What support is available to contractors during the COVID-19 outbreak?
The Government has outlined several areas of support which may be of help to contracting businesses during the current Covid-19 outbreak.
As a contracting business may be trading as a limited company, partnership or sole trader, there are several schemes which may need to be considered, not just in respect of the contracting business but also for any self-employed staff they may engage. These are detailed below.
There are some gaps in the available advice which hopefully will be dealt with when the detailed operational guidance is made available. These include the details of the calculation of the maximum amounts payable to weekly paid employees and how the schemes will apply to directors who may not have employment contracts but who are paid fees via PAYE as ‘office holders’. HMRC have said that they are working closely with BEIS to provide this guidance as a matter of urgency.
The Self-Employment Income Support Scheme
This scheme is aimed at protecting the income of self-employed individuals who lose trade due to the Coronavirus. As such it is not applicable to contracting businesses which trade as a limited company. It does apply to a contractor who is a sole trader or a member of a partnership, and although not specifically stated, it would seem sensible if this were to include LLP members who are paid on a self-employed basis.
There is currently little detailed information on this scheme and most of it was within the Chancellor’s announcement on Thursday 26 March. As with the Job Retention Scheme (details below), the enabling regulations are not yet available and there is nothing directly related to this scheme in the Coronavirus Act 2020.
The scheme will provide a grant of 80% of average monthly trading profits for 2016/17 to 2018/19 to a maximum of £2,500 per month. Initially, this will be payable for a period of three months although this may be extended. HMRC will check the initial eligibility and will contact those who meet the claim criteria.
The eligibility criteria are that the self-employed person/partner:
- has submitted their Income Tax Self-Assessment tax return for the tax year 2018-19
- has traded in the tax year 2019-20
- is trading when they apply, or would be except for COVID-19
- intends to continue to trade in the tax year 2020-21
- has lost trading/partnership trading profits due to COVID-19
The financial criteria are that:
- Their self-employed trading profits must be less than £50,000 and
- More than half of their income comes from self-employment
This will tested by at least one of the following conditions being true:
- having trading profits/partnership in 2018-19 of less than £50,000
- those profits constitute more than half of the total taxable income (probably tested by reviewing tax return details)
- having average trading profits in 2016-17, 2017-18, and 2018-19 of less than £50,000 and these profits constitute more than half of the average taxable income in the same period
If the business started trading between 2016 and 2019, HMRC will only use those years covered by a Self-Assessment tax return. It appears that where trading started part way through a tax year, income for purposes of the grant will be calculated based on the actual period of trading using a pro-rata basis to arrive at the average monthly profits for the period of trading.
Individuals who believe that they may be eligible cannot apply for this grant, instead HMRC will contact them but that may not be until June. To assist in ensuring HMRC have all the details required to assess eligibility, they have extended the deadline for submitting tax returns covering 2018/19 until 23 April 2020. This scheme is not applicable to company directors, so contractors operating via a personal service company may need to apply for a grant under the ‘Coronavirus Job Retention Scheme.’
Business Interruption Loan scheme
This is available to small and medium enterprises (SMEs) which are defined as being a business with a turnover of £45M or less. The scheme provides access to loans, overdrafts, invoice finance and asset finance and is Government backed through the British Business Bank. The SME must:
- be UK based in its business activity
- have a borrowing proposal which the lender:
- would consider viable, were it not for the Covid-19 outbreak
- believes will allow the SME to trade out of any short to medium-term difficulty
- the loan must be for business purposes and support trading activities
- more than 50% of turnover must come from trading activity
This means that the scheme cannot be used to make up the loss of personal income of sole traders, as it is intended to allow the business to continue trading through a period of reduced sales. It is possible that lenders may consider that an application to obtain funds to pay furloughed employees while awaiting Job Retention Grant payments would be acceptable.
The Government will also make a Business Interruption Payment to SMEs entering the scheme, which will cover the first 12 months’ interest payments and any lender-levied fees.
