Coronavirus: a guide for businesses and employers
Employees and The Job Retention Scheme
(Will cover at least 3 months from 1 March 2020)
It should be borne in mind that the Government’s strategy is to avoid redundancies where possible. They have approached this issue by creating the Job Retention Scheme to fund ‘furloughs’, whereby staff are temporarily sent home rather than being made redundant. It must be stressed that these furloughs are only valid where the person might otherwise have to be made redundant, although how this is monitored remains to be seen. The member of staff must do no work for the employer during this time, so they should not answer emails etc. Of course, there is a slight impracticability about this, imagine ringing up to ask them for, say, a phone number; can they give it to you? Hopefully, there will be some sense of reality in application here. It is also worth noting that directors can be put on furlough, and it has been further stated that they can look after statutory administration style tasks whilst off work, so long as they don’t engage in any ‘commercial’ duties. It is not clear whether all directors can be on furlough, or one must be retained to operate the company. Indeed, given the official communication that persons operating from ‘Personal Service Companies’ may be eligible, it tends to suggest that one-person companies can operate a furlough policy. However, given that many ‘one-man bands’ pay themselves by dividends, any salary they take will often be less than £10,000pa which is likely to make any entitlement to salary replacement minimal.
Another significant point is that anyone with the virus will be entitled to Statutory Sick Pay. Furthermore, if someone who is not sick needs to stay at home in accordance with Government advice, for example because someone they live with is ill, they may also qualify. Please also read the section below concerning Statutory Sick Pay and COVID-19 The Government has asked employers to use their discretion with regards to medical evidence, as clearly the system will not be able to cope with issuing doctors’ notes on a vast scale. If someone returns from sick leave they can be put on furlough thereafter. Note that taking time off to look after someone else, does not appear to qualify for sick leave and reference should be made to the rules governing time off for dependants.
Similarly, Statutory Maternity Pay, Paternity Pay, Adoption etc are also still in place and will apply where appropriate.
It should be borne in mind that the minimum furlough period is three weeks and introducing short weeks or reductions of hours do not appear to be acceptable, for example, working a four-day week instead of five will not count as a furlough. However, it may be possible to rotate furloughs so that one individual takes, say, three weeks then returns to work whilst a different person is put on a three week furlough, thereby spreading the impact across the workforce.
Only employees on the payroll on 28 February (meaning that the employer must have set up a PAYE scheme by then) are eligible and there are rumours that it may be possible to include people who left since then and re-joined. However, HMRC’s guidance seems to imply that this may only apply where someone was made redundant after 28 February then re-hired. People on zero hours contracts on that date are eligible, but calculation of their salary will be slightly different. The scheme covers full- and part-time workers and it is possible to be furloughed on one job whilst still working on another (each employer has a separate cap so it may be possible to earn, say, £5,000 per month from two jobs!). Employees on Agency Contracts are also covered. Employees on unpaid leave cannot be furloughed unless placed on unpaid leave after 28 February.
Employees can do volunteer work or training whilst furloughed, but it seems that compulsory training courses may entail the employer paying at east Minimum Wages for the time incurred. It would seem that this does not apply to cases where an employee studies alone.
So, what is available? Essentially, the first announcement was that the Government would fund 80% of eligible employees’ salaries up to a cap of £2,500 per month per employee. It was subsequently confirmed that the payments would be £2,500 plus Employer’s NIC and Employer’s Auto Enrolment Pension Contributions. Essentially, payments to employees earning £37,500 (£3,125 per month) or under will be eligible for £2,500 gross per month plus Employers NIC and Pension from the Government at a future date. They do not have to be paid their full salary. Employers may choose, for example, to inform staff that their pay will reduce to either 80% of normal rates, or £2,500 per month, whichever is the lower. However, the figure cannot fall below the minimum wage.
If the staff member is furloughed for less than a month, say three weeks, then the calculation will need to be honed accordingly by calculating the furlough pay by reference to working days lost. So, 3 weeks may equate to 15 working days lost out of, say, 23 working days in the month, so 15/23rds multiplied by the monthly pay.
If the employee has been employed for at least 12 months (at the time of the claim), then it is possible to claim the equivalent month from the previous year, or the average monthly amount in the year to 5th April 2020. This may work well in March for people paid an annual amount each March, but then would they be able to flip to the average amount in April, where there is no prior year equivalent? It would seem so as if the reference is to each month, then it would seem that a choice is available each month. If an employee has worked for less than 12 months, you should take an average over the period that they worked. However, if they only started part way through February 2020 then you will need to extrapolate the monthly pay accordingly.
