By Tarlochan Lall, Barrister, Monckton Chambers
- Owing to the national emergency which has shut most businesses, the approach adopted in the CJRS is essentially pay and check later.
- Although the scheme is generous, it comes with conditions attached.
- Breaking the conditions will create disputes, when HMRC can demand repayments.
- There is no easy dispute resolution mechanism.
- Businesses must take care to avoid breaking the conditions; and keep records.
When the Chancellor of Exchequer adopted the ‘whatever it takes’ mantra and announced the Coronavirus Job Retention Scheme (“CJRS”), he estimated expenditure of circa £10billion to protect the jobs of circa three million workers over three months. The Resolution Foundation and the British Chamber of Commerce estimate costs of £30 billion to £40 billion owing to the existing and expected take up of the Job Retention Scheme with up to ten million workers expected to be furloughed.
It is not only the numbers that are breathtaking. The statutory basis for such expenditure ‘appears to be’ (see A House of Commons Briefing Paper (Number CBP 8880) issued on 8 April 2020 (“the Briefing Paper”)) a two-line provision that is s76 of the Coronavirus Act 2020, which states:
“Her Majesty’s Revenue and Customs are to have such function as the Treasury may direct in relation to coronavirus or coronavirus disease.”
The process by which the CJRS has been introduced is that enabling power was adopted in what have been described as one of three Budgets supplemented by administrative acts in the form of HMRC guidance, first announced on 20 March 2020, published on 26 March 2020 and updated on 4, 9 and 15 April 2020 and a Treasury Direction issued on 15 April 2020 under s76 quoted above (“the Direction”). The Briefing Paper refers to three sets of guidance, for employers, businesses and employees, updated to 15 April. The first two appear to be identical. References to “the Guidance” mean the employers guidance unless otherwise indicated. The announcement of the Direction states that it provides the legal framework for the CJRS. The Direction is not expressed to have the force of law. Its form is a schedule with fifteen paragraphs, which have the appearance of mandatory rules.
The provisions described below have features such that they are bound to give rise to disputes, especially given the number of economic operators affected and the amounts involved. However, there is no express mention in the Guidance or the Direction of a dispute resolution mechanism, such as rights of appeal. At this point, an aggrieved employer would only have recourse through High Court judicial review proceedings.
There are already serious concerns about possible abuse and eligibility. The CJRS is generous and of wide scope. Claims will have to be made through a new online portal due to be opened on 20 April 2020. It appears that the claims will be processed through the portal upon claimants providing specified information, with HMRC having the “right to retrospectively audit all aspects of” the claim. Potential issues arise over how HMRC would take any enforcement action where entitlement to the grant is called into question.
(i) Eligibility for participation
“All employers are eligible to claim under the scheme”. The employer must have:
- a PAYE payroll scheme registered on HMRC’s real time information system for PAYE (“RTI”) on 19 March 2020. This is the only condition mentioned in the Direction; and
- a UK bank account, which is mentioned in the Guidance.
The 15 April update of the Guidance clarified that eligible employees for whom claims can be made, will be identified by reference to the RTI submissions made for payments made to employees on or before 19 March 2020.
Charities and recruitment agencies with agency workers on PAYE can also qualify. Public authorities are some of the largest employers, but the Guidance states that if they continue to receive funding for staff costs, they are not expected to furlough employees. The Direction indiscriminately refers to employers, which are defined by reference to the Income Tax (Earnings and Pensions) Act 2003 and expanded in specific ways. Some organisations not primarily funded by government whose staff cannot be redeployed to assist with the coronavirus response may qualify. Administrators of companies in the insolvency process of administration can claim if there is a reasonable likelihood of rehiring workers.
The Guidance states “if you cannot maintain your current workforce because your operations have been severely affected by coronavirus” an employer can furlough staff and participate in the CJRS. There is no such condition in the Direction. The Direction states that the purpose of the CJRS is to “provide for payments to be made to employers on a claim made in respect of them incurring costs of employment in respect of furloughed employees arising from the health, social and economic emergency in the United Kingdom resulting from coronavirus and coronavirus disease." The Direction goes on to say that integral to that purpose is that employers should only be reimbursed gross earnings up to prescribed limits per worker, employers NICs on such gross pay and permitted pension contributions.
The Briefing Paper states that “it is still unclear whether employers will need to show that they cannot otherwise pay their workers’ wages.” Arguably, the Guidance and the Direction read as a whole do not set such a condition precedent to entitlement. The object of the scheme is essentially to provide a form of compensation for the impact of forced lockdown, namely essentially turning off the income taps of businesses overnight while their costs remain firmly in place. That affects all businesses whatever their size. There has been publicity in relation to some well-known Premier League football clubs taking staff off furlough in the face of criticism that they can afford to pay the previously furloughed employees. It has been reported that 20 EU member states have introduced such schemes. In France owing to expected take up, larger employers have been ‘encouraged’, it seems essentially by peer pressure, to self-fund the furlough rather than relying on government assistance.
