The Man in the Middle and FurloughingWednesday, 8th April 2020
Guest blog by Thomas Slipanczewski, ETC Tax
Furloughing – Agencies, Umbrella Companies, PSC’s and Contractors
The rapid response from the Government and the corresponding implementation of fiscal measures to support employers in retaining staff throughout the Coronavirus outbreak, has resulted in widespread in uncertainty for some. This is particularly true of those who do not fall squarely within traditional employer and employee relationship, namely agencies, umbrella companies, contractors and those who operate via personal service companies (PSC’s), receiving at least some, PAYE income (where I refer to PSC here, it is on the basis that at least some PAYE income is paid).
With significant ambiguity and misinformation now out there, in this briefing note, we seek to clarify the position in relation to the above ambiguity and highlight the assistance that is available.
When considering the position of agencies, umbrella companies, contractors and employees of PSC’s, it is worth focusing on the legal position of each person (natural or otherwise), to the arrangement. In substance, agencies, umbrella companies and PSC’s are employers for the purposes of employment law. Often, they engage contractors to carry out work for third parties, on their behalf and in return, remunerate that contractor. Conversely therefore, for the purposes of employment law, contractors amount to employees. We use these terms as employer and employee below.
What may be claimed?
Employers are entitled to claim up to 80% of the usual monthly wage cost for each employee who is ‘furloughed’, up to £2,500 a month, alongside Employers’ NIC contributions and the minimum automatic enrolment employer pension contributions on that respective wage.
Who can claim?
Any organisation with UK employees can apply, including businesses, charities, recruitment agencies and public authorities. The only requirement is that the employer must have created and started a PAYE payroll scheme on or before 28 February 2020 and have a UK bank account. Therefore, this includes agencies, umbrella companies and PSC’s. Notably however, in relation to a PSC, you may only furlough an employee (probably also the director and shareholder), in the employees’ capacity as employee and therefore, may only claim income paid via PAYE and the corresponding NIC and pension contributions. This does not include any remuneration in the form of dividends.
Where does this now leave contractors?
Many contractors may now be left in a vulnerable position as the third party, who they have been contracted to work for, may have ceased all working arrangements. Similarly, the agency or umbrella company, who are employing them, may have the contractor on a zero or limited hour contract and as a result, because of the current climate, no recourse to further work and without income throughout this period.
However, Government guidance states that all employees, on any type of contract may be furloughed, which specifically includes those on agency contracts and employees on flexible or zero-hours contracts. As a result, the employer agency, umbrella company or PSC may furlough its employees, who have found themselves without work.
The only condition is that the employee does not work for the period that they are furloughed. This may be particularly difficult for those who operate through a PSC and may occupy multiple roles such as employee, director, shareholder and secretary. It may not always be clear which role you are carrying out and therefore, it is advisable to exercise caution where possible and not carry out any work, other than that strictly required as a matter of law, by an officer of a company, such as filling accounts.
Similarly, the Government have also advised that the furlough is an all or nothing scheme and therefore, employees who carry on reduced hours will not be entitled.
What about employees with variable income?
Some employees may have significant variations in their pay and their pay for February 2020 may not be representative. Therefore, the Government are allowing employees whose pay varies, or has varied over the last year to claim the higher of either:
- The same month’s earning from the previous year; or,
- Average monthly earning from the 2019-20 tax year
Of course, this may only be possible for (1) where the contractor is still working for the same agency or umbrella company as he or she did at the same time the previous year.
Where an employee has been with the agency or umbrella company for less than a year, you can claim for an average of their monthly earning since they started work. Further, if an employee only started in February 2020, the employee should pro-rata their earnings to claim.
A specific problem with the furloughing of many umbrella users will be the structure. In our experience, most will pay their employees the National Minimum Wage (NWM) with the balance being paid in the form of bonuses as and when the end client pays up. This is because of the relatively lean margins on which these structures typically operate. However, bonuses are not included within the scheme. This might mean that an employee of an umbrella will be stranded on NMW when it comes to calculating the amount due through the scheme.
General practical problems
The big issue with this scheme is the cash flow problem.
The employer will still have to pay the payroll with the Government reimbursing them afterwards.
Reimbursements will not be made until the end of April so any business will have to have funds, or have access to such funds, in the interim period or they will not make it to the end of April and the reimbursement.
With umbrella structures, these cashflow practicalities are likely to be a problem.
Making a claim
The online service to make a claim is not yet available, however it is expected to be available by the end of April 2020.
In order to make a claim, you will need the following information:
- your ePAYE reference number
- the number of employees being furloughed
- the claim period (start and end date)
- amount claimed (per the minimum length of furloughing of 3 weeks)
- your bank account number and sort code
- your contact name
- your phone number
You will need to calculate the amount you are claiming. HMRC will retain the right to retrospectively audit all aspects of your claim.
Furlough audit by HMRC
We understand that HMRC will be ‘auditing’ employers who have furloughed its employees. It remains to be seen whether agencies, umbrellas or PSC’s will be seen as compliance risks in this regard.