I apologise for the length of this bulletin, but with things moving very quickly with various news from different sources sometimes disjointed, I have tried to lay it in some format which will be helpful to you during these worrying times and at the same time tried to explain items (as far as possible) which are of concern and will effect majority of you. In due course we will produce and streamline forms for loans and make them available those of you wishing to apply for Business Interruption Loans etc, as detailed below.
Late yesterday, detailed guidance was released on how the Coronavirus Job Retention Scheme will work and about the new Coronavirus Self-employed Income Support Scheme. As with most situations, there are those who are covered by these schemes there is also a significant minority that miss out and will be reliant on Universal Credits and welfare. The following notes have been taken mostly from the guidance released by HMRC and the government.
Coronavirus Job Retention Scheme
Where it applies, the scheme provides the employer with a grant to cover 80% or £2,500 of employment costs of employees who have been furloughed. Employers can also claim for the associated Employer National Insurance contributions and minimum automatic enrolment employer pension contributions on that wage.
Who can claim?
Businesses and Charities.
They do not have to be a limited company so can be a partnership or sole trader BUT they must have created and started a PAYE payroll scheme on or before 28 February 2020 and have a UK bank account.
Which employees are eligible?
The employee must have been on your PAYE payroll on 28 February 2020, and can be:
- on flexible or zero-hour contracts;
- the scheme also covers employees who were made redundant after 28 February 2020, as long as they are rehired by their employer;
- Employees hired after 28 February 2020 cannot be furloughed or claimed for in accordance with this scheme;
- Employees on unpaid leave cannot be furloughed, unless they were placed on unpaid leave after 28 February;
- Employees on sick leave or self-isolating should get Statutory Sick Pay but can be furloughed after this;
- Employees who are shielding in line with public health guidance can be placed on furlough; and
- Employees who have more than one job can be furloughed for each job separately (being furloughed for one employment does not mean they will need to be furloughed for all).
Additional Conditions for Furloughed Workers
Please note an employee must be furloughed for a minimum of three weeks to be eligible for a claim.
When on furlough, an employee cannot undertake work for or on behalf of the organisation. This includes providing any services or generating revenue although a furloughed employee can take part in volunteer work or training, as long as it does not provide services to or generate revenue for, or on behalf of your organisation.
If an employee is working, but on reduced hours, or for reduced pay, they will not be eligible for this scheme.
While on furlough, the employee’s pay will be subject to usual income tax and other deductions.
Interaction with Maternity Leave, contractual adoption pay, paternity pay or shared parental pay:
If your employee is eligible for Statutory Maternity Pay (SMP) or Maternity Allowance, the normal rules apply, and they are entitled to claim up to 39 weeks of statutory pay or allowance.
Employees who qualify for SMP, will still be eligible for 90% of their average weekly earnings in the first 6 weeks, followed by 33 weeks of pay paid at 90% of their average weekly earnings or the statutory flat rate (whichever is lower). The statutory flat rate is currently £148.68 a week, rising to £151.20 a week from April 2020. This is not part of the Coronavirus Job Retention Scheme. However, if you offer enhanced (earnings related) contractual pay to women on Maternity Leave, this is included as wage costs that you can claim through the scheme. The same principles apply where your employee qualifies for contractual adoption, paternity or shared parental pay.
The Procedure, How to furlough an employee:
The process of furloughing an employee is subject to normal employment law and regulations. The employer needs agreement from the employee to furlough them, unless it’s covered by a clause in the employment contract. They also need to select employees in a fair way to avoid any discrimination. If an employee disagrees with their employer’s decision, they’ll need to talk to their employer and try to come to an agreement.
Any furlough agreements should be in writing. It’s a good idea to include:
- the date furlough starts;
- when it will be reviewed; and
- how to keep in contact during furlough
Again, I cannot reiterate it enough, a worker will stay employed while they’re furloughed, but they must not work.
How to calculate the claim:
The employer will receive a grant from HMRC to cover the lower of 80% of an employee’s regular salary or £2,500 per month, plus the associated Employer National Insurance contributions and minimum automatic enrolment employer pension contributions on that subsidised salary. Fees, commission and bonuses should not be included.
