This briefing note follows on from the update yesterday (26 March).
In this note, we will cover:
- Support for the self-employed
- Update on the Job Retention Scheme
Support for the self-employed
You will be aware that the Chancellor announced a financial support package for the self-employed yesterday evening.
Although details are sparse at this stage and we will need to carry out further analysis, we note the following key points.
• The good news:
- It is a grant, not a loan
- You will be eligible if you are self-employed and have lost trading profits due to Covid-19
- It will be based on the average of the last three years’ profits. If you started trading within this period, your profits will be averaged based on the returns you have filed
- It will be paid up to a maximum of £2,500 per month
- Unlike the employee scheme, you can continue to work and still claim
• The bad news:
- It does not apply to anyone who operates through a limited company
- It only covers those with profits of £50,000 or less. This is not a phased scheme – if your profits exceed this level, you are not entitled to participate
- Funds will not be available until June
- If you became self-employed on or after 6 April 2019, you will not be eligible
• Other points:
- HMRC will contact you if you are eligible
- It is not yet clear whether the grant could be repayable if your trading profit for the whole of the tax years 2019/20 or 2020/21 are higher than the average of the previous three years (in spite of the crisis)
• Initial conclusion
- Given that the Government recognised in 2016 (by taxing dividends) that a significant number of self-employed people in the UK trade through a limited company, it is disappointing that neither this support package nor the package announced last Friday appear to offer meaningful support for this section of the business community. We hope that the Government will respond to lobbying by business groups to change this.
Job retention scheme: further guidance
In his statement yesterday, the Chancellor said “Those who pay themselves a salary and dividends through their own company are not covered by the scheme but will be covered for their salary by the Coronavirus Job Retention Scheme if they are operating PAYE schemes.”
A frequent question asked over the past week is whether directors can self-furlough and claim 80% of their salary. Even though we have covered this in previous updates, in the light of the Chancellor’s statement, it is well worth re-examining this issue.
The following questions have been raised:
Can a director furlough themselves?
In the available guidance, it is clear that:
- the decision on whether someone is furloughed is an employer decision. An employee may not decide to furlough themselves
- an employee should not undertake any work for their employer at all while they are furloughed
- the purpose of the Job Retention Scheme is to save the jobs of employees who would otherwise be made redundant
It is our understanding that it is doubtful whether a sole director or the senior/managing director can ever genuinely say that they are not working for the company at all – even if a company is closed for business, someone will presumably need to carry out basic functions (answer the phone, deal with emails, check the post, manage cash flow etc) and perform such business management as is needed, even in a closed state. We therefore have some concern as to whether HMRC would accept that such a director can be genuinely on furlough.
However, this may not be true of other directors. If there is more than one director in your company, it seems to be a reasonable stance that one director will remain working and all other directors can be furloughed. Remember though, to ensure that any claim under the Job Retention Scheme is not jeopardised, you must take care to ensure that the furloughed directors are not seen to be working.
Clearly any decision on this issue needs to be made on a case by case basis and needs to be carefully managed.
If a director was on furlough, what would the recovery be?
The recovery is restricted to 80% of salary, employers NIC and pension contributions. It is not clear from the guidance whether “pension contributions” refers only to those made under auto-enrolment or whether all company contributions, whether contractual or discretionary, may be included in the calculation.
For most directors of own companies, salary is set at the lower earnings threshold for NIC. For the current tax year, this is £719 per month. We understand that HMRC will be checking any claims under the Scheme against the monthly payroll information submitted to them under RTI to prevent inflated or fraudulent claims.
If a director can be furloughed, the basic claim is therefore going to be 80% of £719 per month, or £575.20. If a company pays a regular pension contribution of (say) £1,000 per month, there is a possibility that the claim could increase to £1,375.20 (being £719 + £1,000 x 80%).
What about zero hour contract workers?
The government guidance states that zero hour contract workers and temporary workers are eligible to be furloughed. It is not clear how a claim under the Scheme will be calculated, but we assume a reasonable approach is to base this on an average of recent pay amounts.
What about workers who are off sick?
It is our understanding that employees who are on sick leave are not available for work and therefore cannot be furloughed until they have recovered and are available for work.
As always, we are here to help and support you as far as we can. There continue to be areas of uncertainty – if you disagree with our interpretation, or if you have anything to add, please let us know.
As noted, we are concerned that there are gaps in the support packages announced so far and hope that the government will address this. We are endeavouring to keep you up to date with all relevant announcements and will continue to pass on new information as soon as it is available.
If you need assistance or further guidance, please let us know. Check out further information on https://acklandwebb.co.uk/blog/