25th March CoronaVirus Update
***Update - Coronavirus Business Interruption Loan Scheme (CBILS)***
The major banks have now released guidance on how to apply for funding via CBILS and what information they will require to consider the application. We have had conversations with our contacts at these banks to discuss how they will be assessing these applications.
You should speak to their bank relationship manager in the first instance. Each lender will consider funding applications on their own merits, and then consider whether CBILS is suitable as part of the application. If other lending options are available and criteria met then these will be offered before CBILS.
As part of the application process the lender will need to understand whether there has been any material change in the businesses financial performance and will consider whether the business was a going concern before and after the change. From what we understand the banks will be considering the recoverability of the loan and viability of the business under normal lending terms.
CBILS loans are intended for businesses that can evidence long-term viability but are suffering short-term cashflow problems resulting from the Covid-19 issue. CBILS loans cannot be used to refinance existing borrowings.
The application process will mean that may need to provide the following information:
Most recent set of Management accounts
A copy of the latest Financial Accounts (including full profit and loss pages)
Financial information such as current aged debtor list, aged creditor list and hire purchase or third-party finance commitments
Schedules of rental income, lease terms and tenant details
A financial forecast covering a minimum of a 12-month period, to include full details of the underlying assumptions applied
A business plan or strategy formed in response to coronavirus.
***Companies House accounts filing extension ***
Guidance was issued by HMRC this morning in a joint initiative between them and Companies House, to enable businesses to apply for a 3-month extension for filing their accounts. HMRC state that this is to enable businesses to prioritise managing the impacts of Covid-19.
Companies will still have to apply, in order for the 3-month extension to be granted, and those confirming the reason for the extension as Covid-19 will immediately and automatically be granted the extension.
We can help with this.
***Clarification of previous guidance on Working Tax Credits***
In their haste to issue guidance on Monday, HMRC initially said that the increase in Working Tax Credits (WTC) by ï¿¡20 per week from 6 April 2020 would mean up to an extra ï¿¡3,040 WTC would be available next year.
What they meant to say was that the increase of ï¿¡20/week (they now say ï¿¡1,045 per year) will increase the potential claim UP TO ï¿¡3,040. This has been updated in the document on the support site.
***Employee retention scheme***
The Coronavirus Job Retention Scheme enables furloughed employees to be paid 80% of their salaries, whilst they are not working. The scheme will be available to all business with employees.
We have included below details of the latest Institute of Chartered Accountants (ICAEW) interpretation of how they believe the scheme will work. It seems their initial opinion is the scheme may be of little use for directors who claim minimum salary and top up with dividends.
It should be noted that much needs to be clarified at this stage, but we have included below our main recommendations of what you should be doing.
We are due to receive template letters from Employmentor (our employment law partner) to support the furloughing of employees and as soon as these are available – we will publish them here.
We have included below the main action points we you need to be thinking about:
*** Action points regarding Employee retention scheme***
Check employee contracts
Employers should check the contractual terms, as the government have said the process is subject to existing employment law.
*Option A If the contract contains a clause for unpaid leave, pay according to the contract*
This should be more straightforward, and the client can make use of the contractual provisions.
*Option B If the contract is silent on unpaid leave - claim 80% grant and top up difference*
If the contract is silent, and the employer proposes to top up to full normal pay for the furloughed employees and claim the 80% grant from HMRC, then employers will not necessarily need worker consent to designate them as furloughed. They will still need to notify the employee and make provisions to protect entitlement to the Government grant. For example, it needs to be clear that the employee can’t do any work for the employer.
*Option C If the contract is silent on unpaid leave - only pay the 80% grant*
If the contract is silent and the employer wants to reduce pay to the 80% grant, then employers will need worker consent. This is because this would technically be a breach of contract.
Employers need to vary the contract, which must be signed by both parties. Given the nature of the COVID-19 crisis, most employee’s will hopefully agree to the change.
They also need to notify the employee and make provisions to protect entitlement to the Government grant. For example, it needs to be clear that the employee can’t do any work for the employer.
*Per the latest Government FAQs*
Q How are you going to ensure that firms use money to pay furloughed workers wages?
A Government will retain the right to retrospectively audit all aspects of the scheme with scope to claw back fraudulent or erroneous claims.
It is therefore important not to act in haste at this point and you should wait as long as they can to make sure the advice, which is in the pipeline, can be supplied.
As also mentioned, the ICAEW have released some information which gives details of their understanding of how the scheme will work and their guidance may be found here. We have copied below the main understandings reached by the ICAEW. The key issue is that the wages for the calculation includes employers NI and employers pension contributions.
Maximum grant
You will see from the ICAEW notes that the maximum grant will be calculated per employee and is the lower of:
? 80% of ‘wages’. The notes published so far, use the phrase ‘wage for all employment costs up to a cap of ￡2,500 per month’.
