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Employers need to estimate their total class 1 NIC liability for 2020/21 and in some cases correct coronavirus job retention scheme (CJRS) claims without delay.

Employers and payroll professionals have been grappling with the employment allowance dilemma since April 2020, when the CJRS for furloughed wages came into effect. There was confusion about whether employers should claim the employment allowance for 2020/21 as well as the employer’s NIC due on furlough pay under CJRS, and we are still waiting for concrete guidance from HMRC.

Help at hand

The ICAEW Tax Faculty stepped into that vacuum with advice to its members. There are three alternative actions to take, depending on the expected total secondary class 1 NIC liability for the whole tax year. The maximum employment allowance available to be set against employer’s NIC for 2020/21 is £4,000.

1. NIC is less than £4,000

The employer should claim the employment allowance for 2002/21, if it also meets the other conditions for the allowance.

Where the employer has claimed employer’s NIC under the CJRS, this claim should be amended to remove the employer’s NIC element. Where the CJRS claim did not include an amount for employer’s NIC, no action is required

The employer should claim the employment allowance for 2002/21, if it has not already done so.

The CJRS grant will have included a claim for employer’s NIC, but as the total secondary class 1 NIC for the whole year exceeds the sum of the NIC element of the CJRS claim and the NIC due outside of the CJRS claims, the employer has not overclaimed, considering the tax year as a whole.

3. NIC not covered by grant is less than £4,000

The employer needs to estimate how much of the employment allowance covers secondary class 1 NIC included within the CJRS claims, and then deduct this amount from either:

• their CJRS claims; or
• their 2020/21 claim for employment allowance.

The employment allowance claim can be reduced by contacting the HMRC employer helpline. The CJRS claim can be reduced as indicated below.

Correct the CJRS claim

Where the employer needs to adjust an earlier amount claimed under the CJRS as they have doubly-relieved part of their employers’ class 1 NIC, this can be done by amending the next CJRS claim. The final CJRS claim for October 2020 must be submitted by 30 November 2020.

Repay HMRC directly

If there are no further CJRS claims to submit the employer should contact HMRC to get a payment reference number. This can be done by webchat or telephone: 0800 024 1222. There is guidance on how to repay the excess grant electronically, but payment by cheque is not an option.

Once the employer has received the reference number from HMRC they should repay the overclaimed amount with 30 days.

HMRC has the power to raise an income tax assessment equivalent to the excess amount of the CJRS grant, if the employer does not voluntarily repay it. This assessment must be paid with 30 days of the date it is issued (see Factsheet CC/FS48). Strangely even if the employer is a company, the assessment will be for income tax not corporation tax.

Where HMRC does not raise an assessment and the employer later realises that they had overclaimed the CJRS grant, the employer can add the excess CJRS grant to the income tax they owe for 2020/21, or for a company – the next accounting period.

Penalty possibility

The deadline for notifying HMRC of an incorrect CJRS claim is 90 days after the grant was received, or for grants paid on or before 22 July 2020; 20 October 2020. If notification is not made within these periods HMRC can apply a failure to notify penalty.

However, HMRC confirmed in Factsheet CC/FS48 that it will not apply a penalty where the employer did not know that they had overclaimed the CJRS grant, in other words the CJRS calculation was wrong due to a genuine mistake.

Under the latest variation to its job support initiative for businesses required to close temporarily due to Covid-19 protective measures, the government will pay two thirds of each employee’s salary.

This re-worked job retention scheme is more generous than the job support scheme (JSS), but the employer will still have to pay the employee’s wage upfront plus any employer’s NIC and the minimum employer’s pension contributions on those wages.

In addition to the expansion, the Chancellor also rolled out further local lockdown grants for businesses.

Rishi Sunak confirmed a restricted furlough 3.0 scheme in a Friday afternoon announcement as the rate of infections creep back on a steep incline.

“That doesn’t mean announcing a new package every time the health measures change. Instead we’ve developed an economic toolkit to give businesses the right the support at the right time, for their situation.”

However, the Chancellor’s decision breaks from his previous refusals to revise the furlough scheme.

Eligibility

To be eligible, the employee must be furloughed for periods of at least 7 days at a time, during which they will receive 66% of his wages. Employees are only eligible for this support if they were on the payroll of the employer and included on an RTI return before 23 September 2020.