At a minimum, employers must pay their furloughed employees the lower of 80% of their regular salary or £2,500 per month. An employer can also choose to top up an employee’s salary beyond this but is not obliged to under this scheme.
- Full time and part time salaried employees:
The employee’s actual salary before tax as of 28 February should be used to calculate the 80% (fees, commission and bonuses should not be included).
- Employees whose pay varies:
If the employee has been employed for a full twelve months prior to the claim, you can claim for the higher of either:
- the same month’s earning from the previous year; or
- average monthly earnings from the 2019-20 tax year
If the employee has been employed for less than a year, you can claim for an average of their monthly earnings since they started work.
If the employee only started in February 2020, use a pro-rata for their earnings so far to claim.
- Company Directors & Shareholders:
For directors who take a relatively low salary and dividends, it is the salary figure only that can be included in this scheme, dividends are excluded. It will be the salary as at 28th February 2020 that is used to make the calculation. Often this will be 80% of £719 a month. However, many small companies are run by just one or two directors and have no other employees.
What government financial support is available to director/shareholders during the Coronavirus crisis?
A director or company officer is an employee for PAYE purposes.
A director cannot claim the COVID-19 Grant for the Self Employed by virtue of holding the office of a director.
Although it may be possible for a company to furlough a director under the COVID-19 Job Retention Scheme there are potential issues for small companies to consider.
Company law dictates that director should be engaged under the terms of a service contract with their company.
A service contract does not automatically create an employment contract.
Many director/shareholders are remunerated in the most cost-efficient method for their company: a mixture of low salary topped up by dividends.
If the director’s company is adversely affected by COVID-19, the director may consider Furloughing for normally employee type duties, so, If as a director you were on the payroll, engaged under an existing written or verbal employment contract on 28 February 2020, and your services, in performing the duties expected of you as an employee or director are not required due to the effects of the ongoing crisis, the company may furlough you.
Can you furlough a sole director?
In deciding whether to furlough a director in respect of their duties as a company officer, it is assumed that the director will not be furloughed in respect of their duties as an officer of the company. This is because a company cannot operate without its director and all directors have ongoing fiduciary duties to their companies.
We, at Shaikh & Co take a view that most companies will need to have someone on hand, to handle on-going administration such as post, bookkeeping, tax filings and banking. We see no reason why a company cannot go into a ‘COVID-19 hibernation’ meaning that the director would have no day to day duties during that period, but we are uneasy recommending that a sole director is laid off completely.
Perhaps part-furloughing is possible and duties in working as a company officer could be agreed at say 1 day per week. Duties as an employee would then by furloughed. This would be evidenced by two contracts: a service contract and an employment contact.
HMRC states that ‘If an employee is working, but on reduced hours, or for reduced pay, they will not be eligible for this scheme and you will have to continue paying the employee through your payroll and pay their salary subject to the terms of the employment contract you agreed.’
The HMRC statement is at odds with the idea that a company could go into a period of hibernation. However, it is for the employer to agree the terms of any modification to an employment contact and for the directors to act in the best interests of the company.
Salary or dividends?
There is no scheme in place for the government to provide financial support to shareholders where the amount of their dividend is affected by the COVID-19 crisis. If a company can no longer afford to pay dividends, it may be insolvent, directors should take appropriate advice.
If the company decides to change the terms of the contract in order to pay a salary instead of a dividend, this must be agreed contractually between the company and its director. As suggested above, we would normally expect to see a service contact which details the duties of a director as a company officer and an employment contract which covers duties as an employee. Above all it needs to be remembered that a furloughed employee is not allowed to work for the employer during the furlough period. Depending on the type of business, a company director may well need to work in some capacity during even a period of closure of the business.
Whilst writing this it has come to light that self-employed limited company directors can be furloughed as employees on their PAYE element (even if they are sole employee), technically they cannot then work for the same business, however it is thought that they are allowed to continue to carry out their duties as officer of the company such as statutory filings etc.
