Furlough scheme to wind down gradually

REFLECTS THE CHANCELLOR'S STATEMENT ON 29 MAY 2020 

NOTE: It is now too late to put somebody on furlough for the first time, as 10 June was the last day.  But if someone is or has previously been on furlough, they are eligible to continue until the scheme closes on 31 October 2020. However, the 10 June cut-off date does not apply to those who are returning to work after paternity or maternity leave.

Under the Coronavirus job retention scheme (CJRS), employers can claim 80% of furloughed employees’ usual monthly wage costs, up to £2,500 a month, plus the associated Employer National Insurance contributions and minimum automatic enrolment employer pension contributions on that wage.

From 1 September this grant will reduce to 70% and then to 60% from 1 October, with the employer in each case paying the balance to make up the 80%

The following will apply for people furloughed:

• June and July: The government will pay 80% of wages up to a maximum of £2,500 as well as employer National Insurance (ER NICS) and pension contributions. Employers are not required to pay anything.
• August: The government will pay 80% of wages up to a maximum of £2,500. Employers will pay ER NICs and pension contributions – for the average claim, this represents 5% of the gross employment costs the employer would have incurred had the employee not been furloughed.
• September: The government will pay 70% of wages up to a maximum of £2,187.50. Employers will pay ER NICs and pension contributions and 10% of wages to make up 80% total up to a cap of £2,500. For the average claim, this represents 14% of the gross employment costs the employer would have incurred had the employee not been furloughed.
• October: The government will pay 60% of wages up to a maximum of £1,875. Employers will pay ER NICs and pension contributions and 20% of wages to make up 80% total up to a cap of £2,500. For the average claim, this represents 23% of the gross employment costs the employer would have incurred had the employee not been furloughed.

The greater flexibility for the scheme is being introduced to support the transition back to work, and ensuring workplaces are COVID-Secure, with possibly less workspace available.

More Details

Flexible furloughing from 1 July (see also our article - Flexible Furlough Scheme)

• From 1 July, a month earlier than expected, employers can bring back to work furloughed employees for any amount of time and any shift pattern, while still being able to claim the CJRS grant for their normal hours not worked.
• From 1 July, employers will be able to agree any working arrangements with previously furloughed employees.
• When claiming the CJRS grant for furloughed hours; employers will need to report and claim for a minimum period of a week.
• This is a minimum period and those making claims for longer periods such as those on monthly or two weekly cycles will be able to do so.
• To be eligible for the grant, employers must agree with their employee any new flexible furloughing arrangement and confirm that agreement in writing.
• Employers can claim the grant for the hours their employees are not working, calculated by reference to their usual hours worked in a claim period. Further details will be included in future guidance.
• Employers will need to report hours worked and the usual hours an employee would be expected to work in a claim period. HMRC says this can be done via their portal.
• For worked hours, employees will be paid by their employer, subject to their employment contract and employers will be responsible for paying the tax and NICs due on those amounts.
• Further guidance on flexible furloughing and how employers should calculate claims will be published on 12 June.

Closure to new entrants from 1 July (effectively 10 June):

• The scheme will close to new entrants from 30 June. From this point onwards, employers will only be able to furlough employees that they have furloughed for a full three-week period prior to 30 June.
• This means that the final date by which an employer can furlough an employee for the first time will be the 10 June, in order for the current three-week furlough period to be completed by 30 June. Employers will have until 31st July to make any claims in respect of the period to 30 June.
• From 1 July the scheme will only be available to employers that have previously used the scheme in respect of employees they have previously furloughed.
• From 1 July, claim periods will no longer be able to overlap months, employers who previously submitted claims with periods that overlapped calendar months will no longer be able to do this going forward. This is necessary to reflect the forthcoming changes to the scheme.
• The number of employees an employer can claim for in any claim period cannot exceed the maximum number they have claimed for under any previous claim under the current CJRS.
• Employers can continue to make claims in anticipation of an imminent payroll run, at the point payroll is run or after payroll has been run.
• Employers will be able to make their first claim under the new scheme from 1 July.

