In this excerpt from the report ‘COVID-19 Tax Issues For Businesses’, Sarah Bradford gives some advice for employers and employees in this current situation.
A number of measures were put in place to help employers and employees during the Covid-19 pandemic, most notably, the Government’s flagship support package, the Coronavirus Job Retention Scheme. The scheme allowed employers to maintain their workforce by placing employees on furlough and claiming a grant under the scheme, rather than making employee’s redundant.
During the pandemic, and particularly during the initial lockdown, employees were asked to work from home were they could. This changed the way in which many employees worked and necessitated the provision of equipment, supplies and services to enable the employee to work at home. The way in which the equipment was made available to the employee affects the tax treatment, and it is important that employers are aware ofthe rules governing the tax treatment of support provided to employees at home. Some of the rules were temporarily relaxed for a limited period to provide a more level playing field where employees purchased home working equipment, the cost of which was later reimbursed by the employer.
As a result of changed working arrangements where employees are placed on furlough or are working from home, the nature of the benefits and expenses provided to employees may be different to usual. Employers need to ensure that the tax implications of providing benefits in kind to employees are understood and, where necessary, these are valued correctly and reported to HMRC.
Many employers operate share and share option schemes. These too have been affected by Covid-19 and HMRC have relaxed some of the rules as a result. Employers operating share and share option schemes should ensure that they are familiar with the rule changes introduced as a result of Covid-19.
The impact of the virus has also meant that more employees may have been off sick than usual. Employees may also be absent from work due to Coronavirus because they are self-isolating, shielding or because they have caring responsibilities. Normally, employers must meet the cost ofstatutory sick pay (SSP) paid to employees. However, for a limited period, employers are able to reclaim SSP related to Coronavirus absences fromHMRC.
Employees may go on, or return from, statutory leave during the pandemic. Employers should ensure that statutory pay is calculated correctly,particularly where the employee has been furloughed.
Despite the best endeavours of the employer and the support packages on offer, redundancies may be inevitable. Employers should ensure that theytreat payments made to employees on the termination of their employment correctly.
Coronavirus Job Retention Scheme
The Coronavirus Job Retention Scheme (CJRS) provided a lifeline to significant numbers of employers and employees. Under the scheme, employers can place employees on furlough and, assuming that certain conditions were met, could claim a grant under the scheme to enable employees to continue to receive 80% of their salary up to a maximum of £2,500 per month while on furlough.
There are two phases to the scheme:
- 1 March 2020 to 30 June 2020;
- 1 July 2020 to 31 October 2020.
Prior to 30 June 2020, employers were not allowed to do any work for their employer while on furlough. However, from 1 July 2020 with theintroduction of flexible furloughing, employees who had been furloughed prior to 30 June 2020 can work for their employer on a part-time basis, with the employer claiming a grant under the scheme for the furloughed hours that the employee does not work.
The scheme will run until 31 October 2020. From 1 August 2020, the support that an employer is able to claim under the scheme is gradually reduced.
Claims for grants under the scheme are claimed via a dedicated online portal and paid into the employer’s bank account. The full amount of the grant claimed must be passed on to the employee.
Detailed guidance on the scheme is available on the Gov.uk website. The guidance is comprehensive and contains details of how to work out claims under the scheme in various different circumstances, together with workedexamples. Employers looking to make claims under the scheme are urged to follow the guidance.
Eligibility for the Coronavirus Job Retention Scheme
Under the CJRS, employers can claim a grant for an employee who was employed on 19 March and in respect of whom a PAYE submission under real-time information had been made by that date. Employees who were on the payroll on 28 February 2020 and in respect of whom a PAYE RTI submission had been made and who had left by 19 March can also be re- employed and furloughed. They did not need to be back on the payroll by 19 March 2020.
Claims can be made for an employee regardless of the nature of their employment contract. The scheme covers full-time, part-time agency, flexible and zero-hour contracts.
For pay periods starting on or after 1 July 2020, an employee can only be furloughed if that employee had previously been furloughed for a minimum of three consecutive weeks prior to 30 June 2020.
To be eligible to make a claim, an employer must have a UK PAYE scheme that started before 19 March 2020, be registered for PAYE online and have a UK bank account.
Employers who placed employees on furlough needed to agree this with the employee and confirm in writing that the employee has been furloughed (or reach a collective agreement to that effect with a trade union). Where an employee is flexibly furloughed on or after 1 July 2020, the employer must agree a new flexible furlough agreement with the employee.
What Can You Claim from the Coronavirus Job Retention Scheme?
The amount that can be claimed under the scheme depends on the pay period to which the claim relates.
