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Coronavirus Job Retention Scheme update and Treasury direction - UK

  • United Kingdom
  • Coronavirus - Workforce issues


Less than a week before the Coronavirus Job Retention Scheme (the Scheme) is due to go live (currently due to open on 20 April), further significant changes have been published in the form of a Treasury Direction (the Direction), setting out the legal framework for the Scheme and updated Guidance.

This Alert is not intended to amount to a complete analysis of the Direction and updated Guidance. It is intended to highlight key issues employers should be considering to ensure, as far as practicable, that furlough arrangements already entered into have the best possible chance of being reimbursed by HMRC, and also that future furlough arrangements are compliant. This document should not be relied upon as a substitute for employers seeking timely and specific legal advice.

The status of the Direction

The Direction amounts to a legally-binding order from the Treasury to HMRC, with which HMRC must comply. The Direction does not refer to the previous iterations of Guidance which have been issued regarding the Scheme, and accordingly we think that the Direction will prevail to the extent there is any conflict between them. However, the Guidance is certainly not obsolete, and continues to flesh-out how the Scheme will operate in practice.

Highlights of the Direction

1. Scheme purpose and manner of application

The exceptional purpose of the Scheme is to reimburse employers for the costs incurred in respect of employees who are furloughed “arising from the health, social and economic emergency in the United Kingdom resulting from coronavirus and coronavirus disease”. This is very important as the Direction also makes clear that no claim may be made in respect of an employee if it is contrary to the exceptional purpose of the Scheme.

It is now therefore clear that the costs are only recoverable for furloughed employees if the furlough ultimately results from matters associated with coronavirus, whether health, social or economic. Accordingly, there does not appear to be a “business need” requirement, rather just a link between the economic/health/social emergency resulting from coronavirus and furlough.

The claim for reimbursement must be made in such form and manner, and contain such information, as HMRC may require at any time (whether before or after payment of the claim) to establish entitlement to payment under the Scheme. HMRC may later require information, for example, to prove that the costs arise from the emergency resulting from coronavirus. It is therefore vital that employers keep updated regarding HMRC’s requirements.

2. Meaning of a “furloughed employee”

A furloughed employee is one who has been instructed by their employer to cease all work in relation to their employment, where the instruction is given by reason of circumstances arising as a result of coronavirus.

Critically, the Direction states that such instruction will be valid, for the purposes of reimbursement under the Scheme only if the employer and employee have agreed in writing (which may be in an electronic form such as an email) that the employee will cease all work in relation to their employment. Accordingly, employers should revisit urgently the terms upon which employees have already been furloughed and should make sure that any future arrangements are compliant. It is clear that the paper-trail must reveal that “agreement” was reached that no work would be performed for the employer. Whilst, in practical terms, it seems unlikely in the current circumstances that HMRC would reject otherwise legitimate claims under the Scheme, simply because an employer does not have the express written consent of the employee to do no work, it is a risk and those employers who have not communicated clearly to employees that a condition of furlough is that they do no work should consider a further communication to those employees. Employers may wish in any event to secure employee text, postal or email agreement, where it is practicable to do so. Due to the risks involved, legal advice should be taken for employers who are in any doubt about this requirement.

The Guidance is clear that “workers” are included under the Scheme. However, the Direction wording refers expressly to tax legislation (section 4 of Income Tax (Earnings and Pensions) Act 2003), which applies to those working under of contract of service (in employment law terms an “employee”, office holders or someone in apprenticeship and to certain agency workers). In practice, workers may be deemed “in scope” of those working under contracts of service for tax purposes. Accordingly, we see no obvious discrepancy between the Direction and the Guidance, which includes a paragraph about limb b workers, in practical terms.

3. Costs which are recoverable

There is a distinction between a “fixed rate” employee and other employees. Fixed rate employees are, consistent with NMW legislation, likely only to be those with annual hours stipulated in the contract. Those who have weekly or monthly hours of work will not therefore, according to HMRC (effectively the administrative/ enforcement body for both NMW and the Scheme), be fixed rate employees. This somewhat narrow interpretation adopted by HMRC means that there are not many employees who will qualify as fixed rate employees. For fixed rate employees, the reference salary is the amount payable to the employee in the latest salary period ending on or before 19 March 2020.

For all other employees, only “regular salary or wages” can be included (using a countback or averaging period) in a claim under the Scheme. This excludes performance-related payments (unless the payments are contractually due and certain) and benefits in kind. Crucially, it also excludes any part of the salary or wage which is “conditional upon any matter”. Our initial view is that supplemental payments which are conditional upon some form of additional obligation, such as shift premiums, call-out payments and the like, are excluded. The conditional aspect is an addition and will cause inconvenience and confusion to many employers who have acted on past Guidance. The payment of overtime would not be conditional on any matter and would therefore be included (although voluntary overtime might be treated differently).

Very importantly, if a claim under the Scheme amounts to less than 80% of the employee’s reference salary, it appears that the whole claim may be disallowed. This would make it vital that employers are cautious and careful, when calculating the amount to be claimed, that all allowable elements of wages or salary are included to avoid the risk that the employee is not being paid 80% of the reference salary. This may seem counterintuitive to those employers seeking to avoid “over” claiming from the Scheme and we believe the position will become clearer once HMRC starts processing claims.

Accordingly employers must weigh up the risk of underclaiming, and losing the ability to recover anything at all for a furloughed employee under the Scheme, and paying furloughed staff allowances which may not be recoverable under the Scheme. An employer might therefore wish to err on the side of caution and pay employees allowances which may (or may not) be recoverable in order to preserve their ability to recover pay for a furloughed employee under the Scheme.

Where employers have already paid those who have been furloughed an amount lower than provided for under the Scheme, or will pay such a lower amount before the end of Saturday 18 April 2020, they are permitted ‘to top up’ the amount to that required under the Scheme, provided the top-up is paid before a claim is made. If they do not do this, none of the furlough costs would appear to be recoverable, because they would have been paid at an amount lower than provided for under the Scheme.

Many of the initial headlines concerning the Direction and Guidance mentioned the apparent relaxing of the cut-off date from 28 February to 19 March. Costs can now be recovered if they relate to any employee on an employer’s PAYE payroll on or before 19 March 2020 (and therefore, importantly, were notified to HMRC on an RTI submission on or before that date), rather than 28 February 2020 as previously stated. However, this may not benefit as many recent starters as anticipated. Due to the way the RTI system works, an employer is required to notify HMRC about salary payments on or before the payment date. This suggests that if an employer has not made a salary payment to a new starter, and therefore made an RTI submission, prior to 19 March, he/she is unlikely to be covered. In other words, those who are paid weekly or for whom monthly salary fell prior to 19 March, requiring an RTI submission, will fall within the Scheme. Employees paid monthly, at or towards the end of the month, will fall outside the Scheme if they started work in March and no RTI submission had been submitted on or before 19 March.

There are further technical details contained in the Direction and we will be updating our Questions and Answers Alert on the Scheme shortly.

This note is a generic briefing, based upon the Treasury Direction of 15 April 2020 and Government Guidance available as at 15 April 2020, and is not a substitute for detailed legal advice on the specific circumstances employers are facing. Employers should therefore take legal advice.