There is no commitment from the Chancellor to extend furlough payments or employment to support in the devolved nations if they chose to take a more cautious approach than England.

To read more about the scheme, check out our detailed article.

Sick pay

From 26 May, employers with fewer than 250 employees can obtain a refund from the government for the cost of providing 2 weeks of coronavirus related Statutory Sick Pay (SSP) per employee. See our separate article with the details.

Job Retention Scheme updated FAQs

We have attempted to answer some of the frequently asked questions about the scheme, though some answers remain speculative until we have published details.

• Q - What shape will the scheme take between August and October? Will employers be allowed to bring workers back part time, and to what extent, and how much will employers be asked to contribute? 
• A - The Chancellor has now published details about the scheme from August to October, and has said further guidance will be published on 12 June. We know that the government grant will be reduced from 80% to 60% in stages - with the employer paying the balance to make up the 80%. We also know that the minimum furlough period of three consecutive weeks will be reduced to just one week from 1 July, when flexible furloughing is introduced to allow people to return to work.
• Q - Do employers need to formally extend their furlough arrangements, or does this happen automatically?
• A - Much will depend on the existing written agreement between employer and employee, but if an end date was set in that agreement, or a fixed period of time was agreed, then the agreement will need to be extended, if both sides agree. This may require some additional consultation and negotiation. HMRC has made clear that an auditable written record of any agreement must be retained. 
• Q - How should I account for these grants in my cash flow forecast and accounts?
• A - In terms of accounting for both the cash flow forecast and accounts, entities should recognise the salary expense as normal and recognise the grant income separately. See our further explanation of the accounting entries.
• Q - Is it possible to make early claims for the extra four months from July to October?
• A - HMRC has previously said that claims could be made up to 14 days in advance of running the payroll – thus putting an employer in funds to make a payment to their employees. We are not aware of any likely changes to this guidance, and in fact HMRC says it will not allow overlapping month claims. Also, the reality of the situation is that it is very difficult to put a claim in so early, as the furlough figures invariably won’t have been calculated through the payroll at this point, and the government's share of the wage costs is reducing
• Q - Do claims spanning a company’s year-end have any impact, or are their special things to consider?
• A - There are no payroll considerations, but there might be wider issues to consider from an accounting and audit perspective. See our separate article on audit reports under COVID-19.
• Q - What can be claimed (e.g. - expected bonuses paid during summer months)?
• A - The rules on the inclusion or exclusion of pay components is pretty clear now and are covered in our detailed guidance. Basically, anything which is not regular wages should not be included, and discretionary variations in pay cannot be taken into account. There are unlikely to be any changes on what should and shouldn’t be included within the furlough calculation. 
• Q - Do I have to have already made claims to be able to claim during the extension period?
• A - The key condition is that a PAYE payroll scheme must have been started on or before 19 March 2020 and the employer must have a UK bank account. That key condition won't change, but the government has also made clear that the final date by which an employer can furlough an employee for the first time is 10 June. .
• Q - Can a worker do other jobs when on furlough?
• A - From 1 July, employers can agree any working arrangements with previously furloughed employees, who can return to work without losing any money from the Government. Before then, the CJRS rules allow a worker to work for someone else whilst furloughed. However, a furloughed employee cannot undertake work for, or on behalf, of the organisation or any linked or associated organisation. That changes from 1 July. It is worth noting that in any case there may be clauses in a worker's contract of employment that restrict taking up employment elsewhere. For any employer that takes on a new employee, the new employer should ensure they complete the starter checklist form correctly. If the employee is furloughed from another employment, they should complete Statement C. From 1 July, employers will be able to agree any working arrangements with previously furloughed employees.
• Q - What about summer holidays whilst on furlough?
• A - Whilst furloughed, an employee will continue to accrue leave as per the employment contract. The parties can agree to vary the holiday pay entitlement as part of the furlough agreement, but almost all workers are entitled to 5.6 weeks of statutory paid holiday each year. Holiday can be taken whilst on furlough. The Working Time Regulations (WTR) require holiday pay to be paid at the normal rate of pay or, where the rate of pay varies, calculated on the basis of the average pay received in the previous 52 working weeks. So the employer will need to top up the furloughed worker's pay to reach the full pay for that worker. HMRC has provided detailed guidance on holidays and bank holidays.
• Q - Can a furloughed director increase their salary and reduce their dividends in order to claim a larger grant under the scheme?
• A - No you cannot increase the amount. The rules are very clear on how the grant is calculated. Where a person has been employed for 12 months or more, the grant that can be claimed is the highest of either: (a) the same month's salary from the previous year, or (b) the average monthly earnings for the 2019/20 tax year. Where employed for less than 12 months, you can claim 80% of the average monthly earnings since starting work. If the director/employee only started in February 2020, you can work out a pro-rata for the earnings so far, and claim 80%. 
• Q - Can you furlough staff for their notice period up to redundancy?
• A - Whilst HMRC has made clear that CJRS grants cannot be used as a substitute for redundancy payments, it has also made clear in its advice to employees that an employer can still make someone redundant while on furlough or afterwards. .Employee rights are not affected by being on furlough, including redundancy rights. Please note there is case law affecting sole director/shareholders who face redundancy. The courts have held that a sole shareholder could not be an employee of their own limited company for the purposes of a redundancy payment from the National Insurance Fund. There is more on this in our separate article.
• Q - What happens to my pension contributions if I’ve been furloughed?
• A - If you’ve been furloughed, the required contributions made by your employer will be covered by the CJRS. You will still need to pay the minimum contribution to get the government’s contribution. The amount you pay will shift in line with your new furlough pay. Up to 31 July, the government will pay the minimum 3% employer contribution based on your furloughed salary, capped at £2,500 a month. Anyone earning above this amount could see their pension contributions drop significantly. If your employer usually contributes above the minimum, they should continue to make the contributions due under the scheme. The Pension Protection Fund has published a useful guide: Covid-19 and your pension: where to get help.