However, the fact that this cash can only be reclaimed in the future, as things currently stand, leaves a potential headache for employers who will still need to fund the net amount of salary in the meantime. Where this is a problem, it seems that the recourse may be to consider the Business Interruption Loan Scheme (see below) which involves the Government, effectively, underwriting loans from commercial banks and lenders.
Holiday entitlement accrues over the furlough period. Statutory provisions have been enacted to allow staff that don’t take all of their holiday during a ‘leave year’ to carry it over to the next 2 years. Similarly, employers won’t need to ensure that full holidays are taken. Should an employee leave, then accrued but untaken holiday must be paid to them. Needless to say, the cause of the untaken leave must be due to the wider implications of COVID-19, essentially that it was not ‘reasonably practicable’ to take the leave. Finally, an employer may insist that leave is not taken, which would seem to be a provision to ensure vital roles are carried out during the pandemic.
There is some debate as to employee rights where someone is deemed employed for tax purposes but self-employed under employment law (as is not uncommon in the entertainment industry). Engagers will be worried that putting someone on furlough in such circumstances may grant them employee rights. Whilst we do not know the answer to this at present, it would seem unlikely given that this is a financial package operated by HMRC, but never underestimate the judiciary’s capacity to overturn logic at a future date!
The claim process (which will be online with HMRC) is not currently open, but when it is then a claim can be made at least every three weeks. Claim payments will be made into the employer’s bank account.
Note that payments received under this scheme should be treated as taxable income of the employer but will, of course, be offset by the actual wages paid. Wages will still be paid through a payroll and tax and NIC operated. As previously noted, there is a cash flow issue here, and it remains to be seen how quickly HMRC can process repayments. It is likely that they will pay upon application and investigate later to check some claims, but this is not clear at the time of writing and they might withhold suspicious looking claims in some cases.
It may be worth contacting HMRC to try and defer PAYE payments whilst awaiting the cash from HMRC (see below)
Statutory Sick Pay and COVID-19
This measure is open to small and medium sized entities with fewer than 250 employees. It covers all costs for employees over a two week period where they are claiming Statutory Sick Pay. Medical Certificates from GPs will not be required. At the time of writing, details are not available of exact amounts and how claims will be made. The scheme will operate from as soon as the regulations are enacted.
Deferring VAT payments due between 20 March and 30 June 2020
This scheme is only a deferral, but does help with cash flow. Payments due between 20 March and 30 June may be deferred any time until 31 March 2021. Although this is optional, it would seem advisable in any event. It should be noted, however, that this doesn’t cover the Mini One Stop Shop scheme for European traders.
The presumption is that no interest nor penalties would be applicable to deferred payments.
VAT Returns will still need to be submitted on time, but HMRC does not need to be informed that you are deferring payments. Meanwhile, if you wish to defer but your VAT is collected by Direct Debit, then you’ll need to suspend the Direct Debit in the meantime!
Business Interruption Loan Scheme
The Government has marshalled the main banks and other lenders to engage in this scheme whereby the Government covers the first 12 months’ interest charges and the lender’s fees and guarantees up to 80% of the loan. The loan is still repayable and interest will run from the start of year two. Loans can be up to £5 million and last up to 6 years. The earlier requirement that it only applies to firms who cannot get commercial finance elsewhere has been scrapped and banks have been prohibited from requiring personal guarantees in addition to the Government support for loans of less than £250,000.
This may be an ideal way of covering furloughs whilst the Government processes the repayments, or for the self-employed whilst they await payments under their scheme. Different banks will offer different deals of course, so shop around but you may find that they give preference to existing business customers. There are eligibility criteria (available from the British Business Bank) and the business must have turnover under £45million. Larger businesses may be eligible for the COVID-19 Corporate Financing Facility.
As we write, there have been announcements that there will also be another scheme for larger firms not currently eligible for loans, under which the Government would provide a guarantee of 80% so that banks could make loans of up to £25m to firms with an annual turnover of between £45m and £500m.
HMRC Time to Pay Service
All businesses, including the self employed may contact HMRC and arrange a payment schedule on a case by case basis. Phone lines are likely to be busy.
Getting a delay on paying PAYE in order to pay the following month’s wages may be appropriate, especially as you will be able to point out that you should be able to pay once refunded by the Job Retention Scheme payment.
