The Fizz! Blog

HMRC pushing back on early furlough claims

In Spring 2020, a company called Carlick Contract Furniture Ltd furloughed much of their workforce, and began claiming funds from HMRC under the Job Retention Scheme to cover the cost. As part of that process, they did something that a lot of other employers will have done. They included a couple of new employees, who had been taken on in February 2020, but hadn’t been paid that month - as is often the case with people who start late in the month, it was agreed that they’d just be paid for their February hours on their March payslip.

However, the JRS rules were actually unambiguous on this point. Although people were quite understandably wanting to stretch those rules in the interest of fairness, it was made quite clear that to come under the scheme, an employee had to have formed part of a formal payroll report to HMRC prior to 19 March 2020. For most monthly-paying employers, that meant the person had to have been paid at the end of February. It wasn’t enough to have been an employee, you had to have had salary actually reported to HMRC. This isn’t something that emerged later on - it was widely discussed on accounting and payroll forums and everyone advising on claims and making them knew or should have known about it.

HMRC picked up the point, and demanded Carlick repay the money. The First Tier Tribunal has ruled (whilst expressing some regret) that they’re within their rights to do so, despite the claim having been in the spirit of the rules. This is obviously very unfortunate for the employer, who hasn’t benefited from the money and was really being kind to the employees, who otherwise they’d have simply cut loose. But it was always clear that the claim was not permitted by the letter of the law, so if you made a similar claim you should expect there to be a good chance that HMRC will come and ask for the money back at some point, and that if they do then you’ll have to pay.

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Do I qualify for the fifth Self Employed Income Support Scheme grant? And how does the turnover test work?

We’re almost at the point where sole traders and members of partnerships can apply for the fifth (and final) grant under the Self Employed Income Support Scheme.  So, who qualifies and how much do they get?

The big picture remains pretty similar to before, this time for those who were self-employed (but not those who work via a limited company) in both 2020-21 and 2019-20.  The grant is for those whose income comes wholly or mainly from self-employed profits of less than £50,000 a year.  You must have submitted your 2019-20 tax return by 3 March 2021, and you must continue to operate your business and intend to do so beyond the point of making the claim.

This final grant covers the period 1 May 2021 to 30 September 2021, and when making a claim you declare that you believe your profits will be significantly down for that specific five-month period, because of the impact of COVID-19 - the grant is only for those still struggling.  If you’re doing OK now, you can’t apply.

So far, so good.

When it comes to the amount payable for those who qualify, though, there’s a twist.  For grants 1 to 4 you either qualified or you didn’t - the amount you were paid was then just mechanical and based on a percentage of average profits.  For grant 5, there’s an extra stage, though, designed to try and distinguish between different levels of distress.  You might get 80% of your average quarterly profits, capped at £7,500 (the same as grant 1).  But you might get just 30%!  There’s a sudden and serious cliff-edge.

Which category you fall into depends upon how much your turnover (revenue from customers) fell in 2020-21 compared (usually) to 2019-20.  If it didn't fall at all, you’ll get nothing.  If it fell by less than 30%, you’ll get the 30% grant (well done to HM Treasury for using the exact same percentage for two wholly different purposes, which is not at all confusing), capped at £2,850.  If it fell by more than 30%, you’ll get the 80% grant, capped at £7,500.  (By the way, if you started in self-employment during 2019-20 and weren’t self-employed at all in the previous three years, you’ll also get the 80% grant, and don’t even have to tell HMRC about your turnover).

If 2019-20 was atypical for some reason, then you can use 2018-19 for the comparison, though you need to be able to justify why 2019-20 was unusually low and thus an unreasonable starting point for the comparison.  Examples HMRC give in their guidance include being on long term sick leave or parental leave, or losing a large contract.

There are some traps you could fall into if you’re not careful.  If you’ve more than one self-employed business, you have to look at the turnover of them all put together, not just the “main” one.  And if one of your tax returns had turnover for a period other than 12 months because of a change of accounting period, you have to annualise it before doing the comparison.   Members of partnerships must use the turnover for the whole partnership, not just their share of it.