This area is full of complications and we await further guidance, the important advise is not to jump to any particular course of action which can then be difficult undo, remember the eligible payments in either case will be backdated to 1st of March, so we wait and see.
Employer National Insurance and Pension Contributions
Employer National Insurance contributions and minimum automatic enrolment employer pension contributions need to be paid for furloughed employees.
The employer can include in the grant claim 80% of the associated Employer National Insurance contributions and minimum automatic enrolment employer pension contributions.
Employer National Insurance Contributions and automatic enrolment contribution on any additional top-up salary will not be funded through this scheme.
Voluntary automatic enrolment contributions above the minimum mandatory employer contribution of 3% of income and above the lower limit of qualifying earnings (which is £512 per month until 5th April and will be £520 per month from 6th April 2020 onwards) will not be funded through this scheme.
Making a claim:
To make a claim as the employer, you will need:
- the 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 weeks);
- the employer’s bank account number and sort code;
- Contact details; and
- Phone number
HMRC will retain the right to retrospectively audit all aspects of your claim.
An employer can only submit one claim at least every 3 weeks, which is the minimum length an employee can be furloughed for. Claims can be backdated until the 1 March if applicable.
Once HMRC have received the claim and the employer is eligible for the grant, HMRC will pay it via BACS payment to a UK bank account.
The scheme is expected to be up and running by the end of April and initially will cover March, April and May.
Finally the grant will be treated as taxable income and included in taxable profits for Corporation tax (limited company employers) or income tax (sole trader and partnership employees).
The Coronavirus Self-employed Income Support Scheme
Who can apply?
You can apply if you’re a self-employed individual or a member of a partnership and:
· have submitted your Income Tax Self-Assessment tax return for the tax year 2018-19;
· traded in the tax year 2019-20;
· are trading when you 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
Your self-employed trading profits must have been less than £50,000 and more than half of your income from self-employment. This is determined by at least one of the following conditions being true:
· having trading profits/partnership trading profits in 2018-19 of less than £50,000 and these profits constitute more than half of your total taxable income;
· having average trading profits in 2016-17, 2017-18, and 2018-19 of less than £50,000 and these profits constitute more than half of your average taxable income in the same period
If you started trading between 6th April 2016 and 5th April 2019, HMRC will only use those years for which you filed a Self-Assessment tax return to make the calculation.
If you started self-employment after 5th April 2019 you are not eligible for this scheme.
How the grant will be calculated:
The grant will be based on 80% of the average profits from the tax years (where applicable):
· 2016 to 2017
· 2017 to 2018
· 2018 to 2019
To work out the average HMRC will add together the total trading profit for the 3 tax years (where applicable) then divide by 3 (where applicable), and use this to calculate a monthly amount.
It will be up to a maximum of £2,500 per month for 3 months.
HMRC will pay the grant directly into your bank account, in one instalment.
How to apply:
HMRC will contact you directly if you are eligible for the scheme and invite you to apply online.
HMRC says Individuals do not need to contact HMRC now and doing so will only delay the urgent work being undertaken to introduce the scheme.
If you are late submitting your 2019 Self-Assessment tax return (due date for submission was 31st January 2020) you can still submit it by 23rd April 2020, for the figures to be included in the grant calculation. Get in touch with us if you are not a client at www.shaikhandcoaccountants.com.
· You can carry on working (if work is available), it is not a requirement of the Coronavirus Self-employed Income Support Scheme that you stop all work.
· HMRC have used the expression ‘average profits’ and ‘trading profits’ in the guidance. These expressions are not used on the Self-Assessment tax return form but almost certainly refers to ‘Net business profit for tax purposes. This figure is calculated after Capital Allowances for purchases of capital equipment.
· There is a requirement that to claim these reliefs, `business must have lost trading/partnership trading profits due to COVID-19. We think most businesses will be able to justify this, but there will be a few that possibly can’t.
Other Measures we have already reported in our earlier bulletins, but are repeated below for ease reference
Government backed loans up to £5million (business Interruption)
To support primarily COVID19 affected small and medium sized businesses
· No interest for first 12 months (government to pay interest for 12 months).
· Government to provide a guarantee of 80% on each loan without any charge.
