The Fizz! Blog

The Job Support Scheme – does it add up?

As of 31 October, the Coronavirus Job Retention Scheme (the JRS) will cease to exist.  We now know about the details of its successor, the Job Support Scheme, or JSS.  The JSS isn’t as generous as the JRS – it’s clear that the government are now at the point where they recognise that many jobs simply aren’t coming back any time soon, and can’t be subsidised forever. 

Here’s an example.

Let’s say you’ve an employee on £24,000 a year, so £2,000 a month – adding in £175 of National Insurance and £44 of pension contributions, they’ll cost you £2,219 a month.

At the moment, you don’t have enough work for them to do, but as long as you bring them in at least 33% of the time and pay them for that time, the JSS will contribute towards the rest of their wages.  It’ll pay a third of the remainder (up to a maximum of £697.92), with you paying another third, the rest going unpaid.  The employee doesn’t quite get a full wage, but it’s a decent deal for them.

If you’ve enough work for our example employee to come in 50% of the time, you’ll have to pay £1,000 a month for that.  That leaves a balance of another £1,000.  The JSS will pay a third of that - £333 – and you have to pay another £333.  That gives the employee a total wage of £1,666 for the month – 83% of their usual salary for working 50% of the time, not too bad!

It’s not such a good deal for the employer though.

As well as paying £1,333 of salary (£1,000 for the time they’re working and another £333 for the time they’re not), you have to pay National Insurance of £129 and pension contributions of £35.  So your total outlay is £1,497.  If the employee works a 40 hour week, then when they were working full-time the total cost to you worked out as just less than £13 an hour.  Now the cost per hour is more than £17 – it’s more than 33% higher than it used to be.

Presumably you considered what you used to pay to be a fair economic bargain for the value generated by the employee, and it’s unlikely that they’ve now become 33% more productive.  So, is a rational employer likely to think that the JSS offers a good deal?  Probably not, especially if you’re juggling a bunch of employees – two people working 50% of their normal hours clearly cost miles more than a single employee working full-time, so there’s a big financial incentive to get rid of part timers and try and give the work to a smaller number of full-time staff (whereas normally NI and pension thresholds mean there’s a small financial incentive to favour part-timers). 

So, just based on the numbers, it doesn’t on the face of it make much financial sense for employers, which is just the inevitable corollary of it being a great arrangement for employees with a fairly small government contribution (contrast the maximum government contribution of £697.92 with the maximum of £2,500 they'd contribute under the JRS).

But, there could still be some situations where the numbers stack up.

There could be “switching costs” that you need to think about.  If that employee’s been with you for a while, they’ll have built up some entitlement to redundancy pay.  That could be, say, £5,000.  And if you think you’ll need to recruit a replacement for them in the Spring if things pick up again, and you’ll do that by paying a recruiter, that could be another £5,000.  So you might think that overpaying someone for a while is better than shelling out £10,000 to ditch them and replace them in the Spring – although that does of course rely upon the degree of confidence you have about 2021.

And there will also be situations where it’s not all about the numbers, of course.  Many employers will want to support employees through a difficult time, and may well be content with what’s a bad deal based on the numbers.  It’s not always about spreadsheets!

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Applications for the second and final Self Employed Income Support Scheme grant open next week - here's what you need to know

Sole traders and partners in partnerships who were eligible to apply for the last SEISS grant in May are going to be eligible to apply for another, with applications open from Monday 17 August.  If you didn't meet the basic income eligibility criteria for the first grant, you won't meet them for the second one either.  They're exactly the same.  This second grant isn't going to help anyone whose income meant that they were not eligible for the first one.

 

This time the payment will be at a slightly lower level; the first one was at 80% of three months of average profits (quantified on a basis that we won’t go over yet again), capped at £7,500.  The second one is at 70% of the exact same average profits figure, meaning that the grant will be 7/8ths of the previous one, and the cap is £6,570.

 

You can only apply if you've been affected by Coronavirus, and they're clear what that means for this second grant.  You can claim this grant if "your business has been adversely affected on or after 14 July 2020".  Although HMRC have produced some guidance around how you might judge whether that applies, that's guidance not law.  The legislation is clear - your business simply has to have been adversely affected in some way since then.

