- What is the aim of the scheme?
The aim of the scheme is to help employers who have taken a financial hit to their business as a result of Covid-19 and cannot afford to pay employee salaries.
- How will the scheme help?
To allow the employer to continue to pay an employee’s salary, the Government will pay the employer a grant of 80% of an employee’s salary up to a cap of £2,500 per month.
The grant will also cover the employers’ national insurance (NIC) on the 80% and the minimum automatic enrolment employer pension contributions on that wage. As an illustration, this gives a maximum cap of £2,500 plus £245 employers’ NIC and £59 auto-enrolled pension contribution. This gives a total grant of £2,084 for an individual employee.
- What does the grant not cover?
It does not cover fees, commissions and bonuses.
- To which employees does the scheme apply to?
It applies to an employee who has been “furloughed”. A furloughed employee is one who has been sent home by the employer and who cannot do any work for the employer during the furloughed period.
- When did the scheme start and how long will it last?
The scheme commenced on 1 March 2020 and so is backdated. It is set to last for at least three months. There is the possibility of extending the scheme should this become necessary.
- Which employers will qualify for the 80% grant?
Employers who are a UK organisation will qualify. A UK organisation includes any UK based employer to include businesses, charitable and not-for-profit organisations. If you are not a UK based organisation then you are not eligible for the scheme.
- Any other criteria?
Please note that although the Job Retention Scheme was backdated to start from 1 March, the employer business will only be eligible to claim the grant once they have agreed the furlough with their staff and that the furloughed staff have stopped working for the employer.
Also, the employer must have had a PAYE scheme that commenced before 28 February and they must have a UK bank account.
Administration of the scheme and payroll issues
- Who will be administering the scheme?
The scheme will be administered by HMRC.
- How do I apply for the grant?
Employers will be able to make an application via a new HMRC online portal.
- When can I apply for the grant?
The online portal is not available and is currently being built. It is expected to be available at the end of April.
- Will there be any changes to how I run the payroll?
As far as we are aware, the payroll should continue to be processed in the usual way and the revised salaries paid to staff.
- I am already suffering from financial difficulty and cannot afford to make any salary payment. What are my options?
You should consider applying for a loan under the Coronavirus Business Interruption Loan Scheme to support staff and other costs in the meantime.
- Once the online portal is available, what information do I need to supply to HMRC?
To claim, you will need:
- Your ePAYE reference number
- The number of employees being furloughed
- The claim period (start and end date)
- Amount claimed (per the minimum length of furloughing od 3 weeks)
- Your bank account and sort code
- Your contact name
- Your phone number
- You will need to calculate the amount you are claiming. HMRC will retain the right to retrospectively audit all aspects of your claim.
What happens after I have made the claim?
Once HMRC have received your claim and you are eligible for the grant, they will pay it via a BACS payment to a UK bank account.
You should make your claim in accordance with actual payroll amounts at the point at which you run your payroll or in advance of an imminent payroll.
You must pay the employee all the grant you receive for their gross pay, no fees can be charged from the money that is granted. You can choose to top up the employee’s salary, but you do not have to.
- Which employees can I apply the grant for?
Furloughed employees must have been on your PAYE payroll on 28 February 2020, and can be on any type of contract, including:
- Full time employees
- Part time employees
- Employees on agency contracts
- Employees on flexible or zero-hour contracts
The scheme also covers employees who were made redundant since 28 February 2020, if they are rehired by their employer.
- Does the scheme apply to employees I have hired after 28 February 2020?
No, employees hired after 28 February 2020 cannot be furloughed or claimed for in accordance with this scheme.
- Can the furloughed employee undertake any work for their employer?
No. During the period in which the employee is furloughed, they must not undertake work of any kind for the employer.
- What if my employee is on Statutory Sick Pay?
Employees on sick leave or self-isolating should get Statutory Sick Pay, but can be furloughed after this.
Employees who are shielding in line with public health guidance can be placed on furlough.
- What if the employee has more than one job?
If your employee has more than one employer they can be furloughed for each job. Each job is separate, and the cap applies to each employer individually.
- What about volunteer work or training?
A furloughed employee can take part in volunteer work or training, as long as it does not provide services to or generate revenue for, or on behalf of your organisation.
However, if workers are required to for example, complete online training courses whilst they are furloughed, then they must be paid at least the NLW/NMW for the time spent training, even if this is more than the 80% of their wage that will be subsidised.
- I have employees working on reduced hours or reduced pay. Will the scheme apply to these employees?
If an employee is working, but on reduced hours, or for reduced pay, they will not be eligible for this scheme and you will have to continue paying the employee through your payroll and pay their salary subject to the terms of the employment contract you agreed.
- Our employee is on Maternity Leave, contractual adoption pay, paternity pay or shared parental pay.
Individuals who are on or plan to take Maternity Leave must take at least 2 weeks off work (4 weeks if they work in a factory or workshop) immediately following the birth of their baby. This is a health and safety requirement. In practice, most women start their Maternity Leave before they give birth.
If your employee is eligible for Statutory Maternity Pay (SMP) or Maternity Allowance, the normal rules apply, and they are entitled to claim up to 39 weeks of statutory pay or allowance.
