Latest update: The Government has today (29 May 2020) announced that employers have to help pay for furloughed workers by contributing towards their salaries on the Coronavirus Job Retention Scheme (CJRS).
From August, employers who are using CJRS will need to contribute to their furloughed workers’ salaries. This is in response to concerns about its spiralling cost and the expected impact on the UK’s growing public spending deficit. As well as contributing towards the salaries, employers will also need to contribute a percentage of their national insurance and pension contributions.
However, the first version of the CJRS will close to new entrants at the end of June. This does mean that combined with the three week minimum furlough period, 10 June is the last opportunity to include any employees who have continued to work in your claim; who have not been previously furloughed.
A summary of the scheme:
- will continue until end of October
- furloughed workers, across the UK and all sectors will continue to receive 80% of their current salary, up to £2,500
- from August, employers will need to contribute to their workers’ salaries, allowing furloughed workers to be able to return to work part-time with employers being asked to pay a percentage towards the salaries of their furloughed staff
On the final bullet, the Chancellor has said that the employer payments will substitute the contribution the government is currently making, ensuring that staff continue to receive 80% of their salary, up to £2,500 a month.
It will be interesting to see how the furlough pay will be calculated for the adjustment based on the employer contribution and payroll teams will be holding their breath in anticipation.
The government has also said they will explore ways through which furloughed workers who wish to do additional training or learn new skills are supported during this period. We await further details on this.
What it is and what will it cover?
The Coronavirus Job Retention Scheme is a government grant – to reimburse employers for 80% of furloughed workers wage costs, to a cap of £2,500 of gross pay per month.
Employers can choose to top-up pay, either for the unfunded 20% of pay or the amount above £2,500 for higher earners, but this will not be a formal requirement to obtain access to the scheme.
The scheme will be backdated to 1 March and was initially open for three months, which has now been extended to the end of June.
We have had a number of questions around deferring the Employment Allowance (the £4,000 that an employer can claim to offset against their employer’s NI each year via the payroll) until later in the year.
This would mean that employers claimed their CJRS grant for NI and then set off later in the year the Employment Allowance; in effect receiving a refund and then a set off for the same employer’s NI.
We do not see this as a tax planning opportunity. Although the employment allowance does allow for it to be claimed at any point in the year, we do not believe that by doing this it is within the spirit of the law and this is not the time to push boundaries. HMRC may consider it in the future as an abuse of the employment allowance and not sensible/ethical ‘tax planning’ advice.
All UK businesses are eligible (or in the Chancellor’s words “Any employer in the country – small or large, charitable or non-profit – will be eligible for the scheme.”)
The grant is available for both full time and part time employees, casual workers, office holders (including company directors), salaried members of Limited Liability Partnerships, agency workers (including umbrella companies) and limb (b) workers.
HMRC original guidance set the date as 28 February, for employees to be on the payroll for the grant to be available. This has now been updated by HMRC and the grant will now be available for those included on payroll on 19 March, but will not cover new hires taken on after this date. HMRC also confirmed that ‘by on the payroll’ means the employee was included on a Real Time Information (RTI) payroll submission on or before the 19 March.
If an employer furloughs an employee for business reasons while they are on sick leave, they can and the employee should no longer receive sick pay and would be classified as a furloughed employee, qualifying for the grant. Please note that when a sick employee is within the scheme , you can only reclaim expenditure through the grant, and not the SSP rebate scheme.
The guidance confirms that employees who fall within the vulnerable category and are required to undertake shielding are able to be furloughed. The guidance also confirms that those with caring responsibilities, including those looking after children, can also be furloughed.
The scheme is open to public sector employees, but the Government view is that the majority of public sector workers are essential workers and unlikely to be furloughed. Even where the public sector role is non-essential, the suggestion is that it would be possible to re-deploy them to an essential role, rather than furlough the worker.
The guidance confirms that where a company is in administration, the administrator will be able to access the scheme, but can only do so where there is a reasonable likelihood of rehiring the workers – for example; where the administrator is pursuing the sale of a business.
For employees on unpaid leave which they started after 28 February, they can instead be put on furlough and pay them at least 80% of their regular wages, up to the monthly cap of £2,500.
Where the employee went on unpaid leave on or before 28 February, they cannot be furloughed until the date on which it was agreed they would return from unpaid leave.
