Had you ever used the word Furlough before coronavirus? I bet you have now! Furlough is the buzzword as coronavirus hits businesses and the lack of work or income means that many don’t need staff at the moment, or can’t afford to pay them.

So, what is Furlough all about? Find out in our latest video, or read about it below.

Before we start, though, we should mention that you should get HR advice on the process. We can advise on the financial impacts, but an HR adviser can help with the documentation and employment law.

What does it mean to Furlough staff?

The phrase comes from the Government’s Coronavirus Job Retention Scheme. This was announced by the Chancellor in March as one of the key measures to help the economy and protect jobs.

It was recognised that businesses wouldn’t be able to afford to keep all their staff on and that, therefore, coronavirus would lead to a lot of redundancies and unemployment. Therefore, the Government decided to step in with an alternative – the Furlough.

Here, the employees of the company will not have to be made redundant or laid off. Instead, they can be “furloughed”. This means that they will remain an employee but won’t do any work for the company for a period of time. During this time, the Government will pay 80% of an employee’s gross pay.

Currently, the Government has committed to paying this from 1 March to 31 May 2020.

This will be particularly useful for those businesses that have had to close completely during the lockdown, or if other closures have caused income to fall or stop entirely – meaning that the business will be unable to pay staff from its own resources. The idea is that businesses can retain their employees until the lockdown ends, and they can then resume employment.

To make sure that you are furloughing correctly, please do take HR advice. There is a legal process to go through to make sure that everything is done properly.

Is my business eligible?

Any business with a UK payroll can claim under the Coronavirus Job Retention Scheme. This includes charities and public authorities.

To do so, you need three things:

  1. A PAYE payroll scheme that was started on or before 28 February 2020
  2. A PAYE Online account
  3. A UK bank account

Which employees can I furlough?

You can only furlough employees who were on your payroll as at 19 March 2020 and had been included in an RTI submission to HMRC by that date.

This can include employees on any type of contract – this includes full-time, part-time, agency, flexible or zero-hour contracts.

If you had already laid somebody off prior to learning about the scheme, then you can also bring them back onto payroll using this scheme as it can be backdated to 1 March 2020.

Anyone who is currently on Statutory Sick Pay can’t be furloughed, but you can furlough them when they return.

How do I furlough someone?

You should take appropriate advice from an HR or Employment Law expert but, in simple terms, you will need to look at your employment contracts.

If the contracts include a lay-off clause, you can make the decision to furlough someone and invoke this clause.

If it does not include a lay-off clause, then the employee must agree to the furlough. In most cases, they are likely to agree as the alternative may be redundancy.

What documentation do I need to keep?

You will need appropriate letters to document the process and the date of the furlough. These must be kept for a minimum of 5 years.

How much will the Government pay?

The Government will pay 80% of an employee’s gross pay for up to three months, up to a maximum of £2,500 per month per employee.

For full-time salaried employees, the amount covered by the Government will be based on the amount paid in the February payroll. If someone joined mid-month, it will be pro-rated.

If an employee is on variable pay, you can pay (and claim) based on the higher of:

  • Their pay in the corresponding month one year earlier; or
  • Average pay from 1 April 2019 to 31 March 2020 (or the months that they worked if they started after 1 April 2019)

The scheme is not intended to cover discretionary bonuses, commission or tips.

However, you can claim for regular payments you are obliged to make, for example compulsory commission payments. You can also include overtime worked in the corresponding month or average pay.

The maximum claim to cover gross wages is £2,500 per month. This is broadly based on the national average wage of £30,000 per annum.

Employer’s National Insurance and any Employer pension contributions (up to the minimum automatic enrolment amount) will also be covered on top of this.

However, non-monetary benefits will not be covered by the Government. Similarly, benefits provided through salary sacrifice schemes (including pension contributions) that reduce an employee’s taxable pay won’t be covered.

Can I pay my employees more than the 80%?

Yes – you can choose to top up employees’ wages if you wish. This is optional and does not affect the amount you can claim from the Government.

How do I claim?

There will be an online portal from 20 April. Therefore, there will be a cashflow gap in covering the March wages.

To claim, you will need:

  • your employer PAYE reference number
  • the number of employees being furloughed
  • National Insurance Numbers for the employees you want to furlough
  • Names of the employees you want to furlough
  • Payroll/works number for the employees you want to furlough
  • your Self Assessment Unique Taxpayer Reference or Corporation Tax Unique Taxpayer Reference or Company Registration Number
  • the claim period (start and end date)
  • amount claimed (per the minimum length of furloughing of 3 consecutive weeks)
  • your bank account number and sort code
  • your contact name
  • your phone number

You need to calculate the claim amount yourself.

HMRC has stated they may retrospectively audit your claim, so please do make sure your calculations are correct and you have all of the legal documents to back up your claim, including letters agreeing the furlough that are signed by you and the employee.

Once your claim has been processed, HMRC will transfer the money into your bank account by a BACS payment.

What work can my employees do when they are furloughed?

There has been some confusion over this, and the advice given is that your employees can not do any work at all. They can’t do anything that generates revenue or provides a service to the business.

You can’t part-furlough someone – it’s all or nothing.

The two exceptions are volunteer work and training. The official wording for each of these is follows:

If your employee does volunteer work

A furloughed employee can take part in volunteer work, if it does not provide services to or generate revenue for, or on behalf of your organisation or a linked or associated organisation. Your organisation can agree to find furloughed employees new work or volunteering opportunities whilst on furlough if this is in line with public health guidance.

If your employee undertakes training

Furloughed employees can engage in training, as long as in undertaking the training the employee does not provide services to, or generate revenue for, or on behalf of their organisation or a linked or associated organisation. Furloughed employees should be encouraged to undertake training.

What is the minimum length of furlough?

The minimum length of furlough is 3 weeks. You can extend furloughs as appropriate.

Can I re-furlough someone?

Yes – an employee can be furloughed, come back to work, and then be furloughed again at a later date.

This means that you could, effectively, rotate your staff on furlough.

Can a Director be furloughed?

At its simplest – yes. However, there are a number of things to consider so we’ve written a whole separate blog on this. You can read that here.

Do my employees pay tax on their wages while furloughed?

PAYE and National Insurance are deducted as normal on the wages for a furloughed employee.

You simply run the payroll as normal with all of the associated deductions.

It’s only the reclaim that is different to your normal payroll process.

Do I pay tax on the Coronavirus Job Retention Scheme grant?

The grant is included in your Profit & Loss account and, therefore, in the tax return for your business.

However, the wages paid are also tax-deductible so the net tax effect should be zero.

What happens at the end of furlough?

Currently, the Coronavirus Job Retention Scheme is due to end on 31 May. Unless it is extended by the Government, you will need to make a decision at that date on the future employment of your furloughed employees.

If your business has returned to normal, the staff will return to their roles.

The Government has stated that, if it isn’t possible for them to return to their roles, you may need to consider redundancies at that stage. If that is the case, you will need HR or employment law advice.

More information

Full government guidance is available at https://www.gov.uk/guidance/claim-for-wage-costs-through-the-coronavirus-jobretention-scheme

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Any questions?

If you’d like a meeting or a Skype call to discuss this, please get in touch with your favourite Liverpool accountant