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COVID-19: Construction industry furlough claims rejected as ineligible.
Why are claims by construction companies for furloughed staff being rejected as ineligible?
One of the qualifying criteria for claiming 80% of the salaries of furloughed employee under the Coronavirus Job Retention Scheme (CJRS) is that the employer must have operated a PAYE scheme prior to the 19th March 2020.
PAYE/Construction Industry Scheme (CIS) Anomaly
HMRC operates two PAYE schemes for construction companies: Subcontractor Only and the hybrid Subcontractor/PAYE scheme.
Subcontractor Only PAYE Scheme – Ineligible for CJRS Grant
Construction companies which fall under the Subcontractor Only category are automatically rejected as ineligible when applying for the CJRS grant. This is despite the fact that these companies have been running employee payrolls for several years.
Subcontractor Only / PAYE Scheme – Eligible for CJRS Grant
All is not lost. Construction companies that have been rejected as ineligible for the CJRS grant can contact HMRC’s Employer Helpline on 0300 200 3200 and request that their PAYE scheme be modified to the hybrid version: Subcontract Only / PAYE.
Once HMRC has updated their system, the construction companies affected can re-apply for the grant after 72 hours.
Hector has his limitations
Despite the multiple qualifying criteria listed by the government for making a CJRS claim, Hector has decided to keep things Plain Vanilla for the construction industry by limiting his checks to whether the company’s PAYE scheme is Subcontractor Only or not.
Hector has no time for Tutti Frutti logic like IF PAYE Scheme equals Subcontractor Only and Company runs Payroll then Eligibility is TRUE.
To be fair, Hector is only a tax inspector and not an IT programmer.
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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.
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Canalitix Accountants are tax agents who can guide you through the claims process for Coronavirus Job Retention Scheme (CJRS) and Self Employed Income Support grants.
HMRC has recently reached out to Canalitix Accountants and other UK tax agents to assist businesses with their claims for furloughed staff wages under CJRS.
The CJRS dedicated online claims system is expected to go live on 20 April 2020 and we would welcome the opportunity to assist businesses including company directors and contractors on PAYE with their claims.
Payroll bureau and HMRC file only agents
Payroll bureau and HMRC file only agents cannot access the CJRS dedicated online services.
However, file only agents can assist business with their CJRS claims because they hold information on furloughed staff, such as national insurance (NI) number, salary, employer’s NI and pension contributions.
HMRC Money Laundering Regulations
RECAP – Coronavirus Job Retention Scheme
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The COVID-19: HMRC Job Retention Scheme Video by HMRC is very comprehensive and worth listening to.
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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.
On 27 March 2020, the government issued new guidance which:
- 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.
Getting the calculation right
Employees on the payroll for over 12 months
Where the employee has been employed for 12 months or more, employers can claim the highest of either the:
- same month’s earning from the previous year and
- the average monthly earnings for the 2019-2020 tax year
Employees on the payroll for less than 12 months
Where the employee has been employed for less than 12 months, employers can claim for 80% of their average monthly earnings since they started work
Employees on the payroll for less than 12 months
If the employee only started in February 2020, then employers need to pro-rata for their earnings to date, and claim for 80%.
Getting the prerequisites right
Once HMRC completes the new Coronavirus Job Retention Scheme online application portal, it’s important for employers to get their prerequisites in order before applying for the grant.
Our suggested checklist include:
- COVID-19 staff consultation notice
- COVID-19 agreed changes to employment contracts
- Furlough leave confirmation letters
- Online account for PAYE, register with HMRC if you don’t have one already
- A P11 payroll report for each affected employee as at 28 February 2020.
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Today, the COVID-19 Job Retention Scheme Update was announced by the government to provide further clarity on how the scheme will operate.
According to the announcement, the scheme will be backdated to 1 March 2020 and provided staff remain employed throughout the crisis the funding will be open to all employers with a PAYE payroll scheme that was created and started on or before 28 February 2020, including charities.
The announcement further explained that the grants will cover 80% of furloughed employees’ (employees on a leave of absence) 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.
The cashflow dilemma for employers
The major stumbling block for employers is cashflow to fund the March 2020 payroll because the government is expected to cover 80% of both March and April payrolls at the end of April 2020.
One option is to take out a business interruption loan or overdraft which is being guaranteed by the government and interest free for 12 months. Unfortunately, some banks are requesting personal guarantees which may deter some directors from considering this option.
Employers may also utilise the COVID-19 Time to Pay Scheme and the VAT Deferral scheme to free up cash resources to pay employees while waiting on the government Job Retention Scheme funds.
However, it is almost predictable that the majority of the business interruption loans and overdrafts secured under the government’s 80% guarantee will go bad and get hived off to the British Business Bank as COVID-19 bad loans.
The government’s 80% guarantee doesn’t equate to free money to employers and directors giving personal guarantees. These loans and overdrafts will have to be paid back by employers for as long as it takes or they will go to the wall.
Therefore, the dilemma is whether employers protect their own future or act in the national interest and provide for their staff during the COVID-19 crisis.
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On Friday 20/03/2020, The Chancellor made the historic announcement that the UK government was to step in and help to pay the wages and salaries of retained workers up to a maximum of £2,500 a month. This announcement placed the responsibility on HMRC to fund 80% of wages for furloughed staff.
The Coronavirus Job Retention Scheme
The Coronavirus Job Retention Scheme has been set up to allow employers to contact HMRC for grants to cover most of the wages of staff who are not working but are furloughed and kept on the payroll instead of being laid off. The scheme will be backdated to 1 March 2020 and is intended to last for 3 months, initially, after which it will be reviewed.
How will HMRC fund 80% of wages for furloughed staff?
HMRC is currently working on the mechanism for reimbursing employers directly into their bank accounts.
In the meantime, employers need to:
- designate affected employees as ‘furloughed workers’ and notify them of this change
- submit information to HMRC about the employees that have been furloughed and their earnings through a dedicated HMRC portal
- HMRC will reimburse 80% of furloughed workers wage costs, up to a cap of £2,500 per month
Canalitix Accountants would welcome the opportunity to act as your agent in relation to HMRC taxes. Once authorised by HMRC, we will manage the Coronavirus Job Retention Scheme application process on your behalf.