Where employees are transferred to a new employer after 19 March, the new employer is eligible to claim under the CJRS in respect of the employees transferred, provided either TUPE or PAYE business succession rules apply to the transfer. Similarly, where a group of companies consolidates multiple PAYE schemes into the one scheme after 19 March, the employees employed in the group on or before 19 March will continue to be eligible for the scheme.
Employers must have created and started a PAYE payroll scheme on or before 19 March and have a UK bank account to be able to access the grant
- An employee must be furloughed for the employer to receive the grant
- An employee who is furloughed, must be furloughed for a period of at least three weeks
- Employers must send written confirmation to employees, confirming they have been furloughed
- There is no need to furlough all employees and employees can be furloughed on a case by case basis, depending on the employer’s needs
- An employer can re-furlough an employee after they have returned to work from a previous period of furloughing
Furloughing will be a new term for many employers, and is a term not previously defined in employment law. Furloughing an employee means they must not undertake any duties of their employment. Those who are furloughed must not undertake any work whatsoever that provides services or generates revenue to the employer or a company linked or associated to the employer (i.e. working for another group company of the employer will not be possible).
It is worth noting that as CJRS will be considered on an employment by employment basis, so someone having a second job or taking on a new job while being furloughed does not impact the CJRS grant the employer receives for the employee.
An employee can take part in volunteer work or training. It’s worth noting however that if the employee is undertaking training, this may be considered working time for minimum wage purposes, and employers will need to ensure that minimum wage is paid if the training is working time. Please remember the minimum wage rises effective 1 April will also apply to such payments.
The ability to put an employee on to furlough leave is something that employment contracts will unlikely provide for, given the term has not previously been relevant to employment law. With this in mind, to take advantage of the CJRS, employers will need to ensure that their employment contracts updated and employees are properly consulted on the changes to their contract to be able to take advantage of the CJRS; legal advice should be sought on the process.
Employers will need to issue written confirmation to employees who have been furloughed and keep a record of this for five years. If an employee is furloughed more than once, written confirmation should be provided each time the employee is furloughed. The guidance is unclear on whether an employer can provide the confirmation after a period of furloughing has commenced. On the basis the scheme was backdated to the 1 March, it may be possible to backdate the confirmation, but we wold strongly advise that it is issued ahead of a period of furlough where possible.
The Treasury direction issued on 15 April suggested that rather than simply issuing employees with a written notice confirming that they have been furloughed, the employer would need to get agreement in writing from the employee that they agree to be furloughed. However, the guidance issued on 17 March confirms that: “To be eligible for the grant employers must confirm in writing to their employee confirming that they have been furloughed. If this is done in a way that is consistent with employment law, that consent is valid for the purposes of claiming the CJRS. There needs to be a written record, but the employee does not have to provide a written response.”
Directors will often take a low or no salary from the business. Instead they will often utilise dividends to top up their income, as and when they have the profits to do so. As dividends are not subject to PAYE, the dividend amounts are unlikely to form part of the CJRS calculation for the director. Directors in this position are likely to find that should they qualify for a CJRS grant, the amount paid would likely be 80% of a low salary.
A further concern is that a director must be non-active to be furloughed, but given they will continue to need to manage the business in some way, they are unlikely to be completely in-active and therefore may fail the CJRS requirements. Directors who only undertake statutory duties during a period of furlough, will be entitled to claim under the CJRS.
When furloughing a company director this should be formally adopted as a decision of the company, noted in the company records and communicated in writing to the director. Once furloughed a director can continue to fulfil their statutory obligations, provided they do no more than would reasonably be judged necessary for that purpose. The director must not undertake any work which would generate commercial revenue or provide services to or on behalf of their company. This latter point extends to include a personal service company.
A final consideration which will be particularly relevant to directors is how the grant will interact with annual payroll schemes, particularly where no payments under the scheme are made during the period the scheme is expected to be open for claims.
The total maximum grant available to the employer will be higher than the £2,500, as it will also cover the employer’s national insurance and employer pension contributions (capped at the minimum 3% based on qualifying earnings) for furloughed employees, but the contributions will be limited to the amounts due on the gross salary payable for the employee by the grant.
While the grant covers the cost of the employer national insurance and minimum pension contributions, it doesn’t appear to provide relief for the apprenticeship levy payments, so this will be an ongoing cost large employers will continue to need to meet.
If you decide to top up an employee’s pay, any additional national insurance or pension contribution payable, will not be funded by the grant. Similarly, if you pay an employer pension contribution above the minimum qualifying earnings requirements, the excess contributions will not be covered by the grant.