Prior to 30 June 2020, the employer can claim 80% of the employee’s usual wages up to £2,500 per month, plus the associated employer’s National Insurance under the scheme (to the extent that this is not covered by the
employment allowance) and the minimum pension contributions that the employer is required to pay under auto-enrolment.
From July 2020, claims must start and end in the same calendar month. Where the pay period spans two months, two claims must be made – one for each calendar month falling in the pay period.
For July 2020, the employer can still claim 80% of the employer’s wages for furloughed hours up to the maximum amount, equivalent to £2,500 permonth, plus the associated employer’s National Insurance and minimum pension contributions.
For pay periods commencing on or after 1 August 2020, employers can no longer claim the associated employer’s National Insurance or employerpension contributions, but must instead meet these costs. However, employers can still claim 80% of the employee’s usual wages up to the maximum amount of £2,500 per month.
The amount that the employer can claim is reduced to 70% of the employee’s wages to a maximum of £2,187.50 for September. However, the employer, must still pay the furloughed employee 80% of their wages up to the cap.
For October 2020, the amount that the employer can claim is further reduced to 60% of the employee’s usual wages to a maximum of £1,875 per month. Again, the employer must pay the employee 80% of their usual wages up to the maximum amount.
Claim Period for the Coronavirus Job Retention Scheme
Before the claim can be calculated the employer must determine:
- the length of the claim period;what to include when calculating wages; and
- the employee’s usual hours and furloughed hours.
The claim period is the period for which the claim relates. The first claim period starts from the date that the employee was first furloughed; this can be backdated to 1 March if the employee had been furloughed from that date. Prior to 30 June, there is no maximum claim period, although claims starting before 1 July 2020 must end on 30 June. Prior to 30 June, a claim can only be made where the employee is furloughed for at least three consecutive weeks.
Claims made for periods starting on or after 1 July 2020 must start and end in the same calendar month and must last at least seven days (unless the pay period spans two months and the claim relates to the days at the start and end of the month).
From 1 July 2020 the number of employees for whom a claim can be made in a claim period cannot exceed the maximum number of employees for whom a claim was made for any claim ending by 30 June 2020.
Detailed guidance on determining the claim period can be found on the Gov. uk website.
What To Include In Wages for the Coronavirus Job Retention Scheme
The claim is based on the employee’s usual wages. This comprises regular payments that the employer is obliged to make to the employee, including:
- regular wages and salary
- non-discretionary payments for hours worked, including overtime;
- non-discretionary fees;
- non-discretionary commission payments; and
- piece rate payments. The following payments should be excluded from the calculation of wages for the purposes of a claim:
- payments made at the discretion of the employer or the client where there is no contractual obligation to make the payments, such as tips(including those distributed through troncs), discretionary bonuses and discretionary commission payments;
- non cash payments; and
- non-monetary benefits, such as company car (including those made available under a salary sacrifice scheme).
Detailed guidance on determining what is included in the calculation of wages can be found on the Gov.uk website.
Where the employee is on a fixed wage or salary, the wages or salary paid to the employee for their last pay period prior to 19 March 2020 forms the basis of the claim. Where the employee’s pay varies, the claim can either be based on the same period in 2019/20 or on their average pay for 2019/20.
Usual Hours And Furloughed Hours
Where an employee is not fully furloughed, it is necessary to work out the employee’s usual hours and furloughed hours. An employee is fullyfurloughed when they are on furlough for the entire claim period and do no work for the employer during that period.
Where, on or after 1 July 2020, an employee is flexibly furloughed, the employer will need to record the employee’s usual hours, the hours that they work in the claim period, and the furlough hours (usual hours less hours worked).
The calculations depend on whether the employee works fixed hours or variable hours. The guidance on the Gov.uk website.
Flexible Furloughing
Flexible furloughing is available for the second phase of the scheme, which runs from 1 July 2020 until the scheme comes to an end on 1 October 2020. Prior to 1 July 2020, a condition of the scheme was that a grant could only be claimed for an employee on furlough if the employee did not work for
the employer while on furlough; grants were not available for employees working reduced hours.
This condition was relaxed from 1 July 2020, allowing employers to bring furloughed employees back to work part time while claiming a grant for the usual hours that the employee does not work. The employee pays the employee as usual for the hours that they work and claims a grant under the scheme for the furloughed hours (i.e. the usual hours that the employee does not work).
A claim under the scheme can only be made for an employee under the flexible furlough rules if the employee was furloughed for at least threeconsecutive weeks between 1 March 2020 and 30 June 2020. The last date that an employee could be furloughed for the first time to meet thisrequirement was 10 June 2020. A claim cannot be made for an employee who has been on reduced hours but not previously furloughed.
