI claim will be £119.78 (13.8% of the 80% salary exceeding £732 – the new employer’s NI threshold) and the pension claim will be £32.40 (3% of the 80% salary exceeding £520). So a total of £1,752.18, which will exactly mirror the cost of employing Jonny.

For March it is rather more complicated as Jonny is furloughed from Saturday 21st, and he has therefore been furloughed for 7 days in March. The claim for March should then be roughly a third of the above figures, and will need to be calculated using the 2019/20 thresholds.

The start date may be different for each employee. Generally you should not backdate any claim, but given the newness of the scheme, and the fact that the detailed guidance was not published until last Thursday evening, we feel that it should be acceptable to backdate claims to the first day on which the employee did no work, and have continued not to work. If you laid them off, but then they came back for any time at all, the furlough period cannot start until they stopped work again.

WHO CAN WE CLAIM FOR?

The guidance states that you can claim for any employee who was on your payroll on 28 February. So, as mentioned above, this excludes anyone who started work for you on 29 February or later.

The employees can be on any type of contract, so that includes:
Full time employees
Part time employees
Employees on agency contracts (e.g. employed via umbrella companies), and
Employees on flexible or zero-hour contracts.

They do not have to have been paid in February, but they do have to have been on your payroll. So, for example, a seasonal worker may not have worked for you since last autumn, but as long as their employment was not ended (i.e. no P45 was issued), then they can still potentially qualify to be furloughed. But if a P45 was issued, then they are no longer on your payroll, and cannot be furloughed, even if they would normally have come back to work for you now. Another area where the rules seem harsh.

Other specific points:
a) If an employee is on unpaid leave, they cannot be furloughed, unless they were placed on unpaid leave after 28 February. Then they can be treated in the same way as employees who have been made redundant – see Point 6 above.
b) If an employee is due to take holiday when they are furloughed, then we think that they have to come off furlough to do so, and they will be entitled to full pay for the duration of the holiday. This may prematurely end the initial three week furlough period, meaning that nothing can be claimed. So it would probably be best to agree with the employee that they should defer their holiday and take it when they are not furloughed. There is nothing in the government’s published guidance on this, but I have seen it elsewhere in commentary from employment lawyers. If in doubt – take advice from an employment lawyer.
c) If an employee (whether due to coronavirus or any other reason) is on Statutory Sick Pay (SSP), they cannot be furloughed. Carry on paying them SSP. But once the period of sickness ends, then they can be furloughed.
d) However, if an employee is “shielding” in line with NHS instructions, then they can be furloughed, presumably with effect from the date that they started “shielding”. “Shielding” is the term applied to people who are required to enter a 12 week period of self-isolation, because they are in the high risk categories of people – mainly those over 70 and those with pre-existing health conditions. As an employer, we would advise you to obtain confirmation from your employee in writing that they are complying with NHS shielding advice.
e) If an employee is on maternity, paternity or parental leave, do take legal advice on what you can do. The guidance mentions employees in this category without categorically saying whether they can be furloughed! However the guidance does say “If you offer enhanced (earnings related) contractual pay to women on Maternity Leave, this is included as wage costs that you can claim through the scheme. The same principles apply where your employee qualifies for contractual adoption, paternity or shared parental pay.” So this rather implies that you can furlough people in these categories, but you can only claim 80% of any pay that exceeds the statutory payments. Many employers can reclaim the cost of statutory payments anyway, so will be better off carrying on as normal.
f) If an employee is pregnant, you can furlough them. BUT – Statutory Maternity Pay is calculated at 90% of “earnings” for the first six weeks, and then it falls to the statutory amount thereafter – which will be £151.20 per week from 6 April 2020. “Earnings” are calculated by reference to a pay period lasting 8 weeks up to the qualifying date, which is normally 15 weeks before the baby is due. But if that 8 week period includes a period during which the employee is furloughed, then the weekly average will be less than what it should have been. If this is likely, we strongly recommend that you take legal advice before you do anything!

And finally under this section – an employee who has two or more jobs can be furloughed from one job, but this does not prevent them continuing to work for the other employer(s). Likewise, if you are employed and self-employed, being furloughed from your PAYE job does not prevent you from continuing to run your own business.

TAX TREATMENT

Do remember that the salary that you pay is still taxable income for the employee. So you must deduct PAYE and National Insurance as normal, and you must also carry on deducting pension contributions in the same way as you did previously. Indeed, if you decide to carry on paying the employee their full salary, the calculations will not change.

As far as the employer is concerned, the total costs of employing the furloughed employee are still legitimate business costs, and are therefore fully tax deductible. But that does mean that any CJRS grant that you receive is taxable income – sorry!

STEPS TO TAKE TO IMPLEMENT FURLOUGHING UNDER THE CJRS

But do get the formalities completed now, if you have not already done so. So, I will make no apologies for repeating a lot of what I said in our third newsletter, as this is still valid advice. Furthermore it will mean that you have all the details relating to the scheme in one place. Bar the odd change of emphasis (e.g. “you can” or “must” do something, whereas previously I said that “you should be able to” do something), and the occasional addition, nothing else has changed.