 

That means it'd be quite possible for it to be appropriate to claim one grant and not the other.  For those who meet the basic income condition, there are four possible permutations:

1. Claiming both grants.  Most claimants will probably have been legitimately adversely affected over both periods so will claim both payments.
2. Claiming neither grant.  Some industries have done well over this period, and for many people there's no claim to legitimately make.
3. Claiming the first grant but not the second.  You may have suffered over the first few months of the crisis, but as of July you'd got back to normal and are expecting similar income in these summer months as you’d usually have, in which case it’ll be appropriate to have claimed the first grant but not the second.
4. Claiming the second grant but not the first.  If your income was unaffected over the early months of Coronavirus then you won’t have claimed the first grant, but perhaps now the jobs you were working on are finishing up and not being fully replaced because of the crisis, in which case it’ll be appropriate to claim the second grant.

As before, you 'll have to certify that your income has been affected, and it’s always possible HMRC will one day check up on that – a self-employed-person who winds up with similar income as usual in 2020-21 AND a grant may have some questions to answer.  There's nothing in that basic scenario that indicates there's definitely a problem - your income this year may be bigger than last year, but if it would have been bigger still were it not for Coronavirus then you've been adversely affected nonetheless, and you absolutely qualify.  But the question could be eventually asked.  And you have to certify that you are still operating your self-employed business – which won’t be the case if, for example, you moved your business into a limited company since 5 April 2019, or you’ve left the UK and don’t meet the criteria for reporting self-employed income here on an eventual 2020-21 tax return.

 

And don't forget - it's taxable.  It'll go on your eventual 2020-21 Self Assessment Tax Return and be taxed as part of your income.  If you're in the sensible habit of putting aside some of your income for the eventual tax on it, don't leave this payment out!

 

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FFS – it’s the Flexible Furlough Scheme

As of 1 July, the new version of the Coronavirus Job Retention Scheme came into play.  The good thing is that employers can now flexibly furlough their staff – it’s not all or nothing, they can work some of the time and the government will subsidise the times when there’s no work to do.  The bad thing is that it’s really complicated.

To recap two things to begin with:

1. An employee can only be part of the new JRS v2 if they completed an uninterrupted three-week period of furlough under JRS v1 by 30 June.
2. The maximum number of employees you can claim funds for in a single month under JRS v2 is the greatest number you claimed for in a single claim in JRS v1.

There’s an exception on both of those where an employee could not meet the qualification for furloughing in JRS v1 as they were on parental leave, but aside from that it’s very simple.

How does furloughing work now?

Most things are the same as they were.

For someone who is still completely furloughed, July looks identical to June in every respect – the scheme will reimburse 80% of normal pay, up to £2,500, plus associated National Insurance and statutory minimum employer pension costs.

For someone who comes back to work for good at some point in the month, July is also the same as June – the scheme will reimburse you for costs up to that point on an identical basis, and after that you’re on your own.

If someone comes back to work part-time or on some other sporadic basis, that’s flexible furlough, and that’s where it gets more complex.

If someone is flexibly furloughed, do they have to have a new formal pattern of working?

Not at all.  You just have to keep track of the hours they do work.

What can be claimed for an employee if they’re flexibly furloughed?

The employer must pay the employee’s wages in full for the time they’re working, obviously.  That’ll just be in line with their employment contract, and there’s nothing special about it.

JRS v2 will reimburse the employer for the time that the employee is not working.  It does that on the basis of “usual hours” – you have to work out the employee’s usual hours and subtract the hours they’ve worked.  The balance can be claimed under JRS v2, with the usual 80% restriction and pro-rata £2,500 cap.   As with JRS v1, you can top the employee up to 100% if you like, but it’s at your own cost.

How do I work out an employee’s usual hours?  Do I look at how many hours they’d normally have been expected to work in the month in question?

No, you don’t.