Cash grants for the retail, hospitality and leisure sectors
These will apply to English businesses with premises and the relevant local authority will administer them. One off grants of £10,000 are available for businesses with rateable values of up to £15,000 and £25,000 for businesses whose premises have a rateable value of up to £51,000. The grants are sector specific and the premises must be used for shops, restaurants, cafes, drinking establishments, cinemas and live music venues, for assembly and leisure or as hotels, guest and boarding premises and self-catering accommodation. Local authorities should contact qualifying businesses in due course. However, they may miss some, so be alert and contact them if you are in doubt.
Rates holiday for the retail, hospitality and leisure sectors
There will be a rates holiday for English retail, hospitality and leisure businesses over the 2020/21 year who use their premises for shops, restaurants, cafes, drinking establishments, cinemas and live music venues, for assembly and leisure or as hotels, guest and boarding premises and self-catering accommodation. Local authorities should contact qualifying businesses in due course. However, they may miss some, so be alert and contact them if you are in doubt.
Rates holiday for nursery businesses
There will be a rates holiday over the 2020/21 year for English nursery businesses who use their premises as providers on Ofsted’s Early Years Register or premises wholly or mainly used for the provision of the Early Years Foundation Stage. Local authorities should contact qualifying businesses in due course. However, they may miss some, so be alert and contact them if you are in doubt.
Support for businesses that pay little of no business rates
The Government will provide additional Small Business Grant Scheme funding for English local authorities to support small businesses that already pay little or no business rates because of small business rate relief (SBRR), rural rate relief (RRR) and tapered relief. This will provide a one-off grant of £10,000 to eligible businesses to help meet their ongoing business costs. To be eligible the business must, as of 11 March 2020, be receiving small business rate relief. Local authorities should contact eligible businesses.
Companies House filing of accounts
If a company’s accounts are likely to be late due to COVID-19 then they can apply to Companies House for a three month filing extension so long as the accounts filing date has not already passed. This should be done online at Companies House website.
As you will probably have heard, the Government has announced some help for the self-employed over a three month period. To be eligible, a self-employed person’s trading profits must, effectively, be generally less than £50,000 and constitute more than half of their overall income. At this stage, as with most of the Government support initiatives, some of the details are yet to be honed, but to apply an individual (or partner in a partnership) must:
- have submitted their Income Tax Self-Assessment tax return for the tax year 2018-19 (they have until 23 April to do so if they haven’t);
- have traded in the tax year 2019-20;
- be trading when they apply, or would be except for COVID-19;
- intend to continue to trade in the tax year 2020-21; and
- have lost trading/partnership trading profits due to COVID-19.
It is not clear yet how one proves a loss of profits, but it is probable that this will be by comparison to previous years. How this works with cyclical or sporadic trades, remains to be seen. For example, a ski instructor may not habitually work in April in any normal year!
There are two tests for seeing whether a trader meets the £50,000 maximum profits test. They must either have had trading profits of less than £50,000 for 2018/19, or the average over the three years up to and including 2018/19 averaged under £50,000.
For example, if over the last 3 years, their profits were as follows:
3-year average = £45,000
As this is below £50,000, both in 2018/19 and under the average test, then they would appear to be eligible.
The calculation of the grant they would be eligible to receive would then be calculated as follows:
You first need to determine whether this exceeds the maximum allowed. The grant can be up to 80% of £45,000 (the average) which equals £36,000
However, this would exceed the maximum allowed of £30,000
Per month (1/12): £2,500
Payable for 3 months: £7,500
HMRC would pay the £7,500 grant directly into the person’s bank account, in one instalment later on, but not during the 3 month period!
If the person’s average had been, say, £24,000, then the monthly figure would be £2,000, with the 3 month amount totalling £6,000.
The historic figures used will correlate to the person’s accounting period dates and, in consequence, what has been declared on their Tax Returns, rather than earnings between 6th April and 5th April each year.
Individuals cannot apply for this scheme yet. HMRC will contact eligible traders by the beginning of June and invite them to apply online. HMRC will use 2018/19 Tax Returns to identify eligible persons. However, using these criteria surely cannot identify a person with over £50,000 in 2018/19, but who meets the averaging test? HMRC are telling people not to apply yet, as this adds burden to the system, but it is reasonable to assume that anyone who qualifies but doesn’t get contacted by HMRC will have an opportunity to claim at some point.
Unlike the employee scheme, you can continue to work and claim the relief. The announcements seen at the time of writing do not specify how someone who continued to earn, say, £2,000 per month would be treated as it seems that they might be able to aggregate £4,500 (£2,000 actual earnings plus a £2,500 grant) whilst others get nothing. It is reasonable to expect that this will be addressed at some point, as will the proof of lost earnings. Indeed, it also may also be the case that the maximum is limited to the actual loss of earnings should it be lower than £2,500, although this is far from clear at this time.
