Making sense of furlough
As we start to unpick and adapt to new ways of living and working, we thought it would be helpful this week to go into more detail about the government’s […]
As we start to unpick and adapt to new ways of living and working, we thought it would be helpful this week to go into more detail about the government’s job retention scheme – in particular looking at what accountants need to know to make it work for their organisation.
In these uncertain times, liquidity is essential. Wherever possible, businesses should focus on revenue streams that can be maintained, or whether new sources of revenue might be created. For example, some perfume and alcohol manufacturers have switched to producing hand sanitiser or the raw materials for producing hand sanitiser to address current shortage.
Expenditure should be minimised: staff costs are invariably a major expense and many businesses will have undertaken a thorough review of staffing levels for the ‘lockdown’ period. This is where the Coronavirus Job Retention Scheme (CJRS) comes to the rescue.
The Government has stressed that the scheme is open to businesses that “cannot maintain their current workforce because [their] operations have been severely affected by coronavirus”. The overriding objective is to avoid wide-scale redundancies.
The CJRS provides employers with a financial cushion – providing a subsidy of the lower of 80% of employee’s pay or £2,500 per month – to retain their workforce. This is on the basis that the relevant employees cease to work in the business for a temporary period – known as ‘furloughing’.
Designation and employee’s agreement
A wide range of employees (e.g. full/part time, agency employees, apprentices, and employees on ‘zero-hour’ contracts) are covered by the scheme. Furloughed employees must be on the payroll on or before 19 March 2020 and notified to HMRC on a RTI submission by that date – this is an important change from the original cut-off date of 28 February 2020.
Furthermore, employees that were working in the business on the original cut-off date of 28 February 2020 but were made redundant between then and before 19 March 2020, can also qualify, provided they are re-employed by the company. Contrastingly, those who started a new job after 19 March 2020 would not be eligible.
This scheme is now set to last until the end of June 2020 but the Government may extend it should circumstances require so.
Businesses must determine those employees selected for furloughing under the scheme. To be eligible, the relevant employees must be individually notified in writing, and employers must retain this notice for five years. Updated guidance now stipulates that employees must specifically agree that they are unable to work for the company during the furlough period.
Employees must be furloughed for a minimum of three consecutive weeks. To allow flexibility, they can be furloughed a number of times (subject to each period being at least three consecutive weeks). Therefore, some companies might wish to rotate their furloughing arrangements between different employee groups. Employees should receive a ‘notice’ letter every time they are placed on furlough.
It is an absolute requirement of the scheme that employees cannot do any work for the claimant business while they are furloughed, although it is feasible for furloughed employees to engage in training or volunteer work during their absence. Each employment is treated separately for the purposes of the scheme and it is permissible for employees to work for another employer (subject to the terms of their employment contracts etc.).
Employees that cannot work because of care responsibilities can be included in the scheme, where they are unable to work from home and would have otherwise been made redundant. Those on actual ‘sick leave’ or ‘self-isolating’ would be eligible for statutory sick pay (‘SSP’) instead (paid at the rate of £95.85 per week from 6 April 2020) but they can be furloughed on their return to work.
Employment law issues
In the vast majority of cases, furloughing (at a reduced pay rate) represents a change in the terms of employment contracts. Therefore, this would need to be negotiated with the relevant employees and require their agreement.
There is still no definitive guidance on the question of holiday entitlement. Businesses may be able to exercise their right to require employees to take holiday during their furlough period. According to recent ACAS guidance, where employees have agreed to take holiday on this basis, they must be paid their full pay. In such cases, the appropriate scheme subsidy can still be claimed and this period still counts as part of the minimum three-week furlough period. Employers would then need to supplement the ‘subsidy’ to provide full holiday pay.
Given the potential issues mentioned above, it is strongly advisable to seek appropriate advice from an employment lawyer.
Salaried company directors may also be furloughed, but they must cease working for the company for the relevant period (though they can still discharge reasonable legal duties without invalidating their CJRS grant entitlement). However, claims may not include dividends paid to them (which tends to be their main method of extracting cash from the company).
Basic mechanics of the scheme
To qualify under the CJRS, organisations must have a current UK bank account and have made a Real Time Information (‘RTI’) submission by 19 March 2020 (another important change from the original HMRC guidance). There are no further restrictions based around size or business sector.
Businesses must calculate each furloughed employee’s entitlement. The CJRS grant for each furloughed employee is 80% of their ‘normal’ salary or wages, ‘capped’ at £2,500 per month. While past overtime can be included in the figure for ‘normal’ salary/wages, it is not possible to include discretionary bonuses, tips and non-cash payments (i.e. benefits in kind). Similarly, benefits provided via a salary-sacrifice arrangement are excluded.
The full amount of the CJRS subsidy must be paid to the employees and directors. In addition, the CJRS grant covers relevant employer national insurance contributions (NICs) and the employers’ minimum automatic enrolment pension contributions on the reduced pay, where appropriate. Apprenticeship levy payments are not covered and must still be paid by the business.
Other computational aspects
Employees on variable pay can claim the higher of either the same month’s wage from 2019 or the average of monthly earnings from the 2019/20 tax year. For those employed for less than a year, an average monthly earnings figure is taken.
Under the scheme, the maximum monthly grant per employee would be around £2,803, as calculated below:
|Employer’s NIC – 13.8% x £1,768 (£2,500 less £732 ‘monthly’ secondary threshold)||243.98|
|Minimum employer auto-enrolment contribution – 3% x 1,980 (£2,500 – £520)||59.40|
All furlough payments are taxed (and subject to NICs) in the normal way. The CJRS grant is taxed as part of the business trading profits.
While employees are on furlough, there is no obligation to comply with the national minimum and living wage legislation – except where employees are undergoing training, when businesses must ensure the appropriate minimum wage is paid. Thus, if the CJRS grant does not cover this, the employer must arrange for a suitable ‘top-up’ wage.
Some businesses may decide to ‘top-up’ the employee’s pay above the 80% monthly salary limit or the £2,500 monthly cap, but bear in mind how this will affect the rest of your business.
Processing CJRS claims
The online system for uploading claims is now live, and it is expected that HMRC will begin to make payments from 30 April. The system will operate ‘round the clock’ and will have a queuing process when demand is high. Importantly, tax agents are able to make CJRS claims on behalf of their clients.
Scheme claims must be made using the online service. If the business has not registered for HMRC’s ‘PAYE Online for employers’ service, this should be done promptly as it can take 10 days to be activated.
Employers must calculate their own scheme claims for the relevant period. HMRC has indicated that the CJRS claim should be aligned to the actual payroll amounts when or before the payroll is run. Businesses must enter the following details to make the claim (which is made every three weeks):
- ePAYE reference number
- Number of employees being furloughed
- Start and end date for relevant claim period
- Total amount claimed
- Company bank account number and sort code
- Company contact name and telephone number
All claims are made on a self-certifying basis and HMRC reserves the right to subsequently audit the CJRS claims. It is therefore strongly recommended that businesses prepare a contemporaneous paper to document their furloughing arrangements and computations. This should include the business case for furloughing relevant employees/workforce groups as a result of Covid-19.
HMRC plans to build in appropriate verification checks as part of its processing procedure to ensure the validity of claims. Where abuse is found, HMRC will clawback the relevant scheme payments and, where appropriate, consider criminal action against fraudulent businesses.