The Coronavirus Job Retention Scheme: furlough guidance Updated

We’ve changed our viewpoint, if you had originally seen our guidance published of the 25th March 2020 – Please re-read this article carefully as the information that came out last night (26th March 2020 at around 8pm) by HMRC has changed our stand on this.

Key policy objectives of the scheme

Overall objective is to keep people at home while enabling employers to retain staff who will be needed when they begin to rebuild their businesses in the future. This means workers who would otherwise had been heading for “lay off” or “redundancy” – being retained in position. The scheme is backdated to the 1st March 2020 – not to cover wages for staff who would have ordinarily been working during that period, but to extend the scheme to employees that had already been laid off or made redundant by the effects of Coronavirus.

Rules (as we see it)

1. Furloughed members of staff must not work for the employer during the period of furlough. – See our up-to-date guidance about Directors being furloughed. 
2. Furlough is from 1 March 2020, so is to be backdated. It will last for at least 3 months and will be extended if necessary. Note that while the scheme is backdated to the beginning of March as it is intended to support all those employed then, a firm will only be eligible to claim the grant once they have agreed the furlough with their staff and staff have stopped working for the employer. This will of course be subject to employment law in the usual way. – You couldn’t therefore, furlough March’s entire wage run (assuming March for a full month) if the employees had only bee furloughed from the 23rd March 2020. The guidance published that the minimum amount of time an employee can be furloughed for is three weeks. Meaning if an employee is furloughed for two weeks, but works for two weeks in an “assumed four week month” – they will not qualify for a Grant.
3. All UK businesses are eligible, ‘any employer on the country, small or large, charitable or non-profit’ to use the Chancellor’s words. The scheme is open to all UK employers that had created and started a PAYE payroll scheme on 28 February 2020.
4. The UK Employer must have a UK Bank account to receive grant funds.
5. The scheme pays a grant (not a loan) to the employer.
6. The grant will be paid to the employer through a new online system which is being built for this purpose. It should be up and running by the end of April 2020 and we practically see that grants would come at a push by the end of May 2020.
7. The employer will pay the employee through payroll, using the Real Time Information (RTI) system as usual, as required by the employment contract. This contract may be renegotiated but that is a matter for employment law. So RTI system reporting of payroll will continue as normal.
8. Scheme will be administered by HMRC:
   • Relevant employees must be designated as furloughed employees. They must not work.
   • Employers will submit information to HMRC through a new online portal.
   • As this will take time to build, businesses should look to the Coronavirus Business Interruption Loan Scheme to support cash flow in the meantime. The narrative used in the information released so far says ‘if your employer cannot cover staff costs due to COVID-19 they may be able to access support…’. This is a conditional phrase which may relate to existing funds available to the employer. We do not yet know how these might be determined, nor whether there is a bar of some description.
9. Maximum grant will be calculated per employee and is the lower of:
   • 80% of ‘wages’. The notes published so far, use the phrase ‘wage for all employment costs up to a cap of £2,500 per month’. It is our understanding that this includes employers’ NIC and pension contributions. Wages will be determined by reference to a defined period (yet to be announced).
   • £2,500 per month cap for grant per month per employee
10. Employees hired after 28 February 2020 cannot be furloughed or claimed for in accordance with this scheme.
11. To be eligible for the subsidy employers should write to their employee confirming that they have been furloughed and keep a record of this communication. See our Furlough letter template.
12. You do not need to place all your employees on furlough. However, those employees who you do place on furlough cannot undertake work for you.
13. At a minimum, employers must pay their employee the lower of 80% of their regular wage or £2,500 per month. = ie: For someone earning £7,000 per month – the minimum gross payroll would be £2,500. For someone earning £1,500 per month – the minimum gross payroll would be £1,200.

