Update on changes to the furlough scheme and extension of the self-employment income support scheme

On Friday The Chancellor gave more details of the updated Coronavirus Job Retention (furlough) scheme and an extension to the Self Employment Income Support scheme. 

Job retention scheme

As previously announced, the scheme will be phased out between now and the end of October.  In summary:
The scheme will continue to pay 80% of a furloughed employee’s normal salary plus associated employer’s National Insurance and workplace pension contributions.
  • In August the scheme will continue to pay out 80% of the employee’s wages but employers will be expected to pay NIC and pension contributions for furloughed staff.
  • In September, as well as paying the NIC and workplace pension amounts, employers will be asked to pay a 10% contribution to furloughed employees’ wages.  The employee will continue to receive 80% of their normal wages up to a capped amount of £2,500 but the amount the government contribute will be 70% of that amount, capped at £2,187.50.
  • In October the employer’s contributions to wages will be 20% with the scheme closing end of October.  In October therefore the furloughed employee will again continue to be entitled to receive 80% of their normal wages, but the Government contribution for this month will be 60% of those wages, capped at £1,875.
Importantly the new flexible furlough scheme will be introduced from 1 July not 1 August as previously trailed.  Under the flexible scheme furloughed employees will be able to return to work on a part time basis in which case the employer pays for the days the employee works (at 100% of their normal salary for the hours worked) and will be paid under the furlough scheme for the other days.  Further guidance for flexible furloughing is due to be published on 12 June.
One critical point to note is that the furlough scheme effectively closes to new entrants from 10 June.  If an employer wishes to furlough additional employees then they will only be able to do so up to that date to allow those newly furloughed employees to complete the require minimum of 3 weeks of furlough before the introduction of flexible furlough from 1 July.  Presumably, it will not be possible to place new employees on furlough after 10 June.  All claims for periods up to 30 June will now have to be made by employers no later than 31 July 2020.
WR comment – the chancellor had already trailed the fact that the scheme would be phased out from 1 August.  Initially the incremental cost to employers will be limited to the NIC and pension contributions on the 80% of salary the furloughed employee is entitled to, but this then increases progressively through September and October before the scheme ends in October.  It seems evident from the Chancellor’s comments that there is currently no contemplation of extending the scheme beyond this point. 
This does seem to give a bit more of a soft landing than might have been feared, but the precise cost implication will vary from employer to employer.  It does also give a degree of protection to those businesses who may well struggle to restart in a meaningful way by 1 August but there is still an incremental cost which may be difficult to meet.  In any event any business with furloughed staff now need to adjust their forecasts for the coming months in the light of the additional costs that will start to flow through.  Employers should also note the deadline for claims for periods up to 30 June.  
There is now also only a very short window of opportunity for employers to furlough additional employees beyond those already furloughed.  With an effective closing date of 10 June employers should now work quickly to address their resourcing needs prior to that date in the event they need to furlough additional staff.  It should be remembered as part of this process that an employee can be brought back from furlough immediately after the end of the minimum three week period and the employer will still qualify for the grant,  At the same time however if the minimum three week period is not met then no grant will be payable and the employer will be responsible for paying the employee 100% of their wages for the period.  

Self-employment income support scheme

The Chancellor also announced that the SEISS is also extended with applications opening in August for a further 3 months’ grant. Under this extension the grant payment will be 70% of average profits not 80% with a maximum of £6,570.  As a result of the new scheme opening in August, claims under the current scheme must now be made by 13 July 2020.  Full details of the second round of the scheme have yet to be announced but at this stage we are assuming that the process will be broadly similar to that of the first scheme and the Government has confirmed that similar eligibility criteria will apply.  There is though no requirement to have claimed the first grant in order to qualify for this second round of funding – presumably this covers the situation where, for example, a business has initially not be adversely affected by the Coronavirus outbreak (and would therefore initially not be eligible for a grant) but is later affected by the outbreak and would therefore be entitled to a grant under the second round of the funding.  
WR comment - It is though pleasing to see an extension of SEISS which extends the protection available to the self-employed beyond the initial grants which are being paid out at the moment.  It is critical for those self-employed people who are eligible to claim under the first round of the scheme make their claim by the 13 July 2020 deadline in order to ensure that they do not miss out on the first round of funding.
Although not entirely clear at this stage it does seem that the eligibility criteria are intended at the moment to remain the same for the second scheme as for the first.  This will be disappointing for those who failed to qualify under the first round, whether because of the level of profits or they only started self employment after 5 April 2019.  It also appears from some of the comments from the Chancellor that there is little expectation of assistance at the moment for those who take the majority of their reward from their own companies by way of dividend rather than salary.  This is deeply disappointing as there is little direct help available for this group who miss out under both the Job Retention and Self Employed Scheme.  As a member of the UK200 group of accountancy and legal practices we will continue to lobby the government to broaden the existing schemes to support these individuals.

Taxation of Coronavirus support payments

As well as announcing details around the two main support schemes HMRC also published on Friday draft legislation on how grants under the various Coronavirus support schemes will be taxed.  It has been clear from the outset that the payments under the Job Retention and Self-employment schemes would be taxable but we now have the first indications of exactly how they are likely to be taxed.  The legislation is detailed and clearly drafted to cover a multitude of different circumstances, but the broad thrust is as follows:
Self-employment scheme – the draft legislation makes it clear that grants under the Self Employment Income Support scheme are to be treated as business (i.e. trading) income and will therefore be subject to income tax and National insurance in the same way as other business profits.  The grant is income of the individual (and not of any partnership of which they are a member unless the amount is treated as a partnership receipt and the amount received is actually distributed to the partners) and will be subject to income tax in full in the 2020/21 tax year.  The income will be taxed in that year irrespective of the accounting date used by the self-employed person.  It seems like the 2020-21 self-assessment tax return will be amended to include a specific box in order to disclose the grants received.
Job Retention Scheme – the draft legislation is less clear other than stating that the normal income tax and corporation tax rules apply to grants under the job retention scheme.  Given that the grants relate to the payment of wages to employees it would seem logical to bring the amounts into account to match the expenditure to which they relate – but we would hope further guidance will be provided in due course.
Other grants – the legislation also covers other grants paid out by way of support for businesses affected by Coronavirus.  As a result, where these payments relate to a business which is subject to income tax or corporation tax it appears that the expectation is that these payments will also be taxable as business profits.  
WR comment – the legislation as drafted is complex and in places a little opaque.  However the broad thrust seems clear (and is broadly in line with expectations).  The treatment of Self-Employment Scheme payments as all being taxable in the 2020/21 tax year seems logical and takes away any potential complexity where a grant received relates to periods which fall into more than one accounting year.  
01 June 2020 | Written by Paul Brown Tax Partner

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