Employees who qualify for SMP, will still be eligible for 90% of their average weekly earnings in the first 6 weeks, followed by 33 weeks of pay paid at 90% of their average weekly earnings or the statutory flat rate (whichever is lower). The statutory flat rate is currently £148.68 a week, rising to £151.20 a week from April 2020.
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.
Calculating the grant
- What is the amount available?
You will receive a grant from HMRC to cover the lower of 80% of an employee’s regular wage or £2,500 per month, plus the associated Employer National Insurance contributions and minimum automatic enrolment employer pension contributions on that subsidised wage. Fees, commission and bonuses should not be included.
At a minimum, employers must pay their employee the lower of 80% of their regular wage or £2,500 per month. An employer can also choose to top up an employee’s salary beyond this but is not obliged to under this scheme.
- What is the salary figure to be used in the calculation?
For full time and part time salaried employees, the employee’s actual salary before tax, as of 28 February should be used to calculate the 80%. Fees, commission and bonuses should not be included.
- What about employees whose pay varies?
If the employee has been employed (or engaged by an employment business) for a full twelve months prior to the claim, you can claim for the higher of either:
- the same month’s earning from the previous year
- average monthly earnings from the 2019-20 tax year
If the employee has been employed for less than a year, you can claim for an average of their monthly earnings since they started work.
If the employee only started in February 2020, use a pro-rata for their earnings so far to claim.
Once you’ve worked out how much of an employee’s salary you can claim for, you must then work out the amount of Employer National Insurance Contributions and minimum automatic enrolment employer pension contributions you are entitled to claim.
- Can I top-up the employee’s salary above the 80%?
It is for the employer to decide whether to top-up the salary or not. If the employer decides to top-up the salary then they can do by any amount up to the normal salary the employee was receiving prior to the furlough period. For example, if the employee’s salary before the furlough period was £2,000 then based on the 80% grant, the employee’s revised salary is £1,600. Regarding the difference of £400, the employer can choose to pay all of it, some of it or none of it.
- I am furloughing an employee in the middle of the pay month. Do I need to calculate the grant on a pro-rated basis?
There has been no guidance from HMRC on this point but we would expect the grant to be pro-rated accordingly.
- What is the income tax and employer national insurance position on the furloughed employee?
Wages of furloughed employees will be subject to Income Tax and National Insurance as usual. Employees will also pay automatic enrolment contributions on qualifying earnings, unless they have chosen to opt-out or to cease saving into a workplace pension scheme.
Employers will be liable to pay Employer National Insurance contributions on wages paid, as well as automatic enrolment contributions on qualifying earnings unless an employee has opted out or has ceased saving into a workplace pension scheme.
Employment law/employment contract considerations
The below represents our understanding of the various issues but you should consult your employment lawyer or HR consultant for advice and confirmation of the below.
- Do I need to obtain the consent of the employee for them to be furloughed?
Yes. The employer cannot simply furlough the employee unless they are contractually allowed to do so. Having a contractual clause that allows the employer to furlough an employee is rare however.
- Will the employee’s employment contract need to be amended?
Yes. Because the furlough arrangement will involve in the majority of cases a reduction in the employees salary, doing so will be a breach of their current employment contract. Therefore, a new revised employment contract reflecting the new reduced salary will need to be drawn up with the agreement of the furloughed employee.
- Can a director be furloughed?
In theory yes but there are practical difficulties especially in the case where there is a sole director. A condition of being furloughed is that the director must not carry out any work for the company during the furloughed period. This is likely to be difficult to achieve as the director, during the furlough period, will likely to be strategising ways of getting the company back on its feet once the Covid-19 crisis is deemed to be over. It might be impractical then to furlough the director.
- But, I am the sole director and only employee of the company with no trade coming in for the foreseeable future? Can I furlough myself in this situation?
If the trade has come to a complete halt, then it would probably be more practical for the director to furlough them self. Consideration may need to be given to advising customers, suppliers etc that the trade of the company has been suspended during the furlough period. This may not be commercially desirable bearing in mind any long-term ramifications for the business but may provide evidence to support that the trade has ceased and the director has stopped working should HMRC investigate any claim.
- If there are practical difficulties to furloughing myself where I am a director, would it be advisable to resign myself as a director?
Where you are the sole director then this is not an option as it is a Company Law requirement that every company have at least one director. Where there are more than one director then this can be considered but may not be necessary provided the director being furloughed does not carry out any work for the company during the furlough period.
Plus, resigning as a director may bring about unintended consequences where the director does not have an employment contract with the company. In this case, resigning as a director may mean that the individual is not an employee and thus will not qualify for the scheme.
- If the director is furloughed then what about their statutory duties under company law? Can these duties be carried out during the furlough period?
During the furlough period, the director can carry out their statutory duties in order to keep the company running and compliant with company law.
- What is the tax treatment of the grant?
Payments received by a business under the scheme are made to offset these deductible revenue costs. They must therefore be included as income in the business’s calculation of its taxable profits for Income Tax and Corporation Tax purposes, in accordance with normal principles.
Businesses can deduct employment costs as normal when calculating taxable profits for Income Tax and Corporation Tax purposes.