The employer will have to pay the employee’s wage upfront plus any employer’s NIC and the minimum employer’s pension contributions on those wages. The employer will then claim back the cost of the wages paid from HMRC (capped at £2,100 per month), but not the NIC or pension contributions.

Who will bear the cost?

Under the expanded JSS, the cost of keeping the staff on the payroll is split between the government, the employer and the employee, with the employer bearing a relatively small amount of employer’s NIC and pension contributions.

The employee must give up one third of their wages, and will have to agree to that change in their employment contract in writing if they are not already on a zero hours contract.

The government is effectively covering all of the employee’s pay, (at 67% of the usual rate) just as it did under the original furlough scheme when it covered 80% reducing to 60% in October.

Will the employer pay nothing?

The government thinks that around half the employees covered by the extended JSS will not be paid enough to trigger an employer NIC liability, or minimum employer pension contributions to a workplace pension.

Employer’s NIC kicks in at £732 per month (£8,784 per year), so an employee who normally earns more than £13,176 per year will create a national insurance liability for the employer when furloughed under the expanded JSS on two thirds of pay.

Workplace pension contributions will depend on whether the individual has been auto-enrolled in the pension scheme or has opted out. Those aged between 22 and state pension age have to be auto-enrolled if they earn £10,000 of more per year. Once in the pension scheme the extent of the employer’s contributions will depend on the rules of the scheme, but a minimum of 3% of the employee’s earnings between £6,240 and £50,000 per year will be typical.

When will employers get the refund?

The online portal to claim under the expended JSS will not open until 1 December 2020, so employers will have to use cash reserves, or borrow, to pay their employees’ wages.

The employer will have to prove that the wages have been paid, by submitting an RTI return, before HMRC will provide a refund of those costs. This is to avoid the instances of fraud and abuse which were apparent under the CJRS.

The scheme will run for six months from 1 November to 31 March, and will be reviewed by the government in January 2020. It will also be available throughout the UK where businesses are close by regulation. Thus, decisions by the devolved governments to close certain hospitality businesses by law for short periods, will rely on the UK government to support the wages of the employees of those businesses.

Job support scheme

The local furlough scheme comes just a month after the Chancellor announced his replacement for the CJRS, which also comes into effect on 1 November. Unlike the local version, the government only contributes 22% of usual wages and £697.22 per month towards JSS.

As the Chancellor announced in his summer statement, businesses that brought back furloughed employees are also eligible to receive a £1,000 job retention bonus.

Local lockdown grants

The Chancellor has also boosted local lockdown grants, which were announced in early September. The grants enabled businesses forced to close to claim up to £1,500 every three weeks. The revised local lockdown grants now allow businesses to claim up to £3,000 per month payable every two weeks.

However, small businesses with a rateable value of or below £15,000 can now claim £1,300 per month, while medium sized businesses with a rateable value between £15,000 and £51,000 can claim £2,000 per month.

This is an increase on the £1,000 local lockdown grants that were restricted to small business properties rateable values less than £51,000.

Previously the local lockdown grant was not designed to support businesses closed by national policies, such as nightclubs. But the new grants will extend to businesses closed on a national level including nightclubs, restaurants, pubs and bowling alleys.

Unlike furlough 3.0, which covers the four governments in the UK, the local lockdown grant is only available in England. However, the devolved administrations will receive a minimum of £12.7bn to support businesses in Scotland, Wales and Northern Ireland.

Claims for the £1,000 bonus per eligible employee, agency worker or office holder must be made between 15 February 2021 and 31 March 2021. This is a change of approach which will also be reflected in the job support scheme.

Under CJRS it was a case of ‘pay now, check later’ to ensure businesses had sufficient cashflow to make salary payments. But with the job support scheme (JSS) and the bonus scheme, HMRC will move to a ‘check first, pay later’ model, with RTI data validating claims. Where a CJRS claim is still being investigated this can delay the bonus payment being made by HMRC.

Eligibility

Employers will be eligible to claim the bonus for an employee, if that individual was included in a claim under the CJRS and they remain continuously employed until 31 January 2021. Employers can claim for the same employees under the JSS and receive the £1,000 bonus.

