We have received many queries from clients in relation to the Covid-19 financial help which is available. We thought that it would be useful to incorporate these queries (and their answers) into two case studies which we set out below:
Arthur and Jane, a married couple, own and operate XYZ Ltd, which is a company that provides management consultancy services to the travel industry. In the last accounts the company turned over £400,000 and made net profits of £150,000. They operate from a premises owned by the company and have two employees. Elaine (employee 1) has a salary of £60,000 and Dennis (employee 2) works part time with his earnings varying each month (although in the year ending 5 April 2020 he earned £15,000). The company pays Arthur and Jane (who are both directors & shareholders) a salary of £8,000 each and they also take dividends of £42,000 each.
How should XYZ Ltd go about furloughing its employees?
Employers should discuss the position with their staff and make any changes to the employment contract by agreement. If they will not agree then XYZ Ltd will need to look at alternatives, including redundancy. When employers are making decisions in relation to the process, including deciding who to offer furloughs to, equality and discrimination laws will apply in the usual way. Employees that have been furloughed will continue to have the same rights as they did previously (eg. statutory sick pay entitlement, maternity rights, other parental rights, rights against unfair dismissal and rights to redundancy payments etc).
What will XYZ Ltd get back for each furloughed employee? When will it get it?
Elaine’s monthly salary is £4,167. As 80% of this (£3,333) is more than £2,500, the claim in respect of her will be limited to £2,500 per month plus the employer’s national insurance on the £2,500 and the employer’s auto enrolment pension obligations on the £2,500. If XYZ Ltd top her up above this level (which it is quite entitled to do) there will be no government assistance for either the salary or associated costs such as employer’s national insurance or employer’s pension contributions above this level.
For Dennis, as his income varies XYZ Ltd needs to look for the higher of Dennis’s average monthly income for 2019/20 and his income for the same month last year. It then needs to take 80% of this and assuming this is less that £2,500 then this is the amount that can be claimed. On top of this, it can claim the employer’s national insurance on the 80% and the employer’s auto enrolment pension obligations on the same amount.
For both employees, income should include wages, past overtime, fees and compulsory commission payments. However, discretionary bonuses (including tips) and commission payments and non-cash payments should be excluded.
HMRC expects to have the portal open to apply for this by the end of April and funds will be paid after this. The general consensus seems to be that payments will start coming through in early June but we will need to wait and see.
More details on the Job Retention Scheme can be found here.
Does XYZ Ltd still have to pay its employees if it has not yet received the funds from the Government?
The company will still be bound by the terms of the employment contract and therefore will still have to follow the salary payment terms set out therein. For cash-flow issues the company should consider the loan or tax deferral schemes (such as the VAT holiday below). It may be possible for the company to agree deferred payment terms with its employee by adjusting the contract, but clearly the employee will have cash flow requirements too!
What is the point about a VAT holiday?
All VAT payments due between 20 March 2020 until 30 June 2020 can be deferred. Therefore quarters ending 29 February, 31 March and 30 April 2020 can all be deferred. This is automatically available and there is no need to apply. HMRC will not charge any interest or penalties on this late payment. Any outstanding liabilities must be paid by 31 March 2021. You still need to submit your VAT return on time as late submission penalties will still apply. If you pay your VAT by direct debit you need to ensure the direct debit is cancelled if you would like to take advantage of this scheme.
See here for more details.
Also business rates? Apparently there is some kind of rebate available?
As the property is an office (as opposed to a retail, hospitality or leisure premises) the company will not obtain any reduction in its rates liability. However if the company is in receipt of small business rate relief for its premises (and it is in England) then it will be eligible for a Small Business Grant of £10,000. If the company qualifies then its Local Authority will write to it with details of how to claim this grant.
See here for more details
The company has a mortgage on its premises. Any chance of a mortgage holiday?
The government announcement on mortgage holidays only applied to individual borrowings rather than company borrowings. This clearly does not stop the company discussing its position with its lender.
If the company decides that it needs emergency funds what should it do?
It should consider the Coronavirus Business Interruption Loan Scheme. Under this scheme it can obtain a loan of up to £6million for a period up to 6 years. The government will pay the first year of any interest as well as any fees levied by the lender. These loans can be provided by any of 40 providers and personal guarantees will not be taken as security for lending below £250,000.
See here for more details
Can Arthur and Jane furlough? Will their dividends be taken into account?