It seems that anyone with a newly started business may fail to qualify as they cannot meet the 2018/19 declared profits criterion. The other issue which is bound to cause concern is that people, effectively self-employed but who trade through a limited company, paying themselves dividends (usually plus a small salary) are not covered by the announcement. This may well be addressed in due course, but we would need some clear definitions as to just who can qualify. Furthermore, if all directors are on the payroll, then they would be employees and it is considered difficult to qualify for a furlough under the employee scheme because, essentially, anyone on an employee furlough must not work for their employer at all during the furlough. This would seem difficult for a single person company. In a company with, say, 3 directors, it may be possible to put, say, 2 on furlough. As things stand though, persons operating through a company and taking dividends look a bit stranded…. Universal Credit may just be the only way unless further measures are being considered. Training can be undertaken whilst on furlough but the employer must pay at least minimum wage whilst this is undertaken even if it exceeds 80% of the salary.
Some freelancers flit between employee engagements and self-employed engagements, a situation made worse by HMRC’s aggressive IR35 campaign. It would seem that, so long as the self-employed element was more than 50% of earnings, then they would be eligible, but if the employee status earnings were high, this could be a problem. Indeed, as these employment contracts would be short term, it seems unlikely that they would be eligible for furloughs under the employee scheme. Where a person has two current PAYE positions, it is possible to continue to work at one whilst on furlough for the other. For people on zero hours contracts, an average will be used over recent months to estimate any claim.
As things stand, anyone who falls outside of these conditions should look towards the benefits system. It will not be sufficient in many cases and there will be injustice unless some means of working to help unfortunate cases can be found. This is unlikely to be addressed immediately as Government time will be focused on initiatives that cover the majority before honing down to less common scenarios.
With regard to Universal Credit, the calculation will ignore the Minimum Income Floor during the virus period, which is slightly helpful. Anyone with substantial savings and other income may find that this impairs their claim, and it will seem very unjust in some cases when compared to the standard packages for others. Hopefully this might be reviewed at some point when things become more orderly.
Outside of the grants to cover earnings losses, there are other areas that the self-employed might explore.
The 31 July 2020 second instalment tax payments on account for 2019/20 can be deferred to 31 January 2021. There is no need to apply as this is automatic. Bizarrely, HMRC suggest that if you can pay then you should still pay on 31 July…. good luck with that HMRC! In fact, you do not need to be self-employed to benefit from this initiative.
Similarly, (as explained above) there is no need to make any VAT payments between 20 March and 30 June. This is a deferral and payment can be made any time up to 5 April 2021. Remember, that this is only for the specified period and, unless it is extended, payments will recommence as normal in July. Meanwhile, anyone paying their VAT by direct debit is advised to cancel the Direct Debit in the meantime.
English Retail, hospitality and leisure industry businesses may benefit from the rates holiday in some instances. The local authority will contact them. They may also be eligible for grants of up to £25,000, but they will need to be operating from premises and paying business rates (see above).
There is also the Coronavirus Business Interruption Loan Scheme (see above). The Government will cover the first 12 months interest and lender fees on loans of up to £5million and guarantee 80% of it. The major banks are all involved and borrowers will need to assess their respective offerings.
There is plenty more to be addressed, both in honing the already announced schemes and dealing with the less common scenarios where the hard luck stories will be numerous.
The Nyman Libson Paul to do list
- Stop the VAT direct debit immediately if you are a payer. Repayments will be made as normal.
- Phone the coronavirus PAYE helpline and agree a PAYE time to pay arrangement.
- Contact your landlord and request a rent reduction/deferral. Check if the rates relief applies to you.
- Consider each and every employee and placing them on furlough where they are idle. Consider which employees should be made redundant with furlough as an alternative. See sample furlough letter attached. Consider any costs that will be paused if you furlough someone e.g. software costs, training.
- Reduce hours or suggest unpaid leave of certain employees where possible.
- Consider the Coronavirus business interruption loan scheme.
- Review on a line by line basis all expenditure to identify cost reductions and deferrals.
- Review all standing orders and direct debits to see what can be cancelled or reduced.
- Consider salary reductions for senior management team and all staff.
- Prepare a rolling 60/90 day cash flow for the business. Update this every day.
- Cancel all orders and negotiate any deposit rebates (furniture etc).
However, in the meantime, if you have any concerns or questions, please get in touch with your usual contact at the Firm.