If an employee was transferred under a TUPE arrangement to the employer’s payroll, that new employer must have made at least one CJRS claim for them before that finishes on 31 October.

• 6 November – 5 December
• 6 December – 5 January
• 6 January – 5 February

And

• The employee must have received at least £1,560 as taxable pay across those three tax months, any tax free allowance or adjustment as driven by their tax code is not deducted/added to the taxable pay.

And

• The full payment submission for each of those three months has been sent under RTI to HMRC on time and is accurate.

It follows then that an employee who is paid £2,000 in November and December and then offered no work in January would not be eligible for the bonus. Although that employee meets the minimum income threshold, as they had not received a payment in each tax month, they would not qualify.

Exclusions

An employee ceases to be eligible for the bonus scheme if:

• The employer has repaid all CJRS grant claimed in respect of that employee.
• They are not paid at least once in each of the three tax months.
• Their total taxable pay does not reach £1,560 across the three months.
• A leaving date has been reported on or before 31 January 2021.
• They are placed on contractual or statutory notice of termination of their employment at any point before 31 January 2021.

The contractual notice of termination of employment applies to all reasons for leaving including retirement, not just redundancy. It follows that it would be an abuse of the scheme to delay reporting a leaving date, and this of course could be validated by RTI data.

Minimum income threshold

There are some particular points to note about the minimum income threshold of £1,560.

• The threshold relates to total taxable pay in a tax month regardless of how many times the employee is paid in the tax month.
• Periods of family related or sick leave do not lead to any reduction in the minimum income threshold.
• Employers who are payrolling benefits in kind will have a higher gross taxable pay figure as it will include the notional amount for the benefits in kind as well as their cash earnings. There is no indication in the guidance that HMRC requires payrolled benefits to be deducted from taxable pay.
• There is no reference to tronc schemes in the guidance. If a tronc is set up as a separate PAYE scheme it will have taxable pay which could reach the minimum income threshold. But as the tronc master is not the employer and therefore cannot be said to have made a claim on behalf of the employee, one would expect that such PAYE schemes would not be eligible. Conversely if tips are being paid through the employer’s PAYE scheme as taxable pay then they would be included in the minimum income threshold.

The guidance refers to gross taxable pay but then requires net taxable pay to be used where there are tax relieved amounts. If you look at the example of Charlotte as she is in a net pay arrangement pension her contributions reduce her gross taxable pay and only the net amount is used to assess if the threshold is reached. If Charlotte had been in a relief at source pension scheme, pension contributions come off net pay so she would have qualified for the job retention bonus based on the minimum income threshold.

I assume that charitable giving and share incentive plan contributions will similarly reduce gross taxable pay for the minimum income threshold.

Compliance and preparation

In preparation for making a claim HMRC requires the employer to file all their RTI returns accurately and on or before the contractual payment date for the whole of the 2020/21 tax year. It is not clear if the employer has used the three day late reporting easement, or has a first late reporting default, if this would invalidate the employer from using the bonus scheme.

HMRC asks that the employer use the ‘irregular payment pattern indicator’ in the full payment submission (FPS) if the employee is not paid regularly. Any requests for information from HMRC in respect to CJRS claims must be dealt with promptly as these can delay payment of the bonus or lead to a claim being rejected.

Agents who are authorised for PAYE online can make claims on behalf of clients.

Taxable income

The bonus is taxable income for both corporation tax and income tax purposes. However, where it is payable to an individual who is also happens to be an employer of a nanny or a member of domestic staff, the bonus is not classed as part of the individual’s taxable income for the year.

VAT and charities

Charities do not get special treatment as far as VAT is concerned. However, they do benefit from a number of concessions within the legislation, which either means they do not charge VAT on some sources of income or, equally important, they do not pay VAT on certain expenses. The best reference to identify these concessions is VAT Notice 701/58.

Zero-rating for advertising

An important concession is that supplies of advertising to a charity have always been zero-rated, irrespective of the medium of advertising – radio, newspaper, TV, internet. But there is a quirk within the legislation that muddies the waters, as zero-rating only applies to a medium if there is direct “communication with the public.” In other words, advertising that targets a private individual is excluded from zero-rating, eg a mail shot sent through the post or campaign sent via individual email accounts.

What has changed?