***It is the ICAEW’s understanding that this includes employers' NIC and pension contributions. Wages will be determined by reference to a defined period (yet to be announced). ***
? ï¿¡2,500 per month.
Illustration
***X Limited a scenario***
X Ltd employs Mr A at an annual salary of ï¿¡24,000, so ï¿¡2,000 per month. Mr A has opted out of auto enrolment.
Each month, Mr A currently receives net pay of ï¿¡1,665 which is after deducting PAYE of ï¿¡191 and employees NIC of ï¿¡144. On this salary, the employer pays employers' NIC of ï¿¡174.
The available grant for the employer is the lower of
(a) 80% of (ï¿¡2,000 + ï¿¡174), and
(b) ï¿¡2,500
So a grant of ï¿¡1,739
The cash required by X Ltd to furlough based on maintaining the existing salary is ï¿¡435 per month (= ï¿¡2,000+ï¿¡174-ï¿¡1,739).
It is a matter for employment law whether the employer is required to pay this top up. Discussions with employees may have agreed that the employee has agreed to a different arrangement during their furlough.
1.If Mr A had not opted out of auto enrolment, X Ltd would also be making pension contributions on his behalf. If so, the available grant is based on 80% of (gross salary + Employers' NIC + employers pension contributions paid), subject to the monthly cap of ï¿¡2,500.
2.The ICAEW understand that the rules for the scheme are being designed with underlying reference to employment law. If the individual is still under contract, Mr A can expect to receive his salary in full. The ï¿¡1,739 grant paid to X Ltd should not be taken as the new maximum cost of employment to the employer unless the contract has been redrafted.
3.Subject to the employment contract and any amendment, the salary which the employer actually pays the employee during the furlough period may be different to the pay paid used as the reference period and upon which the grant figure is based.
***Pubco - a scenario***
In the following ICAEW illustration, the business has already closed as instructed by the government. The ICAEW have had a number of enquiries along similar lines and are seeking clarification of their understanding of how the rules apply. We wanted to update you now – but we can’t be sure what the final position will be.
Mr & Mrs Fuller are the tenants of a pub. They have a substantial wet and food trade as the pub is in a coastal location and does good trade over the Summer. The pub is open all year round.
Mr & Mrs Fuller operate the pub through a limited company (Pubco). They take salaries of ï¿¡8,600 each and withdraw profits of ï¿¡30,000 each in the form of dividends. They live above the pub and work long hours being in the pub every day.
Pubco employs three permanent staff supplemented by extra seasonal staff in the Summer months and at Christmas.
The pub closed on 20 March as instructed by the Prime Minister. and following the Chancellor’s announcement on 20 March, Pubco has furloughed its staff other than Mr & Mrs Fuller who are still living above the pub and dealing with the company administration. The contracts of employment of the other staff have been varied to permit furloughing and the three permanent staff members have agreed to accept a pay reduction to 80% of the previous level. The seasonal staff for this year have not yet been hired.
The ICAEW understanding is that Pubco will be eligible to receive the government grant support under the Coronavirus Job Retention Scheme for the monthly wages of the 3 permanent staff members. No grant support is available to support the living costs of Mr & Mrs Fuller.
Mr & Mrs Fuller will need to look for alternative support while the pub remains closed.
The ICAEW also advise that many owner managed company director/shareholders pay small salaries and the balance of income as dividends. The scheme does not extend to dividends. Only the salary is relevant to the scheme.
Both ourselves and the ICAEW have had many questions checking to see if workers can be moved in and out of being furloughed, if work becomes available to an employer. This has yet to be clarified, but the ICAEW consider it very likely that they will. The scheme is being designed to allow for flexibility so that furloughed staff can be brought back to work to replace those still working who later become sick. The ICAEW anticipate that this will be seen as difficult to regulate and anticipate that a minimum period of furlough leave may be built in as a requirement before the person can return to work.
Payment
The current Institute understanding is that the employer will pay the contractually agreed amounts as required by the employment contract in the usual way. This will involve paying the employee, and HMRC the PAYE and both primary and secondary National Insurance Contributions. The grant will be paid directly to the employer. It is unknown how this will operate for employers who use a payroll agency.
As more details become available – we will update you and we’d like to stress that the above illustrations and points represent the latest interpretations by the ICAEW and a lot needs to be clarified before we can be certain on how the scheme will work.
Directors salaries
We have received a number of queries around whether directors are eligible for the scheme and if so, what can be claimed given the typical salaries/dividend approach.
The initial view from ICAEW above is that they may not be eligible and if they are only salary can be claimed (and there is considerable doubt around this)
We know this is an important issue for you so will be doing more work on this alongside our partners at Employmentor.
*** Deferring PAYE and Corporation Tax***
We have been asked if HRMC will be deferring PAYE/NI and CT payments in similar fashion to VAT and income tax. There have been no announcements on this, and you should consider the Time to Pay arrangements as an option if needed. We would expect HMRC to be an understanding creditor in these unusual times and for them to prioritise protecting taxpayers.