Although historically more or less all payroll calculations have always been done on the basis of actual working days, as with JRS v1 there’s a calendar day system for JRS v2.  For an employee with fixed working hours you need to assess the average hours per day in whatever the employee’s “repeating working pattern” is, then multiply that by the number of days in the month.  For an employee with variable pay, it's more complicated.

The best way to illustrate it is just with some examples.

Example 1 – an employee with fixed weekly hours

Imagine someone who works full time and does a 35-hour week, 7 hours a day Monday to Friday.  They have a repeating working pattern that’s seven days long.  That works out as five hours per day (35 divided by 7).  For July, their usual hours for flexible furlough purposes will be 155 - 5 hours multiplied by the 31 calendar days in July.   They wouldn’t really have worked 155 hours if they’d not been furloughed, because of the way the weekdays fall – there are 23 weekdays in July so they’d have worked 161 hours (7 hours multiplied by 23 working days), but that doesn’t matter.  It’s a strict calendar day calculation.

Example 2 – an employee with fixed hours who works every other Wednesday

You might, though, have an employee who does a 6-hour day on Tuesday and Thursday every week, along with every other Wednesday.  Their repeating working pattern is a fortnight, and they work 30 hours in that time.  That works out as 2.14 hours a day.  So, for July their usual hours for flexible furlough purposes would be 67 – 2.14 hours multiplied by the 31 calendar days in July, rounded up (if it’s a monthly payroll) to the nearest whole number.

By the way, as with JRS v1, you look back to the contract the employee had prior to 19 March in order to assess their contracted hours.

Example 3 – an employee with variable hours, not fixed ones

For staff on variable hours, the system for figuring out their usual hours is very similar to the one you used to work out “normal pay” under JRS v1.  You look back to 2019-20, and their usual hours for the month will be the higher of:

1. Their average hours in 2019-20 (up until the point they were furloughed, if that was prior to 5 April).
2. The hours they actually worked in the same calendar month last year.

"Average hours" here means average hours worked per day (that the employee was on the books) in 2019-20, multiplied by the number of calendar days in the month you're working out their pay for now.  So, if someone was on your payroll all through 2019-20, wasn’t furloughed until after 5 April, and worked 684 hours in the year, that’s 1.87 hours a day.  Usual hours for July 2020’s 31 days would therefore be 58.  But if they did more than 58 hours in July 2019, you’d use that bigger total instead as their usual hours for July 2020.

The calculations become more complex still if the pay period is not a calendar month.  We’re very happy that nearly all the payrolls we run are for the calendar month!

How much must I pay the employee for the flexibly furloughed hours?

Again, you need to go back and look at last year’s pay.

If our employee from example 3 did fewer than 58 hours in July 2019 and therefore those hours don’t take precedence, their usual hours for the July 2020 calculations are 58.  If they actually worked 31 hours, you’ll just pay for those as normal.  For the other 27, you look back to 2019-20, and find the higher of:

1. Their average monthly pay in 2019-20, or
2. Their pay in the same calendar month last year.

Whichever is the higher, you take 27/58ths of it, and 80% of that is the amount that they must be paid, and that HMRC will reimburse.  As ever, you can top up with the extra 20%, but at your own cost etc.

As with JRS v1, it doesn’t matter if that’s less than National Minimum Wage.

How are the claim amounts going to change over time?

At present, if you’re paying the furloughed employee 80% of normal pay, then the government is covering the lot.  Your employee is still accruing holiday entitlement, but that’s the only real cost to you.  However, the support is being tapered away.  Here’s what can be claimed:

July is just the same as June:  80% of salary (up to a monthly equivalent of £2,500) for the time on furlough, plus Employer’s National Insurance and minimum statutory pension contributions for that time.

August: Just the 80% of salary (capped at £2,500).  You’re on your own with the pension and NI.

September: Just 70% of that salary.  You still have to pay at least 80%, so the extra 10% is now out of your pocket, along with the pension and NI.

October: Just 60% of that salary.  You still have to pay at least 80%, so the extra 20% is now out of your pocket, along with the pension and NI.

At least that means that the claims get somewhat simpler from August onwards, since two of the three components drop out!  Perhaps we should be grateful for small mercies. 