The Guidance prescribes a list of information required under the heading “What you’ll need to make a claim”. There are other conditions, the principal ones which are listed below, which may call a claim into question. However, it appears that the process will be pay and check later, unless there are manifest errors in the claim.
(ii) The core features
The Briefing Paper states that
“The Job Retention Scheme is simply a mechanism through which employers can claim money from HMRC. It does not alter existing employment rights and obligations.”
An employer (“E”) can claim a “grant” equal to the lower of 80% of ‘regular wages’ (gross) and £2,500 per furloughed worker (“W”). The following example is adapted from that used in the Briefing Paper:
W’s annual gross pay: £42,000 = £3,500 per month
Normally W is paid £2,675net under PAYE. E pays employers’ NIC of £383.
E can claim £2,500 which is lower than 80% of £3,500 = £2,800, plus employers’ NIC of £245, on the £2,500.
The £2,500 paid to W must be net under PAYE, so E must operate PAYE in the normal way and account for income tax and NIC to HMRC.
Whether E pays W an extra £1,000 is a matter for E and W subject to contractual obligations. If E pays that amount, it would also have the extra employers’ NIC cost of £138, which E must fund.
‘Regular wages’ for the purposes of CJRS mean non-discretionary gross pay (including “past-overtime, fees and compulsory commission”) at the last pay day before 19 March 2020, but excluding tips, discretionary bonuses and commission and benefits-in-kind. The Direction contains detailed provisions on ‘qualifying costs’ for which reimbursement can be claimed. The payment of the excluded elements is again a matter of contract between E and W. If W’s pay varies, regular wages for CJRS means (a) W’s pay in the same month in the previous tax year (if employed for a full 12 months) and (b) W’s average monthly pay for the 2019-20 tax year.
The Direction specifies a duration of three months from 1 March to the end of May 2020 for the CJRS.
(iii) Furlough agreement
The Guidance provides that
“To be eligible for the grant employers must confirm in writing to their employee confirming that they have been furloughed. A record of this communication must be kept for five years.”
That requirement for a written agreement is reflected in the Direction in provisions, which essentially define furloughed employees. The Direction makes clear that the agreement may be in electronic form, such as an email. A practical issue may arise with regard to the existence of the employees’ agreement, for example where they are instructed by email to stay at home and they claim that they have done so because they thought the law stopped them from leaving home, rather than accepting the employer’s instruction by conduct.
The Briefing Paper notes that employers do not have an automatic right to furlough workers and generally employers need to vary employment contracts to put workers on furlough. Where no variation is agreed with the workers, that could give rise to claims for unfair dismissal.
The Advisory, Conciliation and Arbitration Service has produced a helpful template letter which can be used and adapted as necessary. That template makes provision for (a) continuous employment; (b) furlough for a minimum of 3 weeks as required by the Direction and Guidance and a maximum of three months; (c) what pay W will receive; (d) the temporary variation of W’s contract of employment; (e) preservation of W’s statutory rights subject to the specified variations. It is up to employers whether they deal with other employment law issues which can arise, the “most complicated” of which concerns the impact of furlough on annual leave.
The letter or other evidence of agreement is needed for the CJRS claims; and it should also help remove some doubts about employment rights, if addressed in drafting the letter. For example, unless the pay is varied, W has the employment right to be paid its contractual pay even if E cannot provide W with work. Therefore employers who reduce pay during furlough should make that clear.
The following is a list of core conditions that can be derived from the Direction and Guidance.
- Employees can only be furloughed if they were on an employer’s PAYE payroll on or before 19 March 2020. Employees put on unpaid leave after 28 February 2020 can be furloughed; but those put on unpaid leave on or before 28 February cannot be put on furlough until the agreed date of return from unpaid leave.
- All of the grant an employer receives for an employee must be paid to the employee subject to PAYE. Furloughed employees must not be paid less than 80% of their reference pay up to the monthly cap of £2,500 gross.
- Employees can be on any type of employment contract, e.g. full-time, part-time, fixed-term, agency, flexible or zero-hour contracts.
- The minimum period of furlough is three weeks or 21 days. The Direction specifies that the instruction to stop working must be “by reason of circumstances arising as a result of coronavirus or coronavirus disease”. If an employee returns to work, they must be taken off furlough. They can be furloughed more than once, provided each instance is for a minimum period of 3 consecutive weeks.
- Employees cannot undertake any work, including “indirectly”, for or on behalf of the employer or any person connected with the employer, including providing any services or generating revenue (‘the no work rule’). The following types of issues are likely to arise.
- Employers can allocate any critical business tasks to staff not furloughed.