Importantly, you should NOT include previous SEISS grants in your turnover (which is logical, nobody would have imagined you should), and you should NOT include money received under the Eat Out To Help Out scheme (which is not quite so logical, as that’s money that was actually reflected in till receipts and VAT returns and so someone might reasonably consider it to be part of the revenue of their business).

HMRC have uploaded a video to YouTube with some guidance about how to work out your turnover but it’s not necessarily very good.  They accurately say if a tax return has been completed (many applicants have already submitted their 2020-21 return, of course) then you can just take the number from the return.  But they suggest that if you haven’t yet done the return, you could look at your bank statements and add up the money coming in.  That’s no good for a typical business that doesn’t use the cash basis, though, because it doesn’t take into account opening and closing debtors, for example.  Some of our 2020-21 turnover didn’t turn up in our bank account until invoices were paid after the end of the year.

In any case, you’ve until 30 September to claim (if you qualify).  So, if you haven’t done it, perhaps you should get your tax return done first!

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Bounce Back Loans – what are your options under Pay As You Grow?

Last month was the first big month for businesses to begin paying back Bounce Back Loans.  There were a few really early applicants who started repayments in May 2021, but June 2021 was when repayments started in earnest as it’s month 13 for the bulk of early borrowers.

Plenty of businesses find themselves in a position to repay the loans as originally scheduled (for the first year, there were no capital repayments and the government paid the interest; the capital and interest then get repaid over five years).  Many have actually already repaid their loans – it was quite common to take the loan just in case it was needed, with the intention to repay it before the borrower had to start paying the interest, and we’ve seen plenty of businesses doing that.

But there are some businesses that are still struggling.  Some of them would have been struggling anyway, but many are obviously struggling specifically because of the ongoing impact of the pandemic.  The good thing is that for those businesses there are some new, more generous repayment options, collectively known as Pay As You Grow (clever in that it rhymes with Pay As You Go, but stupid in that one might be confused by what PAYG refers to in some contexts).  The bad thing is that the Bounce Back Loan regime, which was lovely and simple, has been transformed into being rather messy.

Under PAYG you’ve three options:

1. You can extend the repayment term.  Rather than the initial six year loan, with repayments over years two to six, you can extend it to 10 years instead, with repayments over years two to ten.
2. You can take up to three six-month interest-only periods, at any point you choose.  You’ll still owe the capital amount, but you can have a breather from repaying it.  Each time you do that, you can also ask to extend the loan term by six months, UNLESS you’ve already extended it to 10 years anyway.
3. You can have one six-month capital AND interest holiday where you make no payments at all (you can’t split this holiday – or the previous three – into a greater number of smaller breaks.  It’s six months or nothing).  Again, when you do this you can ask to extend the loan term by six months if you’ve not already extended it to 10 years.

All three of those options are going to increase the cost of the loan to you in the end, because interest is always going to be based on how much you owe to the bank at any given moment.  The longer you owe money to them for, the more it’ll cost you.  So, although taking a loan “just in case” was more or less a no-brainer for many businesses, PAYG isn’t.

You don’t have to choose one of those options; you can mix and match them all and do the lot if you like.  The actual mechanism for applying is going to vary from lender to lender, but it’s likely you’ll just do it via their online banking platform.  You don’t need to get approved or credit checked – it’s your right to just tell the bank what you want.  Borrowers are assured that taking advantage of PAYG will not have an impact in itself on their credit rating – though of course it you’re having to take a payment holiday or extension because of some kind of financial distress, it’s likely that whatever is leading to that is going to be having some impact on that rating anyway.

