Many small company directors were locked out of CJRS-1 and CJRS-2 because they paid themselves an annual salary at the end of March 2020, missing the RTI cut-off date of 19 March.

If those directors managed to pay themselves some salary between 20 March and 30 October 2020 they are eligible to claim for furlough pay under CJRS-3. The problem is how to calculate the amount to claim based on one annual payment of salary, taking into account the monthly pay cap of £2,500.

New examples

On 14 January HMRC published two examples that outline for the first time how furlough claims should be calculated for annually paid directors (see examples 3.14 and 3.15).

Both examples indicate that HMRC expects furlough calculations to be based on day counts. Whilst that may strike you as the obvious way to calculate their furlough pay, there have been two other methodologies used:

  • take the annual amount paid and apply the monthly reference pay cap of £2,500; or
  • take the annual value and divide by 12 and apply the 80% rule (or lower percentage if applicable for the claim month)

Fixed rate employees

HMRC has taken the view that directors are ‘fixed rate’ employees, which is in itself interesting given they may have a varying pattern of payment depending upon personal needs. For example, creating an SMP entitlement can necessitate a different payment pattern than prior years or if the company’s year end changes.

The Treasury Direction also says at para 13.1 (f): “Basic hours worked in a salary period do not normally vary according to business, economical agricultural seasonal considerations”.

Being designated as a variable pay employee, if eligible for CJRS-1 and CJRS-2 could be beneficial if there was a different payment pattern in 2019/20, as the CJRS guidance says the business can decide if a variable pay approach is more appropriate.

Eligibility issues

There is a further problem with HMRC’s example 3.14, as the eligibility for CJRS-3 (HMRC refer to it as the CJRS extension) is not as cut and dried as the example indicates.

We are told the director received their annual salary payment in December 2019 so is eligible for furlough in April 2020 as an RTI return was made in 2019/20 before 20 March 2020. The director is then furloughed again in November 2020.

To be eligible for CJRS-3 the April 2020 furlough claim must be paid to the director as a salary, which is then reported in an RTI return made between 20 March and 30 October 2020. Only then will they be eligible to be included in a furlough claim in November 2020 under CJRS-3

If they have kept the funds received in April’s claim within the company until the next annual payment period (ie, December 2020), the director is not eligible to be furloughed in November 2020 under CJRS-3 as there will have been no qualifying RTI return for that director.

HMRC has acknowledged that this is not clear in the example 3.14 and have committed to amending it.

Change of pay pattern

If the director has moved onto monthly payments for tax year 2020/21, as many have sensibly done, then they will be eligible to be furloughed in November 2020. This will still be calculated as shown in example 3.14 if the director is to be treated as a fixed rate employee.