The UK Government has released further guidance on how employers should prepare for changes to the UK Job Retention Scheme from 1 July 2020. In this podcast, Mike Whitacre interviews Jonathan Clark, a Tax Director in Frazier & Deeter’s London office, who discusses the new flexible furlough arrangement and how employers will need to calculate their monthly wage cost claims in conjunction with the tapering of the furlough scheme.
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UK COVID-19 Update – Changes to Furlough Arrangements and Wage Cost Claims
This transcript was assembled by hand and may contain some errors.
It has been edited for readability.
Mike Whitacre Hello everyone and welcome to Untangling the Technical UK edition, Frazier & Deeter’s podcast in which we take a look at complex topics to break them down for business people navigating today’s ever-changing tax and regulatory environment.
I’m Mike Whitacre, and today we’re excited to have Jonathan Clark with us from Frazier & Deeter’s London office. Jonathan is an expert in UK employment taxes and other areas such as personal tax and global mobility. Jonathan, welcome.
Jonathan Clark Hi Mike, great to be here.
Mike Today, we want to talk about recent changes to the UK employee furlough scheme, which will be relevant to employers who have been making use of this relief during COVID-19.
Jonathan, before we get into the details of the recent changes, please could you give us an overview of furlough scheme to date?
Jonathan Yes, of course. So, back in March, the government announced a variety of measures to help businesses impacted by the coronavirus. One of the largest relief measures available to employers was the Coronavirus Job Retention Scheme.
The Job Retention Scheme allowed employers to place employees on a leave of absence, known as furlough, and claim back from the government up to 80% of their monthly wage costs, up to a limit of £2,500 per month. In addition to the 80% monthly wage costs, the employer could also claim the employer National Insurance and pension contribution costs on that wage.
All this combined meant the UK government was covering the employer wage cost of up to £2,800 per month for each employee on furlough.
To put all this in perspective, the government revealed earlier this month that the total number of jobs furloughed by employers in the UK so far was 8.9 million, and this scheme was being used by approximately 1.1 million employers, which had amounted to a total cost of almost £20 billion pounds to date.
So, no small number of employees involved.
Mike Okay, so it sounds like a lot of employers have been using the Job Retention Scheme in the UK so far. What changes to the scheme has the government announced that they need to be aware of?
Jonathan So, I would breakdown the recent scheme changes into three key areas – Firstly, the closure of the Job retention scheme to new entrants. Secondly, changes to the flexibility of the scheme to allow employers to bring back furloughed employees on a part time basis. And finally, changes to the amount of employee wage costs that can be claimed by employers going forward. I’ll address each of these three points in more detail.
So, to the first point, the government announced in May that the scheme will close to new entrants from the 30th of June.
Under the original rules of the Job Retention Scheme, an employee was eligible to be furloughed if they were on their employer’s payroll before the 19th of March 2020 and they were going to be placed on furlough for a minimum period of 3-weeks.
From the 1st of July onwards, the employee will only be eligible to remain part of the Job Retention Scheme if they have already been on furlough for this minimum 3-week period by the 1st of July.
What that means is any employees placed on furlough for the first time after the 10th of June will not meet the minimum 3-week period and will therefore not be eligible to remain on the scheme after the 1st of July.
Mike Do you think that cut-off date will impact many furloughed employees in the UK?
Jonathan There may be a few, but in reality, the closure of the scheme to new entrants was announced in May, so employers have had plenty of time to prepare for this cut-off date and based on the government stats of 8.9 million jobs being furloughed to date. I think in reality most businesses with employees who intended to continue using the scheme will have already placed their employees on furlough for at least three weeks at some point in March, April or May.
I would add that there are some exceptions to this rule though with employers who are bringing employees back from either maternity or paternity leave and were not able to be placed on furlough by their employer prior to the cutoff date.
The final thing to add is that employers have until the 31st of July to make a claim in respect of any wage cost claims up to the 30th of June. The Government have said they will not be accepting any claims for June furloughed employee wages in August.
Mike Okay, so that’s an important date for our listeners to be aware of. Can you tell us more about how the scheme will be changing from 1st of July onwards?
Jonathan Yes, of course. So, the next important point to address is the changes to the flexibility of furlough.
During the period March to June, employers were not eligible to furlough employees on a part time basis, this meant they were either place on furlough for the minimum 3-week period, where all work activities were excluded with the exception of training. Or, they were deemed to be working their normal employment hours and the employer was responsible for covering the full cost of their wages.
From the 1st of July, businesses using the scheme will have the flexibility to bring previously furloughed employees back to work on a part time basis – with the government continuing to contribute to the wage costs for any of their normal hours they do not work and effectively remain on furlough.
This gives employers the ability to decide the hours and shift patterns their employees will work on their return to work, obviously within their normal contracted hours.
This means that employees can work as much or as little as the business needs, with no minimum time period that they can furlough staff for. For any hours actually worked, the employer will be responsible for their wages, for any hours not worked, the employer can continue to claim wage costs under the Job Retention Scheme.
If employees are unable to return to work, or employers do not have any work for them to do, they can remain on furlough full-time and the employer can continue to claim the grant for their full hours under the scheme.
Mike Those changes sound really helpful to employers to help them restart their businesses. Are there any specific scheme rules or criteria employers need to aware of?
Jonathan Yes there are, with these changes there is of course some additional administration employers need to be aware of.
Firstly, I would mention that any flexible working arrangement between an employer and their employee needs to be agreed with the employee in writing and the employer must make sure that the new agreement they have for that employee is consistent with existing employment, equality and discrimination laws in the UK.
The employer is also required to keep a copy of this written agreement for five years on record, and maintain documentation to show the hours their employees did or did not work during the flexible furlough claim period.