After a three-year campaign by the Charity Tax Group, HMRC issued Revenue and Customs Brief 13/2020, which has extended the scope for zero-rating on charity advertising expenses where digital advertising is involved.

HMRC now accepts that most internet search browsing advertisements will qualify for zero-rating on the basis that the general public are being targeted rather than private individuals.

Exclusions

It is not all good news for charities, as there are some supplies that will still be standard rated. For example, the R&C Brief confirms at para 4.2 that advertisements sent to email addresses that are targeted at the individual recipient are excluded.

The same outcome applies to ‘natural hits’ generated by the listing of a charity in the result of a search engine. This makes sense because this happens automatically regardless of any action taken by or on behalf of the charity, ie there is no supply of advertising taking place.

Social media and subscription website accounts

When an individual logs into their personal page (for example on Facebook), the website uses tools to display advertisements to them when they are signed in. The content will be related to the individual’s known likes, dislikes, interests or location, based on the information the website has collected about them.

These supplies of advertising will continue to be standard rated as they are targeted to individuals and not to the general public. The Charity Tax Group consider that these supplies should also be zero-rated.

Past errors

A business that has incorrectly standard-rated past supplies of advertising can adjust errors going back four years in the usual way. The VAT overcharged by advertising agencies and suppliers must be paid back to the charity in accordance with the requirements of ‘unjust enrichment’ (see VAT notice 700/45).

Continued learning

The internet revolution has changed so many things and it is often a case of trying to take the digital aspect out of the equation and see what is actually being supplied. The VAT outcome then becomes more logical.

Digital supplies and VAT will continue to evolve in the years ahead – HMRC gave an honest comment in the R&C Brief about the learning curve we all face in the online world: “HMRC will continue to engage with external stakeholders to ensure we understand the VAT treatment of changing advertising practices.”

HMRC recently published an updated version of guidance in its employment status manual for actors and other performers (ESM4121 –ESM4126). This follows months of discussions with key industry stakeholders, including Equity, the trade union for actors, performers, singers, models, directors, designers, choreographers, stage managers, and other creative practitioners in the UK.

In a world where little seems certain and the odds can appear stacked steeply against those in the creative industries, the new guidance, informed by industry input, provides greater clarity in respect of the tax status for performers, and should be of significant benefit.

Setting the scene

As many people know, the off-payroll working rules, commonly known as IR35, are changing again from April 2021. The objective of this move, which follows similar measures for public sector organisations, is to ensure that individuals who work like employees pay broadly the same tax as employees, regardless of the structure through which they provide their services,

While the substance of the rules for determining the employment status for tax purposes of a contract for work between a client and a contractor providing services via an intermediary company are not changing, the responsibility for making that determination and accounting to HMRC for any employment tax will shift to the engager, rather than the contractor’s intermediary company.

The off-payroll rules will apply to all sectors and create additional challenges for many in already testing times. The terms and common working practices of many creative engagements are more likely to be affected, particularly actors and other performers.

Engagers may use HMRC’s CEST employment status checker to decide whether or not the worker should be paid via payroll, but CEST has certain deficiencies and does not function well when used to determine the status of certain performer roles.

In particular performers do not fit easily within CEST question format given, for example, the intermittent working patterns, hiring patterns (with a talent agency often sourcing the talent) and a lack of substitution.

What are the changes?

The updates to the guidance recognise many of the unique features of these performer roles and clarify HMRC’s stance on how they affect the individual’s status for tax.

Most notably, while each contract will need to be assessed holistically on its own merits, most actors and other performers will be recognised as self-employed. Often this is a result of the “itinerant” nature of their work, ie where there are a series of separate engagements or different engagers or simply breaks between contracts.

In business on own account

There is also some useful analysis of other factors that HMRC recognises as indicative of actors and performers being self-employed for tax purposes. This includes examples of activities typical of actors and other performers who are in who are “in business on their own account”, i.e. those who incur costs associated with running a business. The examples include use of an accountant, an agent, registration with HMRC, membership of Equity and other representative bodies, professional training, networking, obtaining insurance and conducting research.

Control

HMRC has also clarified how it views the “control” test in a performance context, i.e. where there is a sufficiently high degree of control over the work by the actor or other performer to indicate self-employment.