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Made any big donations since 6 April?

We've written before about the Gift Aid box when you make a donation, what it means, and - amongst other things - why anyone with income that takes them into higher rates of tax should include the donation on their tax return.

Ordinarily, you'd just include donations made in the year in question on your tax return. In fact, there's an alternative option, which is to "carry them back" and include them on your tax return for the previous year, if you've not yet submitted it. Generally, it's not worth the hassle - if you're donating on a regular basis and your income doesn't vary wildly year-by-year, who cares if a £10 a month donation saves you tax this year or next year? It's not worth the hassle of keeping track of what's been carried back and making sure that you don't claim it again next time, and waiting to file your return at the last minute so as to carry back as many donations as possible.

However, this year there are likely to be a lot of people who made unusually large donations in the early part of the tax year, for obvious reasons. If you donated a one-off £1,000 in mid-April, say, as a higher-rate taxpayer you're going to get £250 knocked off your tax bill. So the amounts involved start to become a bit more interesting, and you might well consider carrying the donation back and sticking it on your 2019-20 return to save the tax early.

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Furloughed staff with company cars

If you’ve a company car, you pay tax for the privilege.  That privilege is quantified based on the list price and emissions figure of the vehicle, and you pay tax on it via PAYE or Self Assessment.

There are a bunch of people with company cars that are getting little or no use are the moment, because the people have been furloughed.  Do they still have to pay tax on the privilege?  Fundamentally, yes.  The tax bill arises because the car is available for private use.  Even if there’s absolutely no business use that remains the case – and even if there’s no private use that remains the case too, as it’s still available for private use.

If there’s someone on furlough who has absolutely no use for the car and wants to avoid paying tax on it whilst it’s sitting idle, then you need to make it completely unavailable for private use, and document what you’ve done.  At the very least you’d want to formally document the fact that use of the car was forbidden for the furlough period, and a disciplinary offence, and document the mileage before and after.  And you’d probably also want to actually physically take the car away from the person too.

On top of that, for any period of non-availability to reduce the tax payable, it needs to be for at least 30 consecutive days – so for someone on furlough for three weeks, say, there’s nothing that can be done.

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Reimbursing employees for home-working costs

Lately, a lot of people have found themselves working from home for the first time.  There are some rules around employers reimbursing employees for extra domestic costs in those circumstances.  Usually they're a bit niche, but suddenly they've become more mainstream!

 

If an employee has to work from home, then an employer can reimburse them for the extra costs that the employee is likely to incur on heat and light and so on.  For some time, the maximum that could be paid tax-free without any evidence was £4 a week.  Handily, from 6 April that allowance went up to £6 a week.  Technically, it's got to be a requirement of the employee's employment contract that they're obliged to work from home, and with the recent rush to decamp from offices it's unlikely that most employers formally amended contracts in that way, but even so it's unimaginable that HMRC would push that point under current circumstances.  The change is probably implied in the combination of government and employer instructions to stay home anyway.

 

You can pay more than £6 a week without the recipient paying tax if the extra costs they've incurred justify it - you'll need to keep some evidence backing the calculation up, though.

 

If an employee has to work from home as part of their contract, but their employer doesn't pay them an allowance for it, then they can claim tax relief on the £6 a week themselves, which isn't as good as the £6 itself, but it's something.  There's more at https://www.gov.uk/tax-relief-for-employees/working-at-home

 

In real life, these allowances probably aren't being made as often as you'd think.  In large part, that may be because employers and employees alike probably recognise that so much time and money is being saved on travel that many employees are clearly better off anyway!  Plus nobody's needed to have the heating on until this week.  But it still might be a nice way to say "Thanks!" to staff who've pulled together and helped keep your business going in trying times.

 

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Is a Coronavirus Job Retention Scheme or Business Rates grant taxable?

This is a question that's understandably coming up fairly frequently.  The answer is that the support payments going to businesses at present are indeed taxable, but that it's probably the wrong perspective to look at it from.