There’s a good amount of kicking cans down roads in all this.  The initial BBL scheme meant that there was absolutely no incentive for banks to credit check applicants in any meaningful way at all (when the government has guaranteed the whole thing, why on earth would a bank spend even ten seconds contemplating the borrower’s ability to repay?).  That means that the borrowers (if we put the fraudsters to one side) are a mix of businesses with real prospects where making a loan to them is genuinely economically productive, and a bunch of hopeless cases where they didn’t have a viable proposition in the first place.  But perhaps these options will move a few businesses from the second camp to the first, and also help some businesses already in the first camp to recover and grow in a more secure way along a slightly less perilous path.

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Working from home allowances and PAYE codes

It’s long been the case that, if an employer requires an employee to work from home, they can pay them a small tax-free amount to reflect the extra costs that the employee might incur as a result. It’s also long been the case that, if the employer doesn’t do that, the employee can at least ask HMRC for tax relief on the allowance they could be receiving but are not.

Until 2020-21 it didn’t happen very often, but of course last Spring the number of employees working from home increased exponentially. Many (probably most) employers didn’t pay the allowance (£312 for the whole year) - apart from anything else, the employees were generally financially better off anyway as a result of not having to commute. So lots of employees claimed tax relief on the £312 instead, which meant HMRC adjusted their PAYE code to collect a little bit less tax each month.

With most PAYE code adjustments, HMRC automatically roll it forward year-on-year, on the assumption that the situation will persist. However, they’ve confirmed that they’re *not* rolling forward the home working adjustments, and a fresh claim must be made each year. This is more good than bad, as it avoids the risk of an inappropriate tax deduction being given for many years and then having to be clawed back by HMRC later when they realise. If you or your employees need to make fresh claims for 2021-22, here’s some more guidance:

https://www.gov.uk/tax-relief-for-employees/working-at-home

The extended Coronavirus Job Retention Scheme and a trap to look out for

In the Budget, the JRS was extended until 30 September 2021, from its previously scheduled end date of 30 April 2021.  Hopefully by the autumn relatively few employers will still need to use it, but it's there if they do.

In the first version of the scheme, claims could be made in respect of furloughed employees who'd been reported to HMRC prior to 19 February 2020 as being on the employer's payroll.  In the second phase, they had to have been reported to HMRC prior to 30 October 2020.  For this (fingers crossed) final stage, they need to have been reported to HMRC prior to 2 March 2021 as being on payroll.

So, that means that anyone who was on your February 2021 payroll can now be furloughed (if necessary) and a claim made from the government towards their wages, right?  Not so fast.  For a staff member who didn't meet the conditions for the first two phases, a claim can only be made for pay periods beginning 1 May 2021 onwards.  For March and April, the final two months of the current/second phase of the scheme, they're still excluded.  It seems quite likely a bunch of employers could miss that condition if they're not careful, and furlough recent starters in the mistaken expectation of being able to claim from the government towards their wages - this wrinkle has not been highly publicised.

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More furlough winners and losers

Many people were wondering what basis would be used for working out the appropriate furlough claims for March and April 2021 for staff on variable hours.  Up until that point, part of the process has involved looking back to the same month a year earlier, and using the higher of that month’s pay or average 2019-20 monthly pay.  But that process would start to fall apart from March, because if you looked back a year you’d be looking at a month that could itself already involve furlough pay, and then you may be starting to work with 80% of something that’s already been reduced to 80%, which is hardly fair.

The new rules have now been published, and they dictate that for those months, you’ll look back two years, to March 2019 and April 2019, for the single-month element of the "higher of" comparison.  That’s going to be great news for some people.  Somewhere out there, there will be someone on furlough who was paid on average £500 a month in 2019-20, but had a really big April 2019 when they were paid £3,000.  That means they’ll have had a furlough bonanza in April 2020, when the system looked back to April 2019 and based their pay on that big month.  And now they’re going to have another big furlough month in April 2021, getting a second chunk based on that same April 2019 pay.

