"It is likely that HMRC will carry out random audits of CJRS applications over the coming years and any abuse of the scheme will no doubt attract at least monetary penalties."
By Catherine Kerr, Partner and Head of Employment
On 15 April 2020, the Treasury issued its Direction to HMRC under the Coronavirus Act 2020 setting out the legal framework for HMRC to follow when making payments under the Coronavirus Job Retention Scheme (“CJRS”). This details significant clarification around many of the announcements made by the government in the past few weeks, as well as some important actions that employers must take now in order to still qualify for the CJRS.
This may not be a quick read, but it is a vital one.
A brief summary of plans by HMRC
HMRC opened its online application portal for the CJRS on Monday 20 April 2020 and are currently promising to make payments within six days of an application. Whilst it is unlikely that each application will be assessed by HMRC at the time the application is made and a significant amount of trust is being placed on employers to apply under the CJRS honestly and reasonably, it is likely that HMRC will carry out random audits of CJRS applications over the coming years and any abuse of the scheme will no doubt attract at least monetary penalties.
As stated in the Direction “No CJRS claim may be made in respect of an employee if it is abusive or is otherwise contrary to the exceptional purpose of CJRS”. It is of vital importance that any claim an employer may make is in relation to an eligible employee only and based on eligible pay.
Due to some of the questions already raised by the Direction, it is possible a further amended Direction may be released over the coming days or weeks. For now, I have summarised the Direction’s key points and highlight where necessary some potential red flags for employers.
Updated payroll eligibility date
One of the biggest changes since the CJRS was announced on 20 March 2020, is the eligibility date for a qualifying employee. Previously, an employee that was employed on or before the 28 February 2020 was eligible, meaning that anyone employed after this date was not.
The Direction has since changed this date to 19 March 2020. This means that anyone employed on or before 19 March 2020 is eligible for the CJRS, provided the employer had a PAYE scheme registered on HMRC’s real-time information system (“RTI”) by 19 March 2020. RTI is a means through which information about tax and other deductions under the PAYE system is transmitted to HMRC by the employer every time an employee is paid.
This change will inevitably capture a large number of employees previously excluded from the CJRS. Many economists are already worried about the cost of the scheme and the Government’s ability to fund it. This change, whilst welcomed by many employees employed after the initial cut-off, will increase those costs. How the Government proposes to replenish the necessary funds in the future remains to be seen.
Has the definition of “furloughed employee” changed?
In short, yes. As well as the change to the eligibility date, the definition of a furloughed employee is pretty wide and sweeping as the Direction states a furloughed employee is an employee that has been furloughed “by reason of circumstances arising as a result of coronavirus or coronavirus disease”.
The original requirement for the employee to be redundant or at risk of redundancy seems to have disappeared. An employee still needs to have ceased all work for 21 days or more to be deemed a furloughed employee.
Statutory Sick Pay
The Direction clarifies that an employee who is off work sick can be furloughed but only once the period of statutory sick pay has ended. For example, if an employee is signed off work sick for 5 days they cannot be furloughed until day 6.
A somewhat confusing section of the Direction states that an employee on unpaid sabbatical or other unpaid leave on or after 19 March 2020 is not eligible to be paid under the CJRS. Arguably, this could mean that any employee placed on unpaid leave due to Coronavirus cannot be paid under the CJRS.
I know some companies that have placed employees on unpaid furlough leave with the caveat they will be paid when HMRC pays their employer via the CJRS. Does this mean they are not eligible because they are on unpaid leave? My view is that this is not the intention of the Direction. As long as the employer has the necessary agreement and employee consent for furlough, these employees will be eligible. The Direction could do with clarification on this point though.
Further, the Treasury’s Direction provides that payment from the CJRS may reimburse the gross amount of earnings paid or “reasonably expected to be paid” by the employer to the employee. Presumably, this would cover a situation where the employer has deferred pay until it has received the money from HMRC. Again, clarification from the Treasury would be useful to further clarify this.
Calculation of pay
The Direction goes into a lot of detail around how pay is calculated for the purpose of the CJRS. This will be different for every employer, so I would encourage you to carefully read paragraph 7 of the Direction in full before making an application via HMRC’s online portal.
In general terms, the CJRS will not pay out for anything that goes beyond an employee’s basic salary as at 19 March 2020. HMRC’s guidance suggests that overtime and any regular payments made to an employee can be classed as pay for the purpose of the CJRS. For employees with varied pay, the CJRS will not pay out in relation to anything that is not “a regular salary or wage”. This means that the following payments are unlikely to be captured under the CJRS:
- conditional payments;
- payments based on performance;
- gratuity or tips; and
- discretionary payments.
The Direction confirms that a payment by an employer of a pension contribution in respect of an employee to a registered pension scheme is a CJRS claimable pension contribution. Paragraphs 8.8 and 8.9 provide more detailed guidance in relation to pension.
Holiday during furlough
HMRC has already clarified that employees can take annual leave whilst furloughed. We know that an employee is entitled to full pay whilst on holiday even if they take holiday during furlough. However, the Direction is silent on the question of whether or not employers can claim 80% of an employee’s pay via the CJRS in relation to holiday days and top up the remaining 20%. Particularly as holiday pay is arguably not “regular salary or wages”. Could it be classed as an “abuse of the Scheme” for an employer to get the CJRS to subsidise their employees’ holiday pay?
The Government has already said that furloughed employees have two years to use their accrued statutory holiday to ensure employers are not inundated with holiday requests for the back end of the year. Also, will their holiday be a genuine rest period during lockdown? Before you get your employees to use their holiday entitlement whilst furloughed, I would recommend you exercise caution and await further clarification and guidance from the Government on this issue.
A link to the Treasury’s full Direction can be found here.
More information on how to claim on the CJRS can be found here.
I expect further developments in relation to the CJRS over the coming days and weeks particularly once the online application portal is live. If you have any questions or would like further clarification, please do get in touch with me via Catherine.firstname.lastname@example.org