Applications should be made to one of the scheme accredited lenders who may be found from the following link:
Further details may be found here:
Coronavirus Job Retention Scheme
This scheme provides a grant to pay wages to furloughed workers and is available to all employers of at least three months’ standing. That is defined as having a PAYE scheme set up and running on or before 28 February. It will run for three months initially starting from 1 March. The scheme is expected to be operational by the end of April. There will be an online portal to claim the grant. There are currently no published regulations or detailed guidance notes on the practical operation of the Employment Retention Scheme, HMRC have said that they are working with BEIS to provide such guidance as quickly as possible.
Grant payments will be available in respect of workers who have been laid off (furloughed) and will cover 80% of the average wages plus employer’s NI and minimum pension contributions.
To be ‘furloughed’ an employee must be laid off for a minimum of three weeks. Importantly, this must be with the agreement of the employee and should be recorded in writing or an amendment to contractual terms and conditions of employment to avoid breach of contract claims. Payments will be capped at £2,500 per month if this is less than the 80% of average salary. Fees, commissions and bonuses are not covered. Employers must pay the lower of 80% of average wages or £2,500 per month to qualify, i.e. no retaining a percentage to cover overheads.
Umbrella companies will probably baulk at this but they will have no admin staff overheads to fund as they can include them in the scheme. They just won’t make any profit and may make a loss, but that’s a Corporation Tax issue for later. Employers who can use the scheme include recruitment agencies, which are defined as agency workers paid through PAYE.
The scheme covers the usual full-time and part-time permanent staff and also:
- employees on agency contracts.
- employees on flexible or zero hours contracts.
It also covers employees made redundant since 28 February, and it seems, that under current rules, those employees could still claim redundancy pay even if they are rehired. Employees who are paid enhanced (earnings related) maternity above the SMP amount are also eligible to be included in the scheme. The information held at the moment suggests that this will only fund the enhancement above SMP.
It does not cover the shortfall in wages for employees placed on reduced hours or pay. They must be ‘furloughed’ to be eligible. It does not extend to:
- employees hired for the first time after 28 February.
- employees on unpaid leave starting from 28 February or earlier
HMRC guidance states that directors can claim, which seems to bring PSC’s into scope, but it is unlikely to be much help where the wages are small and most income was taken as dividends. The grant is taxable income in the hands of the employee and for the employer, as the grant should be treated as turnover for accounting purposes.
An article on the House of Commons Library website suggests that some changes will be needed to employment law as part of the scheme. This is discussed in more detail below. The existing guidance is unclear about switching periods of furlough ‘on and off’ although nothing in the published notes prevents that all it requires is that it is for a minimum period of three weeks.
Government guidance is at:
House of Commons Library notes on interaction with employment law are here:
Interaction with existing employment law
Currently, there are a number of points where existing UK employment law interacts with the support scheme allowing the furloughing of workers which need to be considered.
The term ‘furlough’ is not recognised in UK employment law the normal term is laid off and where a worker is laid off they have certain rights under current employment law. It is possible that the regulations covering the Covid-19 support will make changes to employment law to make the use of furlough easier for employers. Under current rules to send a worker on furlough you must either have a pre-existing contractual right to do so or you will need their consent to putting them on furlough with reduced pay. To do so unilaterally could be a breach of contract and an unlawful deduction from wages. Getting agreement should not be too hard if the alternative is redundancy.
Under current employment law, any worker that has been laid off has the right to statutory guarantee pay of £29 per day (rising to £30 per day from 6 April 2020) for five days in any three-month period. Employees, who usually earn less than £29 a day, will get their usual daily rate, and if employees work part time, their entitlement is worked out in proportion to their part-time hours. To be eligible for guaranteed pay, someone must be legally classed as an employee. They must also:
- have been employed continuously with the same employer for at least one month
- reasonably make sure they are available to work
- not refuse any reasonable alternative work
Employers must ensure they do not discriminate in asking particular employees to go on furlough. Guidance on these points is on the ACAS website at. https://www.acas.org.uk/lay-offs-and-short-time-working. If you need detailed advice, our employment law advisors will be pleased to offer assistance.
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