- Employees working on reduced hours for reduced pay cannot be furloughed.
- Boards of directors must continue to comply with their duties under company law. They can decide which of their number are furloughed. Furloughed directors can undertake work reasonably necessary for compliance with particular duties as directors. They should not do work of any kind they would do in normal circumstances to generate commercial revenue or provide services to or on behalf of their company. For example, a director undertaking negotiations on a critical revenue generating commercial contract should not be furloughed. A company secretary or directors can deal with Companies House filings.
- Directors providing services through personal service companies, and generally directors of owner managed companies, can go on furlough but claims must only be made in respect of regular pay and not dividends. As they are likely to have difficulty sharing responsibility for matters unavoidably needing continuing attention, they have to take particular care with regard to the no work rule and what they can and cannot do.
- Non-employees in the following categories, if paid under PAYE, can be included in the claim:
- office holders, including company directors;
- salaried members of Limited Liability Partnerships;
- agency workers. The furlough should be agreed with the agency, or an umbrella company if that company employs the worker. Furloughed agency workers cannot do any work for or through the agency, including for the agency’s clients.
- Grants cannot be used to substitute redundancy payments. The employees retain their statutory rights, including in relation to redundancy. If an employee is made redundant after the CJRS ends, the employer will remain liable to redundancy pay.
- Grants paid under the CJRS will count as taxable income in calculating taxable profits for income tax and corporation tax purposes. Employment costs can be deducted in the normal way, so the amounts paid to the employees will be deductible, therefore, there would not be any tax cost to the employer, although any additional costs of administering the CJRS would give rise to deductible costs.
- Grants paid to individuals for employees such as nannies or domestic staff will not be taxed on the grant they receive essentially as it is presumed that the grant would be matched by the payment to the furloughed employee. The furloughed employee will be taxed in the normal way.
This list is not exhaustive. The Direction and Guidance contain a number of points on matters of detail, so there is no substitute to referring to them.
LEGAL STATUS OF THE GUIDANCE
There is nothing in the Guidance or the Direction which describes their legal status. The Direction is not a legislative act. The making of a specific direction has been described in De Smith’s Judicial Review as an administrative act. It has also been held that although ‘guidance does not compel any particular decision’, a direction is
“… compulsive in character. It requires the person to whom the direction is given to decide as directed. It deprives him of any freedom of decision, of any power to make his own decision as opposed to that which he is directed to make” ( Roskill L.J. Laker Airways Ltd v Department of Trade  Q.B. 643)
The force of the provisions of the Direction would be derived from their wording and context. HMRC must follow the provisions of the Direction. They have been given the responsibility for the “payment and management” of amounts payable under the CJRS. The context of the national emergency and the purposes of the CJRS stated in the Direction are also relevant to the construction of the provisions of the Direction and the Guidance. The Direction gives HMRC the authority to set the form, manner and information required “to establish entitlement to payment under the CJRS”.
The use of the word “entitlement” in the last quote shows there would be little doubt that the Direction and Guidance are binding so as to create legitimate expectation for claimants that they will be paid the grant if they satisfy the conditions specified in the Guidance and the Direction. That issue is equally important to claimants and the government. The government needs to know what can be done where the grant has been paid, but on a subsequent audit it transpires that conditions for the grant were breached.
The CJRS gives substantive benefits in the form of a grant upon a claim being made. The terms on which the grant is made are set out in the Direction and Guidance. Those instruments contain the primary provisions under which the grant is available essentially as partial compensation for damage suffered by economic operators as a result of government action to prevent them operating, albeit for good health reasons. Some issues are likely to arise over the relationship between the Direction and Guidance, for example whether the ability to pay wages has any bearing on entitlement or abusive conduct (see below).
English courts have since the mid-1980s upheld the protection of substantive expectations and such rights have grown gradually over time. Express and implied representations can give rise to legitimate expectations. An express statement which creates expectation of a specific benefit or advantage is a clear example of an express representation. The courts have held that a representation made generally to the world at large indicates that a policy has been adopted by a public body which can be sufficient to create legitimate expectations. A “statement formally published by the Inland Revenue to the world might safely be regarded as binding, subject to its terms, in any case falling within them” (Bingham J in R v Inland Revenue Commissioners Ex p MFK Underwriting Agents Ltd  QBD, which was also quoted by the Supreme Court in R (Davies and another) and (Gains-Cooper) v Revenue and Customs Commissioners  UKSC 47).
Any early disputes as to eligibility for the grant are likely to relate to whether cases clearly fall within the terms of the Guidance and the Direction and meet all relevant conditions. They would give rise to the matter of the construction of the Guidance and the Direction. Issues of law and fact may arise on matters such as whether there is a furlough agreement, compliance with the no work rule and the consequences of what may be partial or relatively minor breaches, subject to requirements of proportionality. The absence of a dispute resolution mechanism may become problematical because issues of fact are not suitable for JR proceedings in the Administrative Court.