Here is our new illustration

This is what you have been waiting for: (Calculated using tax tables for tax years 2020 to 2021)

HighCo Ltd employs Mr Johns at an annual salary of £24,000, so £2,000 per month. Mr Johns has opted out of auto enrolment. Mr Johns would have currently been receiving net pay of about £1,663 (Using 2020 to 2021’s figures for a like for like comparison)

If it was agreed the Mr Johns would be furloughed for the months going forward (say April 2020) –

Furlough guidance would be: 80% of £2,000 equals a gross pay for payroll of £1,600 per month. Employers NIC on £1,600 per month would be: £110.50

The available grant for the employer is the lower of

(a) 80% of (£2,000 + £110.50 = £1,710.50

(b) £2,500

So a grant of £1,710.50. If HighCo Ltd was simply agreeing to pay Mr Johns the 80%. The total cost to HighCo Ltd would be £1,710.50 and then after the grant of £1,710.50 = £0.00 cost.

HighCo Ltd could continue to pay Mr Johns the difference between 80% and 100% which would cost on these calculations the difference between £2,174 and £1,710.50 = £463.50

Notes to illustration based on an extended understanding of how the scheme will work

1. If Mr Johns had not opted out of auto enrolment, HighCo Ltd would also be making pension contributions on his behalf. If so, the available grant is based on 80% of (gross salary + Employers’ NIC + employers pension contributions paid), subject to the monthly cap of £2,500.
2. We understand that the rules for the scheme are being designed with underlying reference to employment law. If the individual is still under contract, Mr A can expect to receive his salary in full. The £1,710.50 grant paid to HighCo Ltd should not be taken as the new maximum cost of employment to the employer unless the contract has been redrafted.
3. Subject to the employment contract and any amendment, the salary which the employer actually pays the employee during the furlough period may be different to the pay paid used as the reference period and upon which the grant figure is based. This is an important point, and you should keep detailed records of when the furlough period begins and ends. Remember that the minimum term to receive the grant is three weeks.

Example for someone on a Gross salary of £60,000

Bingo Ltd employs Mrs Lews at an annual salary of £60,000, so £5,000 per month. Mrs Lews has opted out of auto enrolment. Mrs Lews would have currently been receiving net pay of about £3,620 (Using 2020 to 2021’s figures for a like for like comparison)

If it was agreed the Mrs Lews would be furloughed for the months going forward (say April 2020) –

Furlough guidance would be: 80% of £5,000 equals a gross pay for payroll of £4,000 per month. Employers NIC on £4,000 per month would be: £425

The available grant for the employer is the lower of

(a) 80% of (£5,000 + £425 = £6,425

(b) £2,500

So a grant of £2,500. If Bingo Ltd was simply agreeing to pay Mrs Lews the 80%. The total cost to HighCo Ltd would be £2,728 (£228 employers NI costs) and then after the grant cap on cost of £2,500 = £228 cost. (Simply the Employers NI)

Bingo Ltd could continue to pay Mrs Lews the difference between the £2,500 cap at her standard salary which would cost on these calculations the difference between £2,500 and £5,000 plus employers NIC of £556 (£5,556) = £3,056.

An employer can also choose to top up an employee’s salary beyond this but is not obliged to under this scheme. Unless the Employment contract specifies so.

Which businesses are eligible?

1. Eligible businesses include charities and not-for-profit organisations and will include single director companies, although the same rules will apply as to other businesses. The grant applies to all UK based businesses.

Owner/managed companies and Sole Directors

2. Many owner managed company director/shareholders pay small salaries and the balance of income as dividends. The scheme does not extend to dividends. Only the salary is relevant to the scheme of the Director on payroll at the 28th February 2020. Based on their salary at that time. It was confirmed by the CBI – Confederation of British Industry on Friday directly by the treasury that a sole Director or a Director can be furloughed can be covered based on their pay-rolled earnings (eg – Not dividends for owner managed Businesses). They can continue to run their Business in terms of performing statutory duties, but the must not be raising any revenue by performing any other work.

How is payment going to work in practice?