Based on our initial calculations, we believe the maximum claim available for a furloughed employee for a month during 2020/21 will be as follows:
|Total grant available||£2,803.38|
Employees will remain liable to PAYE, employee national insurance and any other usual payroll deductions (such as student loan repayments) on the furloughed payment made to them by their employer. The employer may choose to pay more than the amount of the grant paid to them by the Government.
For those who employees who are salaried, the grant will be equal to 80% of the salary as at 19 March. If, based on the previous guidance, the calculation of the claim is based on the employee’s salary as at 28 February (and this differs from their salary in their last pay period to 19 March) the calculation can used from the first claim.
The guidance only talks about grant for salaried employees covering 80% of salary. This seems to limit the claim where a salaried employee may also have variable elements of pay. In such circumstances, it would be hoped that these salaried employees can be treated in the same way as those who have varying pay (see below) and the grant isn’t limited to their basic salary alone.
For those with variable pay, the calculation of the grant entitlement is split into three categories;
- Employees with more than twelve months service
- Employees with less than twelve months service
- Employees who have been employed for less than a month
For the employees who have more than twelve months service, the grant is calculated as the higher of:
- The same month’s earning from the previous year
- Average monthly earnings for the 2019/20 year
For employees with less than twelve months service, the grant is calculated as an average of their monthly earnings since the start of their employment. For employees who have been employed for less than a month, the grant can be based on a pro-rata of their earnings so far and claim 80%.
The wording from the latest guidance suggests an employer doesn’t have to pay the 80% restriction to an employee with varying earnings. I believe this is an oversight in the guidance, and further guidance will likely correct this oversight. While we wait updated guidance, I would strongly advise employers to consider the spirit of the policy intention here and not assume it will be okay to pay 100% of the average on account of the guidance not restricting it to 80%.
If an employer decides to furlough an employee who is returning from statutory leave (which includes maternity leave, paternity leave and parental bereavement leave), claims should be calculated against their salary, before tax, not the pay they received whilst on statutory leave. If the returning employee was on variable pay, then the claim should be calculated using either the:
- same month’s earnings from the previous year
- average monthly earnings for the 2019-20 tax year
The guidance does not yet cover returning employees who are returning from long-term sick, which preceded the 2019-20 tax year. For the salaried the calculation will be based on the pre-sickness salary, and for employees with varying pay it may be possible to use average earnings from a prior tax year, although we wait for guidance to confirm this.
There have been lots of questions about what elements of pay the grant will be made up of, as well as about furloughing for part of a month and whether the grant is then apportioned. The grant claim is based on any regular payments that the employer is obliged to make. This includes wages, past overtime, fees and compulsory commission payments.
The scheme will not cover discretionary bonus (including tips) and commission payments and non-cash payments. It does not include any benefits in kind or any benefits provided through salary sacrifice (including pension contributions). With regards to salary sacrifice, you can normally change or cancel this because of a life event. HMRC has confirmed that Covid-19 is such a life event that could warrant a change.
Grants will be pro-rated if your employee is furloughed for part of a pay period, with the claim being made from the start date of the furlough and not the date that the negotiations started.
The Chancellor has already confirmed that furloughed staff would continue to receive the same wage as before, but with a reduced Government share and it has now been confirmed that the employer will have to contribute a percentage of salaries, as well as National Insurance and pension contributions from August 2020. To ease towards this the Chancellor proposed the following:
- August 2020 – the employer will pay the National Insurance (‘NI’) and auto enrolment pension costs, which is equivalent to 5% of the overall employment cost
- September 2020 – the Government will pay 70% of salaries up to £2,190 and the employer will pay 10%, plus the NI and auto enrolment pension costs
- October 2020 – the Government will pay 60% of salaries up to £1,875 and the employer will pay 20%, plus NI and auto enrolment costs
The scheme is to be closed to new entrants from 30 June. This will help cap the bill to the Treasury, but also prevent employers from rotating staff who are currently not working with those who have spent recent weeks at work. To be able to claim for a furloughed worker, they will need to be furloughed by 10 June, to allow the 3 weeks on furlough in accordance with the minimum requirements.
From 1 July part time furloughing will be introduced to provide more flexibility in the scheme for employer’s to bring furloughed workers back. This will mean that a worker could work for 2 days in a week on full pay, fully funded by the employer, and be furloughed for the other 3 days with pay being met in accordance with the CJRS.