The cases referred to above also concerned the principles that the representation must be “clear, unambiguous and devoid of relevant qualification”. The MFK Underwriting Agents case concerned the issue whether the Inland Revenue, now HMRC, had given rulings and whether they were clear, unambiguous and devoid of relevant qualifications. The urgency of the scheme, its feature of pay and check later and the practical matter that HMRC are unlikely to have capacity to give any rulings may limit the scope of this principle engaging. The Gains-Cooper case concerned published guidance of HMRC, but it was of a general nature, based on underlying law and subject to qualifications. Of greater relevance is likely to be the Supreme Court’s decision that the guidance has to be read as a whole with due regard to relevant conditions, in this case with the Direction.
The government has a long-established guidance and handbook on ‘Managing public money’, which states that grants should be made under conditions which provide for clawback of a grant in appropriate circumstances. The Direction specifies that before making payments, HMRC must, by publicly available guidance or other means they consider appropriate, inform claimants that they accept:
(a) the payment is only made for the purpose of the CJRS specified in the Direction; and
(b) the payment must be returned immediately where the claimant becomes “unwilling or unable” to use the payment for the purposes of the CJRS.
It remains to be seen whether further guidance is issued by HMRC because the Guidance does not cover either of those points. Any ‘small print’ and the terms of any declaration that may be required must be examined carefully. As stated above, this is of equal importance to claimants and the government, in the government’s case in relation to how to recover any grants paid but found subsequently not to be due.
RECORD KEEPING AND DISPUTES
As mentioned above, claimants are expressly required to have furlough agreements, including in electronic form, which must be retained for five years.
Entitlement to the grant is conditional on compliance with the no work rule. The guidance for employee advises employees that if they are concerned that their employer has claimed on their behalf but not paid them their entitlement described in the guidance, they should raise that with the employer in the first instance and then with ACAS. HMRC are understood to be setting up a whistle-blowing facility. Whistleblowing and generally breakdown in relations between employers and employees in difficult circumstances create scope for disputes. Such matters and possible disputes with HMRC following any audits emphasise the importance of good record keeping, including emails, which would be needed for dispute resolution.
ABUSE AND FRAUD RISK
The CJRS has already given rise to concerns of abuse and fraud. The Direction specifies that a CJRS claim cannot be made “if it is abusive or is otherwise contrary to the exceptional purpose of the CJRS”.
In relation to abuse, two key issues are what “abusive” means; and identifying abuse. For example, it has been mentioned above that issues may arise with regard to the ability to pay wages. Although it is considered that is not a specific pre-condition to entitlement, an issue may well arise whether it is egregious for an employer with no apparent issue over the ability to pay so as to amount to an abusive claim which would go to entitlement under the terms of the Direction.
No general rule on the abuse of law in English law has been identified. It has been imported into English law through European law. Even then, it is tied to some legislative provision. The rule of statutory construction, known as the Ramsay doctrine, has been applied in non-tax cases. A clue as to whether it could be applied to the Direction and Guidance can perhaps be found in Mr Justice Ribeiro PJ statement in the Court of Final Appeal of Hong Kong in Collector of Stamp Revenue v Arrowtown Assets Limited, FACV No. 4 of 2003:
“31. The … preferable, view is that the Ramsay principle does not espouse any specialised principle of statutory construction applicable to tax legislation, whatever its language, but continues to assert the need to apply orthodox methods of purposive interpretation to the facts viewed realistically….”
In principle orthodox methods of purposive interpretation could be applied to the provisions in the Direction and Guidance in relation to the facts viewed realistically, especially given the reference to contrary purpose in the Direction in text quoted above.
In relation to the fraud risk the Briefing Paper indicates that the approach of tying the CJRS to the PAYE system is thought by the government as having an inbuilt anti-fraud protection as only evidence of employment for PAYE purposes will give rise to eligibility. However, this is by no means guaranteed protection against fraud. Businesses should protect their login details against fraudsters, for example hijacking legitimate login codes.
At this extraordinary time of the economy with great needs, the overall approach to pay first, check later seems entirely appropriate. The take up of the CJRS resulting in multiples of its anticipated costs to taxpayers as a whole will inevitably in due course call for issues of the kind identified to be addressed. Nevertheless, claimants must take care to establish entitlement; and in some cases searching questions will need to be asked before submitting claims.
Article byTarlochan Lall, Monckton Chambers. Tarl, a former solicitor turned barrister has been a tax lawyer since 1990. Tarl’s experience includes advising businesses and their owners on all direct and indirect tax matters. Tarl has advocacy experience in the First-tier Tribunal, the Upper Tier Tribunal, the High Court and the Court of Appeal without being led. Tarl is a fellow of the CIOT.