In this context, there is a distinction between the content of the artistic performance, for example, the script or musical score, which the performer is unlikely to be able to control, and the artistic interpretation by the actor or other performer of that content – in other words, how it is performed. HMRC accepts that the service provided by an actor or other performer is in essence the interpretation of content that is set by another.

Financial risk

The revised guidance recognises the specific risks run by individual performers. In particular the frequent short term nature of the roles and perennial pressure to find the next job, together with the opportunity costs of filming overrunning and the reputational risk of association with a poorly received production.

Substitution

One helpful acknowledgement by HMRC is that a lack of substitution within a performance context is stated to be non-determinative because of the individual attributes and suitability for the roles.

Help engagers

It is hoped that the revised guidance will mean that many production companies, theatres and other engagers will be confident that they are able to comply with the IR35 rules without the need to move many freelance entertainers onto their payrolls. As such, these businesses should be able to avoid the associated additional costs, including additional employer’s NICs, of engaging performers in this manner. In these times, more than perhaps any other, productions really need the reassurance provided by this clarity.

Help performers  

From the perspective of the individual performers themselves, this guidance should mean that in many cases they may retain their self-employed status for tax purposes. For the majority this will boost their take home pay. It would be a good result if this guidance also helps individuals to weather the current challenges and continue to work in the creative industries.

Avoid conflict

For all parties, the overriding long term aim is that these revised guidelines will provide sufficient certainty to avoid a new wave of tax disputes between engagers and HMRC – which should be a win for all concerned.

New grants worth up to £1,500 will be available every three weeks to businesses required to close due to local lockdowns or targeted restrictions.

The new grants come as the government locks down areas such as Bolton, which have seen localised spikes in coronavirus and new rules on gatherings over six people. This means the effected businesses in England will be able to claim up to £1,500 per property every three weeks, while smaller businesses can claim £1,000.

Announcing the news in Parliament yesterday, chief secretary to the Treasury Steve Barclay said: “These grants provide businesses with a safety net as they temporarily close their doors to help save lives in their local areas.”

The scheme is currently under trial in Blackburn with Darwen, Pendle, and Oldham, before rolling out to other local authorities.

The scheme is basing the size of the business on the rateable value of its premises. A business classed as small with a rateable value less than £51,000, or pays annual rent or mortgage of less than that amount, would receive £1,000. Any business that has a rateable value or mortgage payments more than £51,000 will receive £1,500. Like the other grants, these payments will also be treated as taxable income.

The local authorities will distribute grants to businesses and they will also have authority to implement further eligibility criteria.

These grants target businesses on the business rates list, which is why local authorities also have an additional 5% top up amount of support funding to aid other businesses hit by these local restrictions. The grants offered from this discretionary fund almost are worth up to £1,500. But unlike the scheme based on the rateable value, funding may be less than £1000 in some cases.

“No business should be punished for doing the right thing, which is why today’s package will offer additional breathing space for businesses that have had to temporarily close to control the virus,” said the business secretary Alok Sharma.

This scheme only applies for England, but the government release notes that devolved administrations will receive at least £12.7bn on top of their March Budget settlements to help them with their response to Covid-19 this year.

These localised grants are the latest in a whole raft of grants and measures announced since the number of coronavirus infections spiked in the UK. Some of these measures have included year-long business rates holiday for 2020-21 and targeted support for specific sectors such as the VAT cut for the hospitality sector, a grant that funds businesses to access specialist professional advice.

This grant reflects the government’s current approach to managing the virus by putting in place local restrictions. The most recent example of an area which has undergone these restrictions is Bolton, but since August areas such as Northampton, Leicester and Luton have all faced targeted action.

This is one of the first government schemes to respond to local lockdowns. Politicians and business leaders have urged politicians to offer more support to help during these targeted restrictions, with calls for an extension to the furlough scheme in these areas.

The claims process for the second grant under the Self-employment Income Support Scheme (SEISS) opened on 17 August.

HMRC has written to those who claimed under the first round, noting that they might be eligible for a second claim, but pointing out that eligibility depends on their business being ‘adversely affected’ by coronavirus on or after 14 July 2020.

On claiming the second payment, taxpayers will be required to confirm that their business has been adversely affected, and HMRC advises claimants to keep records to back up their claim. Claims for the second grant close on 19 October 2020.