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1. Details of the grant
Under the Coronavirus Job Retention Scheme, employers can receive a grant (not a loan) from HM Revenue & Customs (HMRC) to cover up to 80% of furloughed workers’ salaries, up to £2,500 per month. Employers can choose to top up the salary of retained workers if they so choose.
Furloughed workers are workers that are to be retained but have been asked to take a temporary leave of absence. Employees are not able to undertake work for the organisation while furloughed – this means that if employees are working reduced hours, or for reduced pay, they will not be eligible for the scheme. You will need to continue paying them through payroll and pay their salary subject to the terms of their employment contract.
If you are to treat employees (or Directors) as furloughed workers, you will need to notify them of the change. Changing the employment status remains subject to existing employment law, depending on the employment contract, and may be subject to negotiation.
The grant will be backdated to 1 March 2020 and will initially be available up to a period of three months. However, this period may be extended by the government if required. The first grants will be available in the coming weeks and by the end of April 2020 for all businesses.
You can apply to furlough an employee or Director more than once. In practice, this means that you can furlough an employee or Director for three-weeks (the minimum period), bring them back to work for a period and then furlough them again. You can do this provided the scheme is still operating.
HMRC has stated that it is possible to furlough Directors of companies from their employment duties while continuing to perform their statutory duties as a Director voluntarily. Furloughing does mean that a Director cannot perform billable work or direct a team of employees and be furloughed (they would continue to be working if they did this). A furloughed Director can however be involved in the filing for their statutory accounts (a statutory duty).
If you want to furloughed Directors from their employment duties, you will need to notify them of the change to a furlough a Director and take the appropriate legal action. We believe that a company resolution has to be passed by the members (shareholders of the company). Such a resolution makes the action legal and can be provided to HMRC if you are challenged later on.
3. Who is Eligible?
The grant can be claimed for employees on the payroll at 28 February 2020 (they need to be on the payroll and RTI return for month 11 – this includes people who were paid zero).
The scheme is open to all UK organisations with employees, including:
- Recruitment agencies (agency workers paid through PAYE)
- Public authorities
The scheme is open to all UK employers that have a PAYE scheme on 28 February 2020 and have a UK bank account.
You can only claim for employees that were on your PAYE payroll on 28 February 2020.
This includes employees on:
- Directors’ (employment duties)
- Full-time contracts
- Part-time contracts
- Agency contracts – only those who are not working.
- Flexible and zero-hours contracts
You can also include employees that were made redundant after 28 February 2020 – providing they are re-hired.
If your employee is on unpaid leave, they cannot be furloughed – unless the unpaid leave commenced after 28 February 2020.
Employees who are on sick leave or self-isolating should be entitled to Statutory Sick Pay (SSP) but can be furloughed after this.
Employees who are in the vulnerable/high-risk groups who are ‘shielding’ (shielding is the definition given to extremely vulnerable people who should self-isolate for 12 weeks) can be placed on furlough.
For those employees who are on, or plan to take, maternity leave and other statutory parental leave, the normal rules apply.
4. How to make a grant claim
Designate affected employees as ‘furloughed workers’ and notify your employees of this change to their employment status.
The employer will pay the employee through payroll, using the Real Time Information (RTI) system as usual.
Submit information to HMRC about the employees that have been furloughed and their earnings through a new online portal that is currently being developed by HMRC
Your payroll provider will make this claim for you.
5. The amount of the grant claim
A claim will be required through a dedicated online portal which is currently being set up by HMRC.
A grant will be provided, which will cover a proportion of the employees’ normal wage, plus the associated Employers National Insurance costs and minimum auto-enrolment pension contributions on that wage. Fees, commissions and bonuses should not be included.
The maximum employers can claim is the lower of:
- 80% of regular wage
- £2,500 per month
For full-time and part-time employees, the amount to be used in the calculation is the gross salary (before tax) as of 28 February 2020.
For employees whose pay varies, a claim can be made for the higher of:
- The same months’ earnings for the previous tax year (2018/19)
- Average monthly earnings from the 2019/20 tax year
For employees that have been employed less than a year, you can calculate using their average monthly wage since they started work.
For employees whose employment commenced in February 2020 – you can pro-rata their earnings so far to claim.
Once the employee’s salary is calculated, an additional amount will be calculated for the Employers National Insurance Contributions and minimum auto-enrolment employer pension contributions on this.
Employers can choose to top-up salary in addition to the grant. However, any additional associated costs due will not be covered by the scheme.
6. Multiple claims and processing for claims by HMRC
You can only submit one claim every 3 weeks, which is the minimum length an employee can be furloughed. Claims can be backdated to 1 March if required.
You will need to calculate the amount you can claim. HMRC will retain the right to audit claims where necessary.
Once HMRC has received your claim and confirmed your eligibility, they will pay reimbursements via BACS to a UK bank account. Claims should be made in accordance with actual payroll amounts at around the time the payroll is run.
You must pay the employee the full amount you receive for their gross pay.
When the government ends the scheme, you must consider whether the employees are able to return to their duties. If not, then depending on your circumstances, you may need to consider redundancy.
HMRC will continue to pay outstanding claims before the scheme is closed.
7. National Living Wage (NLW) / National Minimum Wage (NMW)
Furloughed workers, who are not working, must be paid the lower of 80% of their earnings, or £2,500, even if this would be below minimum wage.
If the employees are required to complete any training while furloughed, they will be entitled to receive at least the NLW/NMW for the time spent training, irrespective of whether this is more than the 80% of the subsidy.
8. Information employers need to make the grant claim
To make a claim, the following will need to be provide to HMRC:
- Your PAYE reference number
- The number of employees being furloughed
- The claim period (start and end date)
- The amount claimed (per minimum length of furlough of 3 weeks)
- Your bank account number and sort code
- Your contact name
- Your phone number
Your payroll provider should have most of the information but may need them confirming to ensure accuracy.
9. Employees rights
Furloughed employees have the same rights as before the furlough began – including entitlement to Statutory Sick Pay, maternity and other parental rights and redundancy.
Holiday will continue to be accrued while the individual is furloughed.
Once the employer and employee have come to an agreement, all employment law will continue to apply during that arrangement.
10. Income Tax and National Insurance – Employees
The amounts paid to furloughed workers will be subject to Income Tax and National Insurance in the normal way. Employees will also be required to pay automatic enrolment pension contributions unless they have opted-out.
Employers will be required to pay Employer National Insurance on wages paid, as well as auto-enrolment pension contributions (if applicable).
11. Taxation implications for employers
Employer NIC/Pension Contributions – Employers will continue to be responsible for Employer’s National Insurance Contributions and employer pension contributions on behalf of their furloughed employees.
Payments received under the scheme are made to offset the costs of wages and associated costs, which are generally tax deductible.
They must, therefore, be included as income in the business’ calculation of its taxable profits for Income Tax and Corporation Tax purposes, in line with normal principles.
The employment costs will be deductible as normal, which should make the effect tax neutral.
12. Formal actions to take to furlough
The following are the formal documents that need to be actioned to furlough an employee or a Director.
- For employees, a formal meeting must take place (ideally face to face on video call) followed by an official letter explaining the furloughing arrangements.
- For Directors an Ordinary Resolution has to be passed by the Shareholders or the company.
Draft formats for employee letters and a draft Ordinary Resolution are available to download below:
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