COVID-19: Ineligible furloughed directors are mostly those receiving a monthly tax-free salary of £719 per month for 2019/20.
This issue relates to claims for Coronavirus Job Retention Scheme (CJRS) grants being rejected as ineligible. The companies affected are those where the directors have operated a payroll for themselves only and opted to receive a monthly tax and national insurance free salary of £719 per month for 2019/20.
Personal Service Companies (PSC)
CJRS ineligibility seems more likely to affect personal service companies where the payroll is run solely for directors and salaries are pitched at the PT level.
Class 1 National Insurance – Primary Threshold
The Primary Threshold (PT) for Class 1 National Insurance contributions determines the level of salary that will not attract PAYE and NI contributions for both the employee and the employer during the tax year. This threshold was set as £719 per month and £8,632 per annum for 2019/20.
The Primary Threshold has been increased to £792 per month and £9,500 for the 2020-21 tax year.
Directors tax planning strategy
A number of company directors adopt the tax planning strategy of paying themselves the PT salary during the year and either topping up this salary through interim dividends or paying a bonus salary in March 2020 to utilise their annual allowance (£12.500 for 2019-20).
Dividends are taxed at a lower rate after deducting the annual dividend allowance of £2,000, The lower rate of 7.5% assumes that total income doesn’t exceed the basic rate tax threshold of £37,500 because after this the tax on dividends becomes punitive.
Annual Employment allowance
In cases where a limited company has 2 or more directors and qualifies for the annual employment allowance, it may still be ineligible for the CJRS grant if it did not utilise any of it’s annual employment allowance before 19th March 2020.
The annual employment allowance is an annual grant to small companies to defray the cost of employers national insurance contributions up to £3,000 for 2019-20 and £4,000 for 2020-21.
Eligibility anomaly for directors
The CJRS guidelines explains that where employees, including company directors, receive salaries that vary during the year, the average salary for 2019/20 will be used to calculate the 80% claim for furloughed workers.
However, it would appear that the average salary in the guidelines is for the period up to February 2020 and not March 2020 which is the final month in the tax year. Therefore directors who ran a final payroll in March 2020 to utilise their annual allowance are left high and dry.
One argument put forward by commentators is that if these directors aren’t paying their taxes during the year how can they expect the tax payer to bail them out now. Maybe, this was the logic of behind the CJRS ineligibility rule. A fair cop.
Nevertheless, for the optimists this may just be a quirk in the computer software which was developed in the record time of 3-4 week. We are currently waiting for the CJRS support team at HMRC to get back to us on this issue within the next 48 hours. Unfortunately, that was promised on Tuesday 21/04/2020 at 10am.
This post on The COVID-19: Ineligible furloughed directors was sponsored by Canalitix.com
This article on COVID 19: Applying for 80% of furloughed staff wages looks at the eligibility and qualify criteria for employers planning to apply to HMRC for help under the government’s Coronavirus Job Retention Scheme.
Coronavirus Job Retention Scheme
Under the Coronavirus Job Retention Scheme, Employers who have had to put staff on furlough leave during COVID-19 are eligible to apply for a grant to cover 80% of furloughed staff wages up to £2,500 per month.
Extended the scheme to cover the associated Employer National Insurance contributions, as well as the minimum employer pension contribution (currently 3%) on that wage
Allowed companies to reemploy staff made redundant after 28 February and place them on furlough.
Under the scheme, the grant of 80% of furloughed staff wages can be claimed for any of the following groups provided they are paid via PAYE:
Employees of businesses, charities, recruitment agencies and public authorities
Company directors of limited companies
Members of Limited Liability Partnerships (LLP)
Agency staff, including those paid via umbrella companies
Zero-hours contract staff
Employers must engage in formal consultation with staff representatives concerning changes employment contracts of staff expected to be put on furlough leave.
The government has advised employers that the decision process to decide who to offer furlough leave must comply with the equality and discrimination laws,
The consultation should explain that only staff who were on the payroll on or before 28 February 2020 will be eligible for furlough leave. However, based on new guidance from the government, companies may reemploy staff made redundant after 28 February 2020 and place them on furlough leave.
The government has indicated that furlough leave should be approved for 3-weekly intervals and employers can claim the 80% grant from the date that staff have been placed on furlough leave which can be backdated to 1 March 2020 until 30 June 2020. The scheme may be extended beyond June 2020 if the government decides it’s necessary to extend the social distancing measure beyond this date.
Changes in contracts of employment
Changes to employment contracts should highlight that:
the employer might be able to keep them on the payroll if they’re unable to operate or have no work for them during COVID-19, and
the employer will pay 80% of wages up to a monthly cap of £2,500 during COVID-19 furlough leave
Furlough leave confirmation
In order to be eligible for the job retention grant, employers must write to all affected staff to confirm that they have been placed on furlough leave and a record of this communication must be kept for five years.