Calculating The Claim for the Coronavirus Job Retention Scheme
There are various stages to working out the amount that can be claimed:
- work out the maximum wage amount you will have to pay a furloughed employee;
- work out 80% of the employee’s usual wages
- work out the amount of the grant
- work out the amount that can be claimed for employer’s National Insurance contributions (pay period prior to 1 August 2020);
- work out the amount that can be claimed for the minimum employer pension contributions that are due under auto-enrolment.
The amount that the employer must pay an employee in respect of their furloughed hours remains at 80% of the employee’s usual hours up to the maximum amount of £2,500 per month/£576.92 per week). This is referred to as the ‘minimum furlough pay’.
The maximum daily amount payable to the employee depends on how many days there are in the month. Where the month has 31 days, the maximum daily amount is £80.65 per day and where the month has 30 days, the maximum daily amount is £83.34 per day.
For pay periods prior to 1 August 2020, the employer can claim the minimum furlough pay, plus associated employer National Insurance contributions and minimum employer pension contributions. For August the employer can claim the minimum furlough pay, for September, the employer can claim 70/80ths of the minimum furlough pay and for October, an employee can claim 60/80ths of the minimum furlough pay.
Detailed guidance on all aspects of the claim calculation can be found on the Gov.uk website. Examples of the calculations in different circumstances can be found here. HMRC have also produced a calculator that can be used to work out the claim. This is available on the Gov.uk website.
Example
An employee works 35 hours per week, Monday to Friday. The employee has been furloughed until 31 August 2020 and returns to work for two days per week from 1 September 2020, working Mondays and Tuesdays. The employee works 7 hours per day.
The employee usually works 35 hours over a seven-day period. There are 30 days in September. Therefore, the employee’s usual hours for the claim period are 150 hours (35/7 x 30).
In September the employee works nine days for seven hours per day. The employee’s working hours are therefore 63 hours. The employee is furloughed for the remaining 87 hours (150 hours – 63 hours).
The employee’s usual pay is £3,000 per month, 80% of which is £2,400. This is less than the maximum amount of £2,500 per month, so the calculation of the employee’s minimum furlough pay is based on £2,400 per month.
The minimum furlough pay is therefore £2,400 x 87/150 = £1,392.
This must be paid to the employee, together with the pay for the hours that the employee works.
As the claim is for September, the employer can claim £1,218 (£1.392 x 70/80).
Making The Claim for the Coronavirus Job Retention Scheme
Claims for grants under the CJRS should be made online via the portal on the Gov.uk website (see www.gov.uk/guidance/claim-for-wages-through- the-coronavirus-job-retention-scheme). The page contains detailed guidance on how to make a claim.
- To make a claim, the employer will need:
- to be registered for PAYE online;
- bank account details and sort code for a UK bank account;
- the billing address corresponding to the bank account;
- their employer PAYE scheme reference;
- the number of employees being furloughed;
- for each furloughed employee, their National Insurance number;
- the start and end date of the claim
- the full amount that is being claimed for employee wages, employer National Insurance contributions and employer pension contributions;
- a contact phone number; and
- a contact name.
- The employee’s payroll number can also be provided, but this is optional.
The employer will also need to provide one of the following:
- their name (where the claim is submitted by an agent, the employer’s name should be provided);
- corporation tax unique taxpayer reference;
- self-assessment unique taxpayer reference; or
- company registration number.
For each claim period, the employer will also need the usual number of hours that the employee would work in the claim period and the hours that the employee has or will work in the claim period.
Where more than 100 employees are placed on furlough, the employer will also need to upload a file containing each employee’s:
- full name;
- National Insurance number;
- payroll number (optional);
- furlough start date;
- furlough end date (if known); and
- the full amount claimed.
If any of the employees are flexibly furloughed, the claim must also include the hours actually worked in the claim period and the usual hours in the claim period. It is important that the employer provides all the information required and only that information – providing more or less information may risk a delay to the payment.
The claim can be made by an agent authorised for PAYE Online on the employer’s behalf.
When making a claim, a draft can be saved for up to seven days. If the claim is not completed within this period, the information will be lost and will need to be resubmitted.
HMRC will check the claim once made and, as long as they agree it, payment will be made into the designate bank account within six working days.
The last date for which a claim can be made for claim periods ending on or before 30 June 2020 is 31 July 2020.
In the event that an employer makes an error in a claim and this results in an overclaimed amount, the excess must be paid back to HMRC. An adjustment can be made in the next claim, reducing that claim by the overclaimed amount. If the employer has overclaimed and does not plan to make a further claim under the scheme, they should contact HMRC to discuss how to make a repayment. Employers who have underclaimed should also contact HMRC to amend their claim. Where the amount of a claim is increased, HMRC will undertake additional checks.