On the other hand, this “look back” system produces losers too, even before the new March/April wrinkle.  Anyone with fixed hours who has increased those hours in 2020-21 and is now furloughed is going to be paid based on a similar look back to 2019-20.  Imagine someone was working three days a week back in January 2020, but within the last 12 months they’ve gone up to four days.  Now their employer has furloughed them for one of those four days a week.  They’re going to get no pay for that day, unfortunately.  The system will look at their usual hours back in January 2020, then look at their actual hours worked in January 2021.  There’s no difference, and that means there’s no claim.

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The Job Retention Scheme and the £2,500 monthly cap

January is the tenth month of the Coronavirus Job Retention Scheme.  It’s now been in place for so long that it’s easy to start to forget the basics that you became familiar with in Spring 2020.  In particular, we’re seeing quite a few businesses understandably confused about the £2,500 monthly cap on the claim for an employee.

The confusion comes where someone is only furloughed for part of the month.  If that’s the case, then the £2,500 cap is reduced accordingly.  So, if someone was furloughed on 13 January, and remained furloughed for the remaining 19 days of the month, the cap for them is 19/31 x £2,500, which is £1,532.

It’s easy to see why that’s necessary and appropriate if you stretch it to its logical conclusion.  If there was no such cap, someone could be furloughed for a single day in January and, provided their salary was £37,500 a year or greater, £2,500 could be claimed for them for just that one day!  Instead, £80.65 is the most that can be claimed.

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Tax at Christmas (COVID edition)

Around this time of year, we usually publish a reminder about the tax rules around Christmas parties and gifts.  Of course, there's a big change this year, which is that it's rather unlikely that many employers are going to be holding Christmas parties in person.  However:

• If you decide to defer your Christmas party until some time in 2021 when (hopefully) you'll be able to hold it in a safe and legal way, you'll still be able to benefit from these allowances - an annual event is an annual event, even if it happens late.
• HMRC have confirmed that if you decide to hold some kind of event online - so, perhaps you provide everyone with their food and drink at home and all meet up on Zoom - then that event is covered by those allowances too.  To be honest, it's perfectly obvious that such an event will be covered, and we're not quite sure who would have asked for confirmation from HMRC, but there it is for avoidance of doubt!

So, having said that, the framework remains the same as ever.  If an employer provides a Christmas party that's available to all of its staff (note that this really applies to PAYE employees, as opposed to, say, freelancers), where the cost is less than £150 per head, then it can reclaim all of the VAT and deduct the entire remaining cost from its profits before working out its tax bill - effectively, if a normal VAT-registered limited company holds its party at a normal VAT-registered venue, every £100 spent on the party ends up costing the company £67 in the long run, once they've got the VAT back and saved corporation tax on what's left.  Actually, those allowances apply to annual events, not specifically Christmas ones - so you could have, say, a summer barbecue *and* a Christmas party costing less than £150 a head in total and still reclaim all of the VAT and get tax relief on the balance.

If you want to give a Christmas gift to staff, then in practice HMRC consider a relatively small item like a turkey or a fairly normal bottle of wine to be trivial, and won't try to tax the employee on the value of the gift (as we've written before, sporadic gifts and benefits each valued at £50 or less are now explicitly considered trivial by HMRC).  Assuming there's VAT on the gift when you buy it, then once more the ultimate cost of £100 of staff gifts to a normal VAT-registered limited company employer will be £67.  Anything more valuable the employees will have to pay tax on - and you'll have to pay National Insurance too.

If you give gifts to customers, then they'll only save you tax if:

• The total value of gifts in a year to the customer is less than £50,
• The gift has a clear advert for your business on it, and
• You can't eat, drink or smoke it!

If you want to give a customer a bottle of whisky then that's still completely fine, and may well make great business sense!  It's just that for every £100 you spend on gifts like that, it costs your business the full £100 - you can't reclaim any VAT or reduce your corporation tax or income tax bill at all.