The Job Retention Scheme does not cover dividends, which are effectively ignored. HMRC have now confirmed that company directors can be furloughed subject to a formal documented decision by the board of directors. While furloughed directors can undertake certain fiduciary duties for their company which are set out in the Companies Act 2006, they cannot undertake any other work for or on behalf of the company. This includes providing services or generating revenue. In any event any furloughing would be limited to 80% of the £8,000 salaries.
Is there any other help?
All 2nd Payment on Accounts (for Arthur and Jane) for 2019/20 which are due by 31 July can be deferred until 31 January 2021. This is automatically available and HMRC will not charge any interest on this late payment. See here for more details.
If they usually pay their dividends prior to the year end and have decided not to take a dividend in 2019/20 then they may wish to claim to reduce their payments on account and reclaim the 1st payment on account made on 31 January 2020. In passing, we should point out that the non-payment of a dividend would probably not have been a good idea in these circumstances because this would be a potential waste of lower tax rates.
David operates as a self-employed pub landlord employing three bar staff who are all on zero hour contracts. Natalie and Janet have been employed for several years but Barry started on 1 March 2020. The pub is rented from a third party landlord. For the past three tax years David’s tax returns have shown profits of £40,000 (2018/19), £55,000 (2017/18) and £61,000 (2016/17). David’s only other income is a private pension of £9,000 per year. Due to government restrictions David had to close his pub on 20 March 2020 and would like to know what help is available until he is allowed to reopen.
Is there any help for the self-employed?
Self-employed individuals or partners in partnerships whose income has been negatively impacted by COVID-19, can claim a grant worth 80% of their profits up to a cap of £2,500 per month.
Do I qualify and how much will I receive?
At least one of the following conditions need to be true for David to qualify:
- having trading profits/partnership trading profits in 2018-19 of less than £50,000 and these profits constitute more than half of his total taxable income
- 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 his average taxable income in the same period
In 2018/19 David’s trading profits were £40,000 and made up 81% of his income (£40,000 / £49,000)
Over the three years David’s average profits were £52,000 and made up 85% of his income.
David therefore qualifies for the grant under the first condition. As 80% of his three year average profit on a monthly basis is £3,467 he will therefore be limited to the maximum grant of £2,500 per month.
How do I claim the grant?
HMRC will write to David in June with details of how to apply (ie this is ‘invitation only’) and hopefully he will be paid shortly afterwards.
Further details of the Self-employment Income Support Scheme can be found here.
What about my employees?
David can claim under the Job Retention Scheme for the costs of furloughing his employees. As Barry was not on the payroll on 28 February 2020 no grant can be claimed in respect of his wages (and unfortunately for him, David may want to think about ‘letting him go’). For Natalie and Janet, David needs to look at the higher of their average monthly income for 2019/20 and their income for the same month last year. He can claim for 80% of this on the assumption that it is less that £2,500 per employee. On top of this he can claim the employer’s national insurance on the 80% and the employer’s auto enrolment pension obligations on the same amount.
Do I get any help with business rates?
As David’s business is in the retail, hospitality and leisure sector in England, it will not have to pay business rates for the 2020/21 tax year. If the property has a rateable value of £15,000 and under then David may be eligible for a grant of £10,000. If the property has a rateable value of between £15,000 and £51,000 then he may be eligible for a grant of £25,000. If he qualifies then his Local Authority will write to him on how to claim this grant.
See here for further details.
Can my landlord evict me if I don’t pay rent?
Commercial tenants who cannot pay their rent because of COVID-19 will be protected from eviction if they miss a payment any time until 30 June 2020.
This is not a rent holiday and David will still be liable to pay his rent and any interest in force under his lease agreement.
Is any other help available?
As detailed in question 1, David can defer his VAT payment, defer his second payment on account for self-assessment and look at the loan scheme for short term finance. He should also consider clawing back his first payment on account, given the uncertainty surrounding his profits.
How can Forbes Dawson Help?
We continue to build on our knowledge bank as more information comes through on a daily basis. We are happy to quote on a bespoke basis for dealing with all your COVID-19 requirements and are confident that our approach will allow us to provide comprehensive, pragmatic and bespoke advice for a fair price.
Forbes Dawson are an independently owned, tax-only firm offering specialist tax consultancy services to private clients, businesses and professional advisers.