As part of the Government’s measures to help businesses through the Covid-19 pandemic, the Chancellor last night announced the ‘Job Retention Scheme’.
In this article, we look at how the scheme impacts small limited companies, as well as the directors of these owner-managed limited companies.
Note: there are changes being made from 1st July.
What is this?
To reduced layoffs due to coronavirus, the government will pay 80% of the usual monthly gross salary, plus associated Employer’s NIC and minimum auto-enrolment employer pension contributions on that wage, up to a maximum of £2,500 per month.
The scheme is to be backdated, to start from 1st March and has recently been exteded by 1 month, to cover a total of 4 months, so to 30th June.
Note that any amount is paid gross of tax, and therefore is still taxable in the normal way (and would still go through the PAYE system just like any normal payroll payment).
Can directors claim?
It’s clear now that directors of their own company will be able to claim the JRS for themselves.
In terms of what directors can and can’t do whilst on furlough, HMRC state that “Where furloughed directors need to carry out particular duties to fulfil the statutory obligations they owe to their company, they may do so provided they do no more than would reasonably be judged necessary for that purpose, for instance, they should not do work of a kind they would carry out in normal circumstances to generate commercial revenue or provides services to or on behalf of their company.”
The following tasks can be done by directors whilst on furlough:
- Prepare and submit tax returns
- Prepare and submit annual accounts
- Furlough staff
- Have board meetings
The following tasks cannot be done by directors whilst on furlough:
- Generate revenue
- Do work which would normally be billed to a client
- Do the kind of work that would normally generate revenue
Whilst this is not particularly clear, it’s our advice to err on the side of caution and not do too much if you’re placing yourself on furlough.
What will directors receive?
Unfortunately, because of the salaries that most directors take from their limited company, the amount you’ll receive as a grant isn’t a lot.
You’re likely to be earning a lower than market salary for tax efficiency reasons; probably around £719 per month if it’s just you, and perhaps around £1,040 if there’s another director or employee.
If it is the case that, then you won’t, unfortunately be able to benefit from the full £2,500, but will still be able to claim based on your salary of, say £719 per month, subject to the conditions in the section below.
Note that dividends that you receive do not count towards your earnings for the JRS; only the salary that you’ve received through a PAYE scheme counts, when calculating the grant that Government will pay.
What should directors do?
As we’ve said above, there is a relatively small benefit to you as a director of the Job Retention Scheme, probably of around 80% of £719 = £575 per month.
Of course, if you really can’t work and do anything from home (such as where your role is very location-specific), then it makes sense to furlough yourself.
Where you can work from home as normal, it seems likely that it’s going to be more beneficial to simply carry on working.
Where you can’t do what you normally do, but can only do a reduced amount, you need to make the decision between:
- Not working at all, so that you can claim the £575 per month.
- Forgoing the £575 per month to work as much as you can from home, as you believe that will put your company in a better position now or in the future than doing nothing and claiming the £575 per month.
How do I furlough myself?
To furlough a director, HMRC state that the board (just you if you’re a sole director) must document the decision formally.
We have put together a template for board minutes to use to furlough yourself: see here.
What are the conditions?
The conditions are as follows:
- To receive the 80%, the worker in question needs to be ‘furloughed’. This can only happen if the employee is not working.
- To be furloughed, the employer must write to the employee: ask your CFO360 Contact to send you a template letter that you can send to employees.
- We then advise that you ask employees to confirm in writing that they accept being furloughed: again, ask your CFO360 Contact to send you a template.
- The claim needs to be for a minimum of 3 weeks. If an employee was furloughed for less than that, the employee are not eligible.
- The employer must have created and started a PAYE scheme as at 28th February 2020.
- The employee must have been employed as at 28th February 2020.
- The employer must have a UK bank account.
How is it calculated?
- For full time or part time employees salaried employees, use the gross salary as at 28th February (not including any bonuses or commission).
- For employees whose pay varies, who have been employed for a full year, employers can claim the higher of either:
- the amount they earned in the same month last year
- an average of your monthly earnings from the 2019-20 tax year
- For employees whose pay varies, who have been employed for less than a year, employers can claim for an average of the monthly earnings since they started work.
- The same arrangements apply if your monthly pay varies such as if you are on a zero-hour contract.
- If you started work in February 2020, your employer will pro-rata your earnings from that month.
- Bonuses, commissions and fees are not included as part of your monthly earnings.
How to claim
HMRC currently don’t have a mechanism in place for this, so are working quickly to get this up and running.
There are then two steps:
- 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). The information you’d need to make the claim is:
- 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 consecutive weeks)
- your bank account number and sort code
- your contact name
- your phone number
HMRC will then reimburse you, outside of the normal processes.
When does this start?
HMRC are busy trying to get the mechanics of this scheme in place.
For March payroll, we should proceed as normal, assuming that your company will support the other 20% of pay. The repayment of the 80% will then take place in April, once the HMRC systems are up and running.
Where this isn’t the case and you want to pay the 80% only, you can do that according to the HMRC guidance, but it’s worth checking the employment law implications.
How this impacts small limited companies with employees
If your employees are not working (and not working from home), then this scheme is going to be very useful to you.
You can keep your employees on payroll even if you can’t afford to, because the government will pay 80% of their salary.
As the employer, you can decide whether or not to pay the additional 20%.
Remember, you do need to confirm in writing to employees that you’re going to furlough them; ask for a template from your CFO360 Contact.
What are the employment law implications?
This isn’t our area of expertise, so we’ve taken the below from the Brightpay.co.uk website , where they state the following:
“Changing the status of employees to a furloughed worker remains subject to existing employment law. Generally, where an employee’s contract contains a layoff or short term clause employers should be able to place employees on furlough leave. Where there is no such clause, it is best advised to get agreement from the employee.
Additionally, a 20% reduction in salary will be a change in terms and conditions of employment. Where employers are not topping up the government payment, they should also seek agreement from the employee.
Given the current situation and the alternatives for those employees should they not agree, one can expect that most employees will agree. That said, prudent employers will seek to get their employees agreement as part of their furlough leave process.”
