Furlough claims for annually paid directors
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. This article was updated on 27 January.
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.
On 14 January HMRC published two examples that outline for the first time how furlough claims should be calculated for annually paid directors. These examples were then updated with further examples added on 26 January – see below.
The 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 for the CJRS (published 13 November 2020) says someone is a fixed rate employee if that person is “entitled under their contract to be paid an annual salary” (para 13.1(b)). Does the director have an employment contract?
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”.
I’m sure many annually paid directors would say that their hours vary enormously from month to month even before Covid-19!
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.
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 was not clear in the original example 3.14 (now numbered 3.16) and has amended it.
There are now two amended examples (3.16 and 3.17). These make it clear that HMRC expect that furlough grants are paid out as wages subject to PAYE and reported under RTI ahead of the next annual payment, which is why example 3.16 now says that the director had received monthly wages since claiming furlough in April 2020 so is eligible for CJRS in November, but based on the December 2019 reference pay.
In example 3.17 this is made even more crystal clear, when it says: "The director is not due to be paid until 30 March 2021, but employers can only claim CJRS in advance if the payroll run is imminent. If W Ltd claims CJRS for November 2020 in respect of this director, they will need to pay them (and operate PAYE) earlier than usual."