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Winners and losers in the extended Job Retention Scheme

So, after accountants and employers spent a lot of time getting to grips with the first (fairly pointless) and second (somewhat more attractive) iterations of the proposed Job Support Scheme, it's been scrapped.  Instead, the existing Job Retention Scheme has been extended until at least March.  The scheme mostly continues as before, but since it's designed to admit new starters who didn't qualify first time around, there are some quirks.  Some people will do well, others badly.

• Anyone who was on the payroll back when the scheme first came into play has their furlough pay entitlement worked out on the same basis - by looking back to their 2019-20 pay.  That means that if they've had a pay rise or started to work more hours in 2020-21 and now get furloughed, they lose out.  Their entitlement will be based on their old, lower pay.
• However, it also works the other way round - if their hours have been decreased in 2020-21, their furlough pay will still be based upon their old, higher pay.  Lucky them.
• You might have two people doing the exact same job, at the exact same pay rate.  But if one of them started during 2020-21, whilst the other was on the books back in 2019-20, they could have different entitlements to furlough pay.  The newer starter's will be based on their September 2020 salary (if they're on a fixed salary).  The longer-standing employee's will be based on their pay back in February.  If they've had a pay rise since then, they lose out - it's not going to be reflected in their furlough pay.  And you could have an employee on variable hours who averaged 30 hours a week in 2019-20, and a colleague who averaged 10 hours a week.  In 2020-21, they might be averaging 20 hours a week each - but the first employee is entitled to three times as much furlough pay as the second.
• In the first phase of the scheme, an employee had to be furloughed for at least a solid three-week period in order to be eligible for the scheme.  That requirement has gone now, so employers experiencing some COVID-related decline in demand, but not enough to send anyone home for weeks at a time, will be able to get a bit of support previously unavailable to them.
• A lot of company directors missed out on furlough pay last time round, on the technicality that their payroll was filed annually, at year-end, so missed the cut-off date for the scheme (none of those directors were clients of this firm - we've always filed director payrolls on a monthly basis).  This time round, they're in.

Despite the oddities of the rules, some employers will choose to top the pay up of those employees who lose out because of the new scheme. This is not something all employers will be able to do though, and in all of these schemes there will be unavoidable unfairness.

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The Job Support Scheme v2 – significantly more generous than v1

In an earlier blog following the announcement of the Job Support Scheme, we said that the numbers weren’t really likely to encourage a rational employer to keep staff on under the scheme. Anyway, the rules for the scheme have been torn up and replaced – it turns out the numbers weren’t really likely to encourage a rational employer to keep staff on under the scheme. Who knew!

Here’s what’s changed.

The new scheme still begins on 1 November.

Previously, it was going to require an employee to be working at least 33% of the time. The employer had to pay them for that time, of course. For the remaining non-working time, the employer would pay a third, the government would pay a third, and a third would go unpaid. The employer would pay the NI and employer pension due on the whole payment. That was pretty expensive for the employer – they were paying for a lot of idle time.

The considered, more generous scheme has two variants. One for businesses that can still legally open (JSSO) and one for ones that must close (JSSC).

JSSC is easy – if your business has been mandated to close because of government restrictions, the government will basically pay two thirds of employees' pay. The employer need pay no salary.

JSSO is more complex, naturally. Basically, the proportions have changed. The employee must now be working at least 20% of the time (so one day a week is enough, albeit someone working every - say - Wednesday might technically find themselves working less than 20% of their usual hours depending on whether there were four or five Wednesdays in that particular month, under the obtuse way that Usual Hours are framed under the JRS and JSS rules). The employer has to pay them for all their actual working time. For the remaining non-working time, whatever that may be, the employer now only has to pay 5%, the government will pay 62%, and the remaining third will still go unpaid just as before. The employer will continue to pay the NI and pension costs on the total payment, but that’s still a considerably less onerous burden for them to bear.

A bit of guidance came out last Friday, there's more due at the end of this week.  The last minute nature of it is frustrating when you might need to write to your employees to tell them what’s going to be happening to them next week.  But at least the scheme might now be useful for more employers.

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