Grant Payments Must Be Paid To The Employee
Where a grant payment is claimed for an employee under the scheme, the full amount of the grant payment claimed in respect of the employee’s wages must be paid to the employee. In September and October, the employer must top up the grant payment so that the amount that the employee receives is at least equal to their minimum furlough pay (i.e. 80% of their usual wages up to the maximum amount).
If the employer has paid the employee at least their minimum furlough pay prior to claiming the grant, the grant monies do not need to be passed on to the employee when they are received; they simply reimburse the employer for the payment that they have already made.
Employees who are flexibly furloughed must be paid at their usual rate (or at such a reduced rate as is agreed between the employer and the employee) for the hours that they work. The employer can opt to top up furlough pay so that the employee continues to receive their usual wages, but this is optional.
Tax And National Insurance Implications For The Employee
The grant payment is treated in the same way as normal wage or salary payments in the hands of the employee. It is liable to tax under PAYE and to Class 1 National Insurance contributions, which the employer must deduct from the grant payment and pay over to HMRC.
Tax Implications For The Employer
Grant payments received by the employer under the CJRS should be included as income when calculating the employer’s taxable profits. However, as furlough pay paid to the employee is deductible when computing taxable profits, as is employer National Insurance and employer pension contributions, the net effect is nil as the income is cancelled out by the corresponding deductions.
From August onwards, the employer must meet the cost of the employer’s National Insurance and employer pension contributions on grant paymentsmade to the employee. These are deductible in computing the employer’s taxable profits. Consequently, the employer will treat the grant as income, but will deduct the grant, plus the associated employer’s National Insurance and employer pension contributions.
For September and October, the employer is not able to reclaim the full amount of the furlough paid that must be paid to the employer. The grant amount is treated as income, but the employer can deduct the full amount of the furlough pay (plus any pay for hours worked), as well as the employer’s National Insurance and employer pension contributions.
Reporting To HMRC
The employer must report payments made to employees who are furloughed to HMRC under Real Time Information (RTI) in the usual way. Pay and deductions should be notified to HMRC on the Full Payment Submission at or before the time that the payment is made to the employee.
Payments should be made on the normal pay day where possible to minimise the impact on employees who receive Universal Credit.
Record Keeping
The CJRS imposes a number of record keeping burdens on the employer. Where an employee is placed on furlough the employer must agree this in writing with the employee or reach a collective agreement with the trade union. The written agreement must be kept for five years. If an employee returns to work on a flexible furlough basis, the employer must agree a new agreement with the employee or relevant trade union, a written copy ofwhich must be retained for five years. The employer must also keep a record of the employee’s usual hours and furloughed hours.
In respect of claims made under the scheme, the employer must keep a copy of all records for six years, including:
- the amount claimed and claim period for each employee;
- the claim reference;
- the calculations on which the claim is based;
- for flexibly furloughed employees, the usual hours worked (together with any underlying calculations).
HMRC Compliance
HMRC are aware of the potential for abuse of the scheme, for example, employers claiming grant payments in respect of employees while requiring them to work while furloughed.
Legislation provides HMRC with strong powers to tackle abuse of the scheme. Employers have a period of 30 days from making the claim (or the date of Royal Assent to the Finance Act 2020 if later) in which to notify HMRC of errors in making claims. Where the error is not notified to HMRCwithin this time, HMRC can recover the money paid out under the scheme together with a penalty of between 30% and 100%.
Employers are urged to check that all claims are valid, as claiming money that is not due could prove very costly.
The End Of The Coronavirus Job Retention Scheme
The CJRS comes to an end on 31 October 2020. Employers must decide whether employees on furlough at that date can return to work on their normal hours. If this is not possible, the employer will need to consider whether the employee can return on reduced hours or whether it is necessary to terminate the employee’s employment (see 2.7). Where employers are able to bring back furloughed workers and employ them until at least 31 January 2021, they may be eligible for a job retention bonus from the Government (see 2.1.16).
Normal redundancy rules apply to furloughed employees.
Job Retention Bonus
To encourage employers to bring furloughed employees back to work when the scheme comes to an end in October, the Government are to pay a Job Retention Bonus of £1,000 for each furloughed employee who is employed continuously from the end of the scheme until 31 January 2021. To qualify for the bonus, the employee must earn on average more than the lower earnings limit for National Insurance purposes (set at £120 per week/£520 per month for 2020/21).
The bonuses will be paid in February.
While the bonuses will be welcome, they will not help the employer to pay the employee’s wages after the end of the scheme, although may coversome of the wage bill once the bonuses have been paid.
To download the whole Covid-19 Tax issues for Businesses Report visit this page here.