So the procedure for furloughing employees is as follows:
1. Make sure you notify them in writing as soon as possible that you would like to furlough them.
2. Tell them the proposed effective date of them becoming a furloughed worker. In normal circumstances, that will probably be the date that you notify them.
3. However, if you closed your business in the last week or so, and the employees were then laid off (and have not worked since), then you should be able to justify backdating, but only as far back as 21 March – i.e. the day after the scheme was announced.
4. You can backdate furloughing if you made someone redundant after 28 February, but before the scheme was announced on 20 March, and you have now re-hired them.
5. You must give the employee the opportunity to agree with your proposals, especially if you are only planning to pay them the amount that you can reclaim under this scheme. Any variation in terms of employment must be agreed with the employee, otherwise you may face a claim against you for breach of contract. However, given that the alternative is probably redundancy, one would hope that employees will readily agree. This is really an area on which we would advise you to seek legal advice, and we are more than happy to recommend an employment lawyer to you.
6. If an employee says that they do not wish to be furloughed, or they will not accept a salary reduction, then you certainly should take immediate legal advice. You could end up with an unfair dismissal claim if you do not handle this properly.
7. When you have agreed that an employee is to be furloughed, do make sure you notify your payroll department or agent, and tell them the effective date. If we deal with your payroll, make sure you advise Nikki.
8. Also you will need to decide if you are reducing the employee’s salary straight away, and notify your payroll bureau accordingly. You are perfectly permitted to pay any amount from 80% to 100% of salary to a furloughed employee.
9. Although the mechanism to notify HMRC is not yet in place, when it is, claims are going to be made in respect of part of March salaries (that will already have been paid) so clearly it makes sense to furlough employees at the earliest opportunity, if that is what you have to do.

HOW DO I CALCULATE THE CLAIM AND WHAT MUST I PAY TO MY EMPLOYEES

The first golden rule is that you cannot pay your employees less than what you are claiming. There is nothing to stop you paying more, and we know of many clients who have paid March salaries as normal.

The second golden rule is that you cannot claim more than £2,500 per month per employee (plus the associated employer’s NI and pension contributions as mentioned above).

So bearing that in mind, you can claim the higher of:
i. The earnings in the same month last year, and
ii. The average monthly earnings in the 2019/20 tax year (but see comment below).

The guidance quite specifically states that “Bonuses, commissions and fees are not included as part of your monthly earnings.” So it seems that you must exclude these payments from the claim. That makes sense for something like a Christmas Bonus, but what about employees who mainly earn commission? Further thoughts on this shortly.

So we think that the calculation of average monthly earnings will be from April 2019 to February 2020, when you calculate any furlough pay for March.

Then, once we move into April, it will presumably be based on the average of the whole 2019/20 tax year. That might mean a small reduction in the average monthly pay, if the employee was furloughed in March, and you reduced their pay to 80%. This is not explicitly confirmed in the guidance, but it is our understanding as the guidance just says “in the 2019/20 tax year” - in the employer guidance at least.

But if your employee started after 5 April 2019, it will just be the average calculated from when they start.

So for specific categories of workers:
A. If your employee is on a regular salary, which does not change from one month to the next, then you just use their contractual salary, and this is pretty straightforward. So that would be the case for most employees, whether they work part time or full time.
B. If your employee is paid on an hourly basis, (under a zero-hour contract for example), or their salary varies (because of seasonal fluctuations perhaps), then use the rules above to determine the higher amount of qualifying pay. So seasonal workers may find that their earnings in the same month last year are higher than their average earnings.
C. If your employee is paid (or guaranteed) a basic salary (which must exceed the National Living Wage (NLW) or National Minimum Wage (NMW) as appropriate), but is actually paid more because they normally earn more in commission, then we think that you can only claim 80% of the basic salary. This is going to be a real problem for those with relatively low basic salaries. Employers can voluntarily top up the pay of these individuals, but many employers will not be able to afford to do so.
D. If your employee is not guaranteed a minimum salary, then you may be in breach of the NLW/NMW rules! Seek legal advice! But probably follow “C” above.
E. If you require your workers to undertake training while furloughed, make sure that they receive the NLW/NMW as appropriate, as the 20% reduction in pay may take them below the NLW/NMW thresholds.

One comment on these rules - Irritatingly, the language in the guidance to employers differs slightly to that used in the guidance for employees! So whilst the employer definition for the average earnings talks about the “2019/20 tax year”, the employee guidance uses the words “from the last year”. We’ve gone with the former, as otherwise the calculation in May will be different to the calculation in April, and we can’t believe that was the intention.

SO WHAT DOES THIS MEAN FOR DIRECTORS?

Directors are, by definition, employees. So if you receive a salary, and you can commit to not working for at least three weeks, then you probably can furlough yourself.

