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Business Services  •  Business Tax  •  Coronavirus Advice  •  HMRC  •  Personal tax  •  Small Business  •  Taxation

COVID-19: The Furlough Job Retention Scheme Summarised

By RJP LLP on 31 March, 2020

The Coronavirus Job Retention Scheme is designed to support employers whose operations have been severely affected by COVID-19. Principally, it is for situations where a business has been forced to close or has suffered an immediate drop in demand but where demand is anticipated to return after the current crisis starts to abate.

The scheme is intended to encourage employers not to make large scale redundancies, but rather to encourage them to furlough (lay off or give leave of absence to) employees because they are not required in the organisation in the short term.  In many cases, an employer may have a proportion of employees on furlough, with others continuing to work as normal.

The scheme is a temporary scheme and will operate initially until 31 May 2020. During this time employers can use the scheme at any time.

This article explains the eligibility criteria for the new scheme, which provides funding for 80% of wage costs during the furloughed period, to a cap of £2,500 per month. It also outlines how the calculations should be made and the tax considerations.

When can claims be made?

The official start date of this scheme is 1 March 2020. There will be an online service for employers to use to make claims, but this is not yet available and is not expected to be available until the end of April 2020.

Who can claim?

Any UK organisation that has employees can apply; businesses, charities, those employing agency workers paid through PAYE and public authorities.

To qualify, the organisation must have created and started a PAYE payroll scheme on or before 28 February 2020 and have a UK bank account.

If a company has gone into administration, it may be possible for employees to access the funding through the administrator, who can access the job retention scheme.

Which employees can a claim be made for?

To be furloughed through the Coronavirus Job Retention Scheme, an employee must have been on the PAYE payroll since 28 February 2020.

They can have any of the following types of contract and circumstances:

  • full-time and part-time employees who are not required for work;
  • employees on agency contracts who are not working;
  • employees on flexible or zero-hour contracts who are not working.

Employees who are shielding in line with public health guidance can also be placed on furlough.

If an employer had already made an employee redundant on or after 28 February 2020, they may apply for support if they re-hire the affected employee(s).

Can an employee work part-time on furlough?

Crucially, if an organisation furloughs an employee, that employee may not undertake any work whatsoever for the organisation during the period of furlough and they cannot be placed on reduced hours. For example, it is not possible to put an employee on a 3-day week and claim the furlough grant.

The employee is also not allowed to provide any services independently for the organisation during the furlough period.

For these reasons, this scheme is not available to employee directors of limited companies unless they are not working at all for their company during the claim period – see related article.

Legal implications

Before using the Coronavirus Job Retention Scheme, employers should discuss and amend an employee’s contract by mutual agreement.  When deciding who to furlough, UK equality and discrimination laws continue to apply.

Once an agreement is reached, employers need to write to affected employees confirming that they have been furloughed and maintain records of any communication.

Employees hired after 28 February 2020 cannot be furloughed or claimed for under this scheme.

Employees on unpaid leave cannot be furloughed, unless the period of unpaid leave commenced after 28 February 2020.

Employees on sick leave or who are self-isolating may receive Statutory Sick Pay and can be furloughed after this.

If an employee has more than one employer, they can be furloughed for each job and the grant cap applies to each employer.

Since the grant payments are not due to be available until the end of April and maybe even later, employers are expected to continue paying employees accordingly in the meantime or agree that payment will be delayed until grants become available.

How to calculate your claim

The Coronavirus Job Retention Scheme covers salary costs for employers based on the lower of 80% of their regular wage, or £2,500 per month. An employer can also voluntarily top up an employee’s salary beyond this.

Whilst on furlough, the employee’s wage will be subject to the usual income tax and other deductions, plus employers’ national insurance contributions (NIC) and minimum automatic enrolment employer pension contributions on that wage. More guidance will apparently be given for calculating employers’ NIC and minimum automatic enrolment employer pension contributions before the scheme becomes live.

For full time and part time salaried employees, the employee’s basic gross salary as at 28 February 2020 should be used to calculate the 80%. Fees, commission and bonuses are excluded.

If the employee has been employed (or engaged by an employment business) for a full twelve months prior to the claim, the employer can claim for the higher of either:

  • the same month’s earning from the previous year; and
  • average monthly earnings for the 2019-20 tax year.

If the employee has been employed for less than a year, the employer can claim for an average of their monthly earnings since they started working for them.

If the employee only started working for the employer in February 2020, their earnings can be estimated pro-rata to calculate the claim. 

To make a claim, every organisation will need to provide:

  • ePAYE reference number;
  • Number of employees being furloughed;
  • Claim period (start and end date);
  • Amount claimed (per the minimum length of furloughing of 3 weeks);
  • Organisation bank account number and sort code;
  • Contact name and phone number.

How to claim

The online service is not yet available and is expected to be available by the end of April 2020.

Employers will need to calculate the amount being claimed. HMRC will retain the right to retrospectively audit all aspects of a claim. The entire grant must be paid on to the employee with no fees charged.

Claims can be backdated until 1 March 2020 if applicable and one claim can be made every 3 weeks, which is the minimum length an employee can be furloughed.

Once HMRC have received a claim and confirmed eligibility for the grant, the money will be paid via BACS to a UK bank account.

The claim needs to be made in accordance with actual payroll amounts at the point at which payroll runs are made, or in advance of an imminent payroll.

The government expects the scheme to run until 31 May 2020, but it may be extended. Once a furlough period has ended, the employer must decide whether the employee can return to their duties or should have their employment terminated. Once the scheme has been closed, HMRC will continue to process remaining claims before terminating the scheme.

Furloughed employees retain their full employment rights during the period of furlough, including statutory sick pay, maternity rights, other parental rights, plus rights against unfair dismissal and to redundancy payments.

How to calculate income tax and employee NICs

Wages of furloughed employees are subject to income tax and national insurance.

Employees will also pay automatic enrolment contributions on qualifying earnings, unless they have chosen to opt-out or to cease contributing to a workplace pension scheme.

Tax treatment of the Coronavirus Job Retention Grant

Payments received by a business under the scheme must be included as income in the  calculation of its taxable profits for income tax and corporation tax purposes, from which employment costs can be deducted.

Who is not expected to use the Coronavirus Job Retention Scheme?

Public sector - The majority of public sector organisations are expected to retain their employees during the crisis period because they are needed to maintain essential services.

Organisations receiving public funding - Employers receiving ongoing public funding for staff costs are expected to use this funding to finance payment of staff costs rather than claim for the CJRS grant.

Exceptions - where organisations are not government funded and employees need to be furloughed, it may be possible to apply for the CJRS scheme.

For further information, visit: https://www.gov.uk/guidance/claim-for-wage-costs-through-the-coronavirus-job-retention-scheme

partners@rjp.co.uk

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