· Loans up to £5 million.
· Provisions to provide further discretionary financial support to businesses.
· Borrower is liable to repay 100% of the loan.
It’s since been reported that some banks are inserting these clauses, which go against the aim of the scheme. Please be vigilant – if you sign a personal guarantee or indemnity you are personally liable for the loan, the limited liability of a company will not apply.
Grants (non-repayable) to retail, hospitality and leisure businesses who occupy ‘rateable’ properties operating from smaller premises and are based in England.
£25,000 Grant—for business with a rateable value over £15,000 and below £51,000. £10,000 Grant—for business eligible for Small Business Rate Relief (SBRR) or Rural Rate Relief, to help meet their ongoing business costs (business properties with rateable value up to £15,000).
You do not need to do anything. This grant will be administered by local authorities, who will write to you if you are eligible for this grant this is expected to start from 1st April 2020
These are grants and not repayable.
Time To Pay service Facility
All businesses and self-employed people in financial distress, and with outstanding tax liabilities, may be eligible to receive support with their tax affairs through HMRC’s Time To Pay service. However, there is no automatic deferment for Corporation Tax liabilities.
You can call HMRC‟s dedicated helpline on 0800 0159 559 for help and advice.
For Income Tax (Self-Assessment)
Payments due on the 31st July 2020 will be deferred until the 31st January 2021.
This applies to all those that are self-employed. This is an automatic offer with no applications required. No penalties or interest for late payment will be charged in the deferral period.
You will still need to pay the amount in full before 31st January 2021
All UK business registered for VAT
Can defer VAT payments due between 20th March 2020 and 30th June 2020 until the end of tax year 2020-21, therefore, have until 31 March 2021 to pay any VAT deferred as a result of this. VAT refunds and reclaims will be paid by the government as normal.
You will be required to cancel any Direct Debit mandates you have with HMRC in order to take this option.
NOTE—VAT Returns are due as normal. Only payment is deferred. This is an automatic offer with no applications required.
Relaxation in planning regulations
Relaxation in planning regulations to allow pubs and restaurants to start providing takeaways without a planning application.
Self-employed people can now access full universal credit at a rate equivalent to statutory sick pay.
Businesses that have cover for both pandemics and government ordered closures should be covered. The government and insurance industry confirmed on 17th March 2020 that advice to avoid pubs, theatres, etc., is sufficient to make a claim as long as all other terms and conditions are met. It goes without saying, Insurance policies differ significantly, so businesses should check the terms and conditions of their specific policy and contact their providers directly.
· Mortgage borrowers can apply for a three-month payment holiday from their lender.
· Tenants can apply for a three-month payment holiday from their Landlord.
· Tenants cannot be evicted from their home over the next three months.
· Homeowners cannot have their home repossessed over the next three months.
Both residential and buy-to-let mortgages are eligible for the holiday.
Borrowers still owe the amounts that they do not pay as a result of the payment holiday and interest will continue to be charged on the amount they owe.
As we said earlier, some people slip through the net and will have to rely on Universal Credit and other benefits, or the Coronavirus business interruption loan scheme to stay afloat. This includes people who started as a sole trader after 5th April 2019 for example and we can think of quite a few clients who fall into this category.
Directors of small companies generally lose out because dividends are excluded (dividends are investment income) from the Job Retention Scheme.
There are no provisions for owners of holiday let properties that are losing out heavily through cancellations and the shutdown.
A final point to note…
There has been a surge in coronavirus-related scams totalling almost £970,000. The National Fraud Intelligence Bureau (NFIB) reported this new trend in fraud related to Coronavirus, or COVID-19. The majority of reports are related to online shopping scams where people have ordered protective face masks, hand sanitiser, and other products, which have never arrived.
Other frauds being reported include ticket fraud, romance fraud, charity fraud and lender loan fraud. There have been over 200 reports of coronavirus-themed phishing emails and people imitating to be from HMRC.
We will send out more updates as and when information becomes available.
If you are not currently a Shaikh & Co client and would like support during this time you can contact us directly or through our website www.shaikhandcoaccountants.com