But remember your salary is just the amount reported through PAYE, and very often it will be relatively nominal – most commonly £719 per month, sometimes less, sometimes a bit more. So you can claim 80% of that, and also your company can top your income back up to the normal salary. But most company directors are also shareholders, and they really live on dividends. BUT DIVIDENDS ARE NOT SALARIES!!! So I am afraid that you cannot claim anything more than 80% of your salaries – sorry, again!

There is also a further issue: if the directors furlough themselves, who is now running the company? If there is more than one director, then furloughing the others is going to be justifiable, assuming they genuinely are not working. But for the remaining director, or for companies that have sole directors, can they furlough themselves? Here are our thoughts:

1. If the company undertakes any activity, then someone must be managing that activity. In normal circumstances, that would have to be a Director, as they are the only person with the requisite authority.
2. “Activity” is a quite a wide term, but I would suggest that any action undertaken to secure future work, or to prepare material that will be used in delivering future work, would be activity.
3. Furthermore, beware social media activity that is linked to the company – this needs to be mothballed.
4. However, if the only actions undertaken by a Director are just administrative – essentially just keeping the company alive – then I do not feel that would necessarily imply activity, at least as far as the company is concerned. So you can probably still correspond with us as your accountants, and you certainly must carry on doing the payroll and maintaining the books.
5. Furthermore, if you publicly state that the business is inactive at present due to coronavirus, then that would help to prove “inactivity”. So something on the front page of your website would be a good idea - and then make sure you keep a record of it. You could probably still leave your contact details as they are, but perhaps have a note to say that people should not expect a reply until the crisis has abated. Perhaps also set up an automatic reply to emails to say that the business is currently mothballed, or that they should not expect a reply until the business is able to be active again.
6. But do bear in mind that the government guidance is pretty clear about “work” – they say “You cannot undertake work for your employer while on furlough”. So there is an argument to say that undertaking the minimum administration is still “work”.

I think my conclusion is to say: if all of your “activity” is reactive, or is required by law, then that may give you justification to furlough all directors. If HMRC challenged that decision, at least you would have an argument in support of your action. But we cannot offer any guarantees – it would be at your risk.

However, what I can say with far more certainty is that if any activity is proactive, then the individual undertaking that activity should not be furloughed.

And finally on this topic, do remember that dividends can only be paid out of retained reserves, and should not be paid at all, if insufficient reserves exist. They are also paid out of post-tax profits, so make sure you retain sufficient cash to pay the corporation tax. If you pay dividends whilst the company is insolvent, and the company goes into liquidation, then the liquidator will require you to repay any excess dividends.

HOW DO I APPLY?

• You cannot do anything now – the government portal for claims should be open in late April.
• We would expect HMRC to contact all employers with further details of the scheme, and how they will apply. We know that some employers have already received an email outlining details of the scheme, but we think this was only sent to people who subscribe to their employer update service. If you haven’t had an email, it doesn’t mean that you cannot apply.
• When the scheme opens, you will be asked to complete an on-line application, and if we do your payroll, then we will be happy to do this for you. We hope that we will not need to charge a great deal to do this – we will confirm pricing nearer the time, but it will probably be calculated in the same way as we charge for payroll at present – a fixed fee per employer, plus an amount per furloughed employee.
• We understand that the employer will calculate the amount that is being claimed. So this will operate under the normal self-assessment rules: it is the employer’s responsibility to get the calculations right, and HMRC reserve the right to investigate any claim made later – how much later is unclear!
• Once the portal is open, you can make a claim every three weeks if you wish to. However it is going to make far more sense to make a monthly claim, and that is certainly what we will do for the payrolls that we manage. Furthermore, you should make the claim at the same time as you run your payroll, so for almost everyone, this will be monthly in any case.
• If you use a payroll bureau, do make sure that you know who is going to do what.

AND WHEN WILL I GET IT?

The government guidance says that the portal should be “up and running by the end of April”, so we would expect the first grants to be paid reasonably early in May. Unfortunately we have no idea whether they will start by just asking for March claims, and then pay those first, or whether March and April claims will be paid together. Thereafter it should be a monthly process until the scheme ends.

AND FINALLY

Do remember that furloughed employees are still employees! So they still have the same statutory rights concerning notice periods, disciplinary procedures, anti-discrimination rights and redundancy entitlements.

Hopefully, your furloughed employees will come back to work in the not too distant future. So keep them informed about what you are doing, and what your plans are. But do not ask them to do any work whilst they are furloughed.

Do also refer back to newsletter 4 for our thoughts on scams and frauds. This scheme is another opportunity for criminals to take advantage of people in these uncertain times. The only legitimate online applications will be routed through GOV.UK (https://www.gov.uk/). And if in doubt – do not click on any links, but contact us instead.

If you have any questions, please do email your regular contact or mail@busbys.co.uk. Again we thank you for your positive responses to these newsletters, and in this instance I thank you for reading this all the way to the end!