Mike How have the calculations changed for working out how much can be claimed under the scheme when an employee returns to work part time?
Jonathan Good question, in respect of working out how much the employer can claim for each employee on flexible furlough, there are now additional steps to the wage cost calculation.
Prior to the 1st of July, an employer just had to calculate each employees’ maximum wage amount in order to work out what they could claim from the government under the Job Retention Scheme. This calculation was based on either the employee’s fixed regular salary, or in the case of flexible contract workers, the calculation involved an averaging exercise of looking at either their entire average wage over the last tax year or looking at their pay from 12 months ago and taking the higher amount.
From the 1st of July, the employer is still required to calculate each employees’ maximum wage amount, but they are also now required to work out their employees ‘Usual Hours’.
For employees on fixed hourly contracts, the ‘Usual Hours’ is relatively straight forward to determine. For example, they could be on a 35hr per week contract, but for employees who have no fixed hours in their contract, or regularly work paid overtime on top of their set hours, again there’s an averaging exercise that is required to be done by the employer.
To determine the ‘Usual Hours’ for someone who works variable hours, the calculation involves looking at the number of hours worked in the previous tax year, and the number of hours worked in the corresponding month last year and take the higher amount.
I would like to add that there is detailed guidance for employers on how to calculate this for employees on HMRC’s Coronavirus Job Retention Scheme page. As there are many factors such as annual leave, discretionary hours worked that also need to factored into these calculations.
Once employers have determined each employees’ maximum claim amounts and their usual working hours, the employer can then work out the amount of wage they are eligible to claim for each employee based on the actual hours worked by the employee in that month and the hours they were deemed to be not working and on furlough.
Mike Okay, so to put that in an numerical example for our listeners, if an employee’s maximum claim amount for the month of July 2020 was £2,000 and their usual working hours was 30 hours per week, if the employer brought the employee back on a flexible working arrangement where they could work 15 hours per week and remain on furlough for the rest, the employer would be able to claim £1,000 for that employee’s monthly wage cost under the job retention scheme in July?
Jonathan That’s correct, Mike. And the employer would be responsible for the other £1,000 of wage cost.
That example you gave is obviously a nice, simple example to use, but where employees will be working different hours every week, might have different pay every week historically, employers will need to be careful of the methodology for their calculations and also keep detailed records to support the amounts in their claims in the event there should be a future inquiry by the government.
Mike: Okay, got it. Can you tell us about the final point around the amount of wage cost that can be claimed by the employer going forward?
Jonathan Yes, of course. So, businesses in the UK were very concerned about an immediate cut-off to the job retention scheme where the ability for employers to reclaim the wage cost would be immediately stopped. To help employers in this regard, the government has also introduced a tapered reduction to the Job Retention Scheme between the 1st of July and the 31st of October, after which the government has said that the Coronavirus Job Retention Scheme will close.
To outline how the tapering will work, it is probably best if I break it down into a month by month change in turn – For July, the government have said they will continue to pay 80% of wages up to a cap of £2,500, as well as employer National Insurance Contributions (ER NICs) and pension contributions for the hours the employee does not work – and under the flexible arrangement any hours they are working, the employer is responsible for those wage costs.
For August, the government will continue to pay 80% of wages up to a cap of £2,500, but the change from this month is that employers will pay now have to fund the NICs and employer pension contributions. Those costs of which is approximately £300 per month for someone claiming the full £2,500 per month wage claim for an employee.
In September, the government has said they will only pay 70% of wages, a reduction in 10%, so that cap is now reduced to £2,187 for the non-working hours the employee is on furlough – And employers will have to pay ER NICs and pension contributions and top up employees’ wages by 10% to meet the 80% they are entitled to under the scheme.
In October, the government will pay 60% of wages, which reduces the cap to £1,875 for the hours the employee is on furlough – and the Employers will have to pay ER NICs, pension contributions and top up 20% of employee wages to meet the 80% criteria for the furlough scheme.
So essentially, there is a lower amount the employee can claim for wage costs from the government each month under the Job Retention Scheme between August and October.
To be clear though, all these tapering changes will not impact the employee, as the idea of the scheme is they are kept whole to 80% of their monthly wage cost through a combination of the government and the employer, up to the existing limit of £2,500 per month.
Mike Okay, so big changes there, especially when you overlap that with the flexible furlough changes.
Jonathan Yes exactly, for employers making use of the flexible furlough arrangement between July and October, when you couple this with the tapered claim amounts the calculations can get slightly more complex to administer.
If you take our previous example of the employee entitled to £2,000 for the month of July who will be working 15 hours per week on a flexible arrangement, the amount of wage cost the employer will be entitled to claim each month between July and October will reduce and the employers will need to know how to factor this into their staff cost projections.
Mike Where is the best place our listeners go to understand the detail on this?
Jonathan Well firstly, the UK government have produced their own online Coronavirus Job Retention Scheme calculator, which I think should be the first “go to” for employees to calculate specific employee claims. But before employers can use the online calculator, they will first have to do their own research into each employees’ maximum claim amount and their usual hours so they have the correct variables to enter into the calculator to get the correct amount they can claim.
Alternatively, I’m also very happy to help any of our listeners in any way that I can with their inquiries on the Job Retention Scheme.
Mike Okay great, and your email address for listeners to contact you is Jonathan.Clark@frazierdeeter.com
Jonathan That’s right.
Mike Jonathan, thank you so much for joining us today. For any of our listeners who want to learn more about the relief measures available to businesses in the UK they should go to www.frazierdeeter.co.uk or feel free to contact a member of the Frazier & Deeter UK team.