The grant is a reimbursement to the employer therefore the employer will need to make payment to the furloughed worker, before then being reimbursed by HMRC.
The latest correspondence from HMRC suggests that the portal will be open for claims from 20 April, with an expected minimum processing time for the grants of at least four working days.
Employers who will struggle to fund the payment to employees initially, should consider how they intend to cover the costs. Arranging a business interruption loan (read our blog here) may provide a solution and we would advise businesses to take step to secure the financing well in advance of their payrun.
Employers can only make one claim every three weeks at most, which presumably will mean the claim is made on a PAYE scheme basis, rather than on an individual basis as each employee is furloughed.
Employers will make the claim in line with the actual payroll amounts, and will do so at the point at which the payroll is run or in advance of an imminent payroll.
To make a claim, employers will need the following information:
- your employer PAYE reference number
- the number of employees being furloughed
- National Insurance numbers for the employees you want to furlough
- Names of the employees you want to furlough
- Payroll/works number for the employees you want to furlough (optional)
- your Self Assessment Unique Taxpayer Reference or Corporation Tax Unique Taxpayer Reference or Company Registration Number
- the claim period (start and end date)
- amount claimed (per the minimum length of furloughing of 3 consecutive weeks)
- your bank account number and sort code
- your contact name
The payment will be made via BACS to the employer, which explains the requirement to have a UK bank account.
It should be noted that HMRC have indicated that they may retrospectively audit the validity of claims being made. With this in mind, should you need assistance in making the claim, PKF Francis Clark would be happy to support you with this, to ensure the amount claimed is correct.
Where there are fewer than 100 furloughed employees details for each employee will need to be entered into the system – this will include their name, National Insurance number, claim period and claim amount and payroll/employee number (optional).
Where there are more than 100 furloughed employees a file will need to be uploaded with the information detailed in the last paragraph rather than input directly into the system. HMRC will accept the following file types: .xls, .xlsx, .csv, .ods.
The grant received should be included in calculating the taxable profits of the business for income tax and corporation tax purposes.
The furloughed payments actually made to the employee and associated employer costs will also be deductible in arriving at the taxable profits of the business.
This is an employment law issue and the guidance makes clear that there will be a variety of legal issues that will need to be addressed and doesn’t appear to be within the policy makers remit to consider this. However, the latest guidance does give some indication that it believes employers are likely to be required to pay employees at the equivalent of full pay for any holiday taken while on furlough. The guidance states: “Working Time Regulations require holiday pay to be paid at the employee’s normal rate of pay or, where the rate of pay varies, calculated on the basis of the average pay received by the employee in the previous 52 working weeks. Therefore, if a furloughed employee takes holiday, the employer should pay their usual holiday pay in accordance with the Working Time Regulations.”
As a consequence of the Working Time Regulations requiring employers to pay employees full pay, there is likely to be an amount paid to employees who’ve taken holiday while furloughed, that won’t be claimable under the scheme. The guidance does go on to recognise that these are unprecedented times and they will be keeping this part of the scheme under review, so there may in future be additional support to cover the additional costs of employees taking annual leave.
There are clearly gaps in the guidance and this is to be expected of a policy that was only announced on 20 March and opened for claims on 20 April. We know through our direct contact with the team working on this at the Treasury that they are working around the clock to deliver a policy, guidance and implementation that is fit for purpose.
When thinking about the questions we don’t yet have answers to, it is important in situations such as this, to consider the spirit of the policy, where we cannot rely on the written guidance for an answer.
To this end, it is helpful to understand the reasons for the introduction of the CJRS; it has been introduced to encourage businesses to follow the latest medical advice for Coronavirus and ensure businesses who rely on physical interactions close their doors to the public.
Where a business can carry on without those physical interactions, for instance by working remotely, it should be business as usual and the policy doesn’t appear to be designed as a catch all wage subsidy for the UK workforce.
I’m sure many clients will have unanswered questions as to how the CJRS will work for them and PKF Francis Clark’s dedicated Covid 19 response team, as well as your usual contact, are here to help in any way we can, so please do get it touch.
Sources of further information
I would anticipate HMRC will carry details of CJRS in due course but for now I will be keeping an eye on GOV.UK website and specifically the document found here which does appear to be regularly updated.
My colleague Steve Ashworth has also produced a useful ‘at a glance’ guide to making a claim for the grant, which is available here.
If you have any questions on this, please do not hesitate to contact me, or your usual PKF Francis Clark adviser.