3. We understand that the employer will pay the contractually agreed amounts as required by the employment contract in the usual way. This will involve paying the employee, and HMRC the PAYE and both primary and secondary National Insurance Contributions. The grant will be paid directly to the employer.

4. Employers will claim the grant through a new separate portal to be built by HMRC.

Employees you can claim 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.

To be eligible for the subsidy, when on furlough, an employee can not undertake work for or on behalf of the organisation. This includes providing services or generating revenue. While on furlough, the employee’s wage will be subject to usual income tax and other deductions.

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.

Employers should discuss with their staff and make any changes to the employment contract by agreement. When employers are making decisions in relation to the process, including deciding who to offer furlough to, equality and discrimination laws will apply in the usual way.

If your employee is on unpaid leave

Employees on unpaid leave cannot be furloughed, unless they were placed on unpaid leave after 28 February.

If your 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.

If your 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.

If your employee does 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.

How to furlough

How to access the scheme [information subject to change, issued 23 March]

You will need to:

• designate affected employees as ‘furloughed workers,’ and notify your employees of this change – changing the status of employees remains subject to existing employment law and, depending on the employment contract, may be subject to negotiation;
• submit information to HMRC about the employees that have been furloughed and their earnings through a new online portal (HMRC will set out further details on the information required). – and this will be issued shortly.

Three weeks furlough minimum

Remember that 3 weeks is the minimum length an employee can be furloughed for. If for instance you may be furloughing a member of staff for 2 weeks. Sometimes it may be more beneficial for an employer to keep the employee in furlough for another one week, to meet the three week minimum to meet the conditions for the grant to be cost effective.

How will you calculate furlough

Full time and part time employees

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.

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.

Employer National Insurance and Pension Contributions

All employers remain liable for associated Employer National Insurance contributions and minimum automatic enrolment employer pension contributions on behalf of their furloughed employees.

You can choose to provide top-up salary in addition to the grant. Employer National Insurance Contributions and automatic enrolment contribution on any additional top-up salary will not be funded through this scheme. Nor will any voluntary automatic enrolment contributions above the minimum mandatory employer contribution of 3% of income above the lower limit of qualifying earnings (which is £512 per month until 5th April and will be £520 per month from 6th April 2020 onwards).

National Living Wage/National Minimum Wage

Individuals are only entitled to the National Living Wage (NLW)/National Minimum Wage (NMW) for the hours they are working.

Therefore, furloughed workers, who are not working, must be paid the lower of 80% of their salary, or £2,500 even if, based on their usual working hours, this would be below NLW/NMW.

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.

What you’ll need to make a claim

Employers should discuss with their staff and make any changes to the employment contract by agreement. We’d recommend always contacting a HR advisor to make sure that this does not conflict with any other contractual obligations.

To claim, you will need:

• your PAYE reference number
• the number of employees being furloughed
• the claim period (start and end date)
• amount claimed (per the minimum length of furloughing of 3 weeks)
• your bank account number 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.

Our top tip as always is records is king in this front. We recommend keeping a clear Google Sheet for your workforce, clearly stating when employees furlough begins and when it ends. Keeping a link to the letter that you have sent them. Make sure that the employee does not carry out any work for you during the furlough period.

Claim

You can only submit one claim at least every 3 weeks, which is the minimum length an employee can be furloughed for. Claims can be backdated until the 1 March if applicable.

What to do after you’ve claimed

Once HMRC have received your claim and you are eligible for the grant, they will pay it via 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.

When the government ends the scheme

When the government ends the scheme, you must make a decision, depending on your circumstances, as to whether employees can return to their duties. If not, it may be necessary to consider termination of employment (redundancy).

Employees that have been furloughed

Employees that have been furloughed have the same rights as they did previously. That includes Statutory Sick Pay entitlement, maternity rights, other parental rights, rights against unfair dismissal and to redundancy payments.

Once the scheme has been closed by the government, HMRC will continue to process remaining claims before terminating the scheme.

Income tax and Employee National Insurance

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.

Tax Treatment of the Coronavirus Job Retention 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.