Calculating the furlough pay that can be claimed from HMRC via the portal is not as straight forward as the headlines suggest.
From the conversations we are having with clients, and enquiries we are receiving, it is becoming increasingly apparent that employers are, unintentionally, not always claiming the correct amounts back via the HMRC portal, and that in most cases claims are being inadvertently overstated.
Complications are arising in the following scenarios:
- Where there are elements of top up pay
- Where there are several elements to the build up of gross pay, some of which may be contractual and/or regular payments
- Where salary sacrifice is in place
- When there are split months, as furlough leave started part way through the pay period
- When employees have variable or irregular pay
- When employees are new starters
The online HMRC calculator cannot assist with the furlough calculation where there is top up pay or salary sacrifice. Also, very importantly, in these circumstances the calculator cannot be used to calculate the Employers NIC or Employers pension that can be claimed back on the furlough element of the pay received. This is because the NIC has to be calculated as a blended total, which is then proportioned to the different elements of pay and the effective daily rates of pay and furlough pay also need to be taken account for both calculations. The claim is not a straight forward calculation.
For pension salary sacrifice, if the salary sacrifice arrangement is not being suspended on the grounds of Covid-19 furlough being a lifestyle event, the Pension Regulator requires the “effective employee contribution”, i.e. the salary sacrifice that is paid to the pension fund as additional employer pension contributions, and which cannot be deducted from furlough pay, to be calculated and paid by the employer to the pension fund by reference to the new nominal gross pay, which also needs to be calculated as it is not the furlough pay. Again, not straight forward.
HMRC stated at the outset, and have recently reinforced, that they will be retrospectively reviewing furlough claims made. Where employers have overclaimed they will need to make repayments to HMRC. HMRC have confirmed that employers should keep all documentation relating to furlough payments for a minimum of 5 closed tax years. This includes: evidence of the employee being eligible for furlough; evidence that proper procedures were followed when furloughing staff; details to evidence accuracy of the claims; and, evidence of the furlough pay being paid in full to the relevant employees.
It is likely that going forward, HMRC will set up specific task forces to review compliance, and also include it in all future Employer Compliance Inspections. On this basis, in addition to seeking repayment of any furlough grant overclaimed, it is probable that penalties and interest will be charged, on the basis that it is a PAYE compliance failure.
To avoid this, we recommend that employers seek advice and have a sample of furlough claims independently reviewed, to ensure that the claims being made are in line with HMRC guidance and that all HMRC requirements are being met. Claims already made cannot be amended, but, if inadvertent errors have been made, these can be adjusted for in future claims. As always, clear documentation and detailed audit trail are vital to evidence compliance.
Smith Cooper’s Employment Tax team are currently carrying out furlough claim reviews, on a sample basis, to confirm to clients if HMRC’s requirements have been met so that any compliance and future repayment risks are minimised. If this is of interest to you, please contact Laura Parr or Mick Verney.