 

In the case of furloughed staff, the reimbursement from HMRC simply covers salary/NI/pension that you've paid out in respect of your employees.  The money you receive is taxable, but the payments you've made are tax-deductible (as your salary payments to staff always are), and so they just cancel each other out. There's no net income there to be taxed in the end.  You're really just the vessel that passes the money on to your employees and keeps them in their jobs.

 

In the case of a grant for Business Rates, the principle is the same, it's just the link between income and expenditure isn't so clear.  The money isn't reimbursement of a specific cost - but it is intended to help cover business outgoings over these difficult months.  So, in so far as you spend it on business overheads, again there's no net income to be taxed.  Of course, if your business doesn't need the money, so some or all of it ends up simply as profit in your hands, it'll be taxable income for you, just like any other excess of revenue over costs.  But that's fair, enough, right?

 

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How do I get my hands on my Business Rates grant?

As part of the government's package of business support, a lot of businesses that are the ratepayer for commercial premises but pay little or no Business Rates are getting cash grants.

Initially the government said that the payment of grants to businesses that claim Small Business Rates Relief (who should get £10,000) and retail, hospitality and leisure businesses (who should get more if their property has a rateable value between £15,000 and £51,000) would be dished out automatically by local authorities, and that businesses should sit tight and wait to be contacted.  But in practice, that's not what all councils are doing.

We've already seen some councils contacting relevant businesses and paying the grants out right away where they hold bank details for the ratepayer.  That's how the system was expected to work.

However, it turns out that other local authorities are making business apply.  That's what our local council, South Oxfordshire District Council, for example, are doing:

http://www.southoxon.gov.uk/business/business-rates

Moral of the story, if you're waiting to be contacted, it'd be worth looking at the website of your council.  And don't forget that you should be eligible for the £10,000 grant, even if you pay no Business Rates at all because your premises qualify for Small Business Rates Relief.  But if you don't occupy commercial premises, or you do but you're not the ratepayer yourself, there's no grant available.

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A round-up of help available to sole traders and partners in partnerships

Now that new announcements have dried up (for a little at least), we’ve put together a round-up of the help available for sole traders and partners in partnerships (you can see our equivalent for limited company owners – the same in many respects – here). 

Self-Employment Income Support Scheme

We’ve emailed clients about this scheme in detail already, but in short anyone who was a sole trader or partner in a partnership in 2018-19, got most of their income that way, and had profits of less than £50,000 will be eligible for a grant.  That’s as long as they’re still a sole trader or partner, and as long as their business has been affected by coronavirus.  The grant will be based on 80% of average profits, capped at £2,500 a month, initially paid for three months.  It'll be taxable, just as the profit would have been.

Even if you do qualify, HMRC's aim is to start to get money to people at the end of June, and the process will involve *them* contacting *you* on the basis of the information they hold about your income, not the other way round.  So there's a cashflow gap to bridge, and there's nothing you can do to speed the process along.

VAT and Tax deferrals

The vast majority of our clients are great at saving for VAT and personal tax as they go, and the tax payment deferral measures should mean that you can safely dip into your tax savings for a while if you need to.  If you want to do that, then:

• VAT payments for the quarters ending in February, March or April can be delayed until early 2021 (though if you’ve a direct debit in place with HMRC for your VAT it’s important that you cancel it – they’ll take the VAT on time otherwise).
• You can delay your July 2020 personal self-assessment payment until January 2021.

Deferring PAYE payments if you have employees

The VAT and self-assessment deferments above are automatic and you don’t have to apply for them.  There aren’t any formal general agreements that PAYE can be delayed.  But HMRC have set up a special helpline for businesses that need to discuss deferring other payments.

It might take a long time to get through, although a client called them one day last week at 8.15am and she was through within five minutes, so aiming for the start or end of the day is probably sensible.  It sounds as if generally HMRC are very open to agreeing more generous payment terms.