Further thoughts

With 8.4m people furloughed, it is clear that the furlough scheme has proved popular, and the 10 June cut-off date for new claims may lead to a spike in such claims before then. More claims may also be possible as more firms find themselves in difficulty.

Many employers are already looking at the size and shape of their organisations post-furlough, but they may be delaying decisions on changes whilst they can rely on the CJRS.  

It cannot be ruled out that the Chancellor will extend the CJRS beyond October to give some businesses more time to adjust, though employers are likely to be expected to pay a greater share of furloughed staff's wages during that further extension. The Treasury will want to end the scheme at some point, as it knows it cannot save every job.

A recent survey by the Institute of Directors revealed that a quarter of employers using the CJRS would not be able to afford to make any contribution towards furloughed workers' wages,.This is a real concern and may mean that a proportion of people on the furlough scheme are simply in the waiting room for unemployment.

And according to a recent report from the Office for National Statistics, 58% of firms that had paused trading during the Covid crisis had cash reserves of less than six months, with 7% having no reserves at all.  Firms that were operating on tight margins before the pandemic will find it difficult to make money with the social distancing rules in place. And having to make the 5% contribution from August could be enough to tip some into closing.

The Chancellor has promised to address the likely increase in unemployment with a scheme to create additional jobs. The FT has reported that he is looking to set up a £100bn job creation scheme focussed on the infrastructure and green energy sectors.

Should the furlough scheme be extended beyond October, we might see it become more targeted at particular sectors, where a return to normality takes longer. And the government may also look at some form of training fund to help people back into new work where their old jobs no longer exist. Maybe we can expect to see changes to the Apprenticeship Levy Scheme to help fund this?

Webinar

Check out our webinar on the Job Retention Scheme, where we go into detail about the scheme, the practical difficulties and the calculations.

For further issues on accounting for COVID-19, see our separate FAQs on company accounts.

Paying wages after furlough

Whilst the furlough scheme will have eased the problem of paying wages during the lockdown, the ending of the scheme will leave the problem of how to fund those wages. Read our practical advice on Paying Wages After Furlough.

[Gary Mackley-Smith]