Grants

• Rates-related grants - If you formally rent premises subject to Business Rates, you should be eligible for a grant if either (a) you currently benefit from Small Business Rate Relief (remembering that you will qualify even if SBRR means you pay no business rates all), or (b) you’re in the retail, hospitality, nursery or leisure sectors.
• Job Retention Scheme - If you employ staff but don’t currently have work for them, you can use the JRS to claim a grant to cover 80% of their wages.
• Statutory Sick Pay – some years ago HMRC stopped reimbursing employers for SSP they paid to staff – but they will now reimburse it if it’s coronavirus-related. Not right away, though, there’s no mechanism for doing so right now, so you’ll need to fund the (modest) cashflow to begin with.
• A self-employed person can’t get SSP, but if you’re unable to work because of coronavirus, or you’re having to self-isolate and cannot work from home, you may be able to claim ESA, albeit it’s not a lot of money and has similar conditions as Universal Credit.

Other things to consider

• Check your business insurance policy, in case you have Business Interruption cover.
• Speak to your landlord (for both your home if you rent, and your business premises) to see if you can delay payments, get a discount, or a rent-free period. Some landlords are open to this.
• Consider talking to your lender to arrange a mortgage payment holiday.
• Talk to your bank to see if you can arrange a business or personal overdraft facility.
• If a loan would be more appropriate, consider asking your bank about the government-backed Business Interruption Loan Scheme.
• If you want to take another job during this period, that’s absolutely fine – there’s nothing to stop you from having a job as well as being self-employed.
• Universal Credit may be available to you – you’ll need to check online to see whether you meet the criteria, but it’s potentially worth a look.
• Some clients are finding opportunities to use their skills to provide different services, or to deliver their services in new ways, or to find new customers to target. It could be worth asking yourself whether you can adapt your business model to find opportunities in the current circumstances – we’re seeing a number of clients doing this successfully.
• Remember also that it’s fine to dip into your savings. While it’s natural to want to preserve them, one of the great benefits of having savings is to help you survive an unexpected loss of income.  With interest rates on cash savings being low, it’s unlikely to cost much in terms of lost interest, and you can look to rebuild savings once things return to normal.  You’ll need to check the rules for withdrawals from your particular account, but even some ISAs now allow you to withdraw cash and replace it later in the same tax year.

Hopefully there are some helpful pointers here, and we’ll of course let you know as and when any new measures are announced.

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Can directors furlough themselves?

A couple of weeks ago the government announced that they would subsidise employees' wages if, rather than laying them off in the crisis, employers kept them on anyway.  If they do that, and the employer expects the government subsidy, the employee is to all intents and purposes not allowed to work at all.  That process is known as "furloughing".  It's been a big deal.  Between 2007 and the Friday before last, the word "furlough" came up in precisely two of Greg's emails in 13 years.  Since the Friday before last, it appears in 189 separate conversations.

The scheme is aimed at employees, not business owners.  But some directors of limited companies have found that their work has completely dried up, and so understandably have asked if they can furlough themselves so that their company gets some contribution towards their own (usually around £700) salary.

The idea of a company director furloughing themselves is basically a logical nonsense.  Even if absolutely every bit of fee-earning work has dried up, and there's no point looking for more, a company director still has legal obligations around the stewardship of the company - there's an obvious Catch 22, where as soon as a director suggests to us that they've furloughed themselves, the fact that they're talking to us means they're still engaged in company business!  And even if fee-earning work has disappeared, many directors will be working hard to try and find new revenue for the company to fill the gap.

However - it's now clear HMRC are in practice going to be content with claims from companies against part of a director's small salary where the company's income-generating work has totally dried up.  They probably realise that limited company owners - especially ones with company income under £50,000 who would have been given some support had they been a sole trader - have fallen through a crack in the system, and they're saying they'll accept claims from companies relating to small director salaries if absolutely all fee-earning work has disappeared.  On that basis, the subsidy the company could expect for a month of inactivity would be about £575, at present for up to three months (assuming a total absence of fee-earning work over a three month period).

Anyway, there's no action to take now.  The claims process for getting the subsidy for furloughed workers doesn't exist yet, and HMRC are hoping to have it in late April.  So for now, directors with no fee-earning work to do will have to be patient - and in the meantime try and find some other source of company income, which hopefully will be greater than that relatively small subsidy.  Of course, as soon as the reclaim portal exists we'll be letting clients know!

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