The partial employment schemes in the EU and in the UK
November 2020 | SPECIAL REPORT: CORPORATE TAX
Financier Worldwide Magazine
November 2020 Issue
On 24 September 2020, the Chancellor of the Exchequer announced a number of measures designed to ameliorate the adverse financial consequences of COVID-19. These measures include the Job Support Scheme (JSS), which will replace the Coronavirus Job Retention Scheme (CJRS) that applied between 20 March and 31 October 2020. Like its predecessor, the JSS will be administered and policed by HMRC. The JSS is a form of ‘partial employment’ scheme that is similar to the measures that are in place in a number of EU member states, such as Germany (Kurzarbeit), France (Chômage partiel) and Spain (ERTE).
The CJRS
The CJRS was announced by the government on 20 March 2020. The scheme was designed to help employers retain their workforce by putting them on furlough and then claiming up to 80 percent of their wages from HMRC (to a capped threshold). Under the original scheme, employees were not allowed to work at all. This was subsequently changed to allow employers to reduce their employees’ working hours and to claim the grant in relation to the hours that were not worked. The CJRS will conclude on 31 October 2020 and it is estimated that, in total, well over £35bn will have been paid out by the government under the scheme.
The UK government recognised ultimately that simply ending the scheme without any replacement could have had catastrophic consequences for the UK’s battered economy; as such, the JSS will apply from 1 November 2020 onward.
The JSS
Under the JSS, employers can reduce the hours worked by their employees to a minimum of one third of their contracted hours. In contrast to the CJRS, it is not possible to furlough an employee entirely, with their wages being paid by the government. The JSS is only available to “viable jobs which provide genuine security”. This means that workers in sectors that cannot currently operate at all, such as theatres or nightclubs, may not be eligible.
Assuming that an employee earns £2000 per month and his or her hours are reduced by 50 percent, the JSS operates as follows: (i) the government pays one third of the wages for the hours that the employee is not required to work (£333 (£1000/3); (ii) the employer also pays one third of those wages (and 100 percent of the wages that the employee works) (£1333 (£1000 + £1000/3)); (iii) the employee receives £1666 (a 17 percent reduction) for working 50 percent of the hours; and (iv) payments are calculated on an employee’s normal wages and government contributions will be capped at £697.92 per month.
Financially, this is not dissimilar to the 80 percent of wages available under the CRJS, but employees have to work at least a third of their hours, instead of none, and employers have to contribute toward the ‘non-working’ hours.
Comparison to Kurzarbeit
The Kurzarbeit operates slightly differently in that there is no requirement for a company to make salary contributions for the time not worked. The original scheme required companies to pay 80 percent of the social security contributions attaching to the wages covered by the scheme, but this requirement has been waived for the duration of the pandemic. The requirement that an employer has to reduce working hours for at least 30 percent of its workforce to become eligible for the scheme has been reduced to 10 percent and the scheme, which is usually only available for a period of six consecutive months, has been extended to be available for up to 21 months at a time ending on 31 December 2021. It has also been extended to cover temporary workers. Under the original scheme, compensation was at 60 percent of the wages corresponding to the reduction in working hours. A sliding scale has been introduced in light of the pandemic. It increases the compensation to 70 percent from the fourth month and to 80 percent from the seventh month (ending on 31 December 2021). Many employers increase the compensation up to a certain extent (often up to 90 percent).
The Kurzarbeit scheme is more generous than the JSS as it comes at no mandatory cost to the employer.
There are two major concerns with the JSS. First, many UK employers may be better off financially by making some staff redundant and retaining the remainder on full hours than by using the JSS. Second, particularly in the hospitality sector, there are jobs that may be viable in the future but are not currently. Individuals in this situation who are currently furloughed are unlikely to be able to benefit from the JSS.
Compliance issues under the CJRS and the JSS and lessons from Germany
The CJRS was offered on a ‘pay now, check later’ basis. The ‘check later’ stage started in August, with HMRC sending out ‘nudge letters’ notifying employers that they will need to repay any overclaimed amounts received under the CJRS.
It is widely accepted that due to the speed with which the scheme was rolled out and the huge uptake, there will have been many inadvertent mistakes made, and some more egregious errors. HMRC chief executive Jim Harra recently gave evidence to the House of Commons public accounts committee that it is estimated that around £3.5bn has been overpaid. The rules changed a few times during the operation of the scheme and there was a lack of clarity in respect of various issues, such as how holiday pay and maternity leave should be addressed. Businesses need to check that errors were not made. HMRC has introduced a quasi amnesty to repay any overclaimed amounts. Once that has expired, on 22 October 2020, businesses that have not addressed any CJRS overpayments will potentially be treated as criminal and can be ‘named and shamed’.
With the JSS soon to be available, businesses that are intending to apply should consider putting protocols in place to ensure that they are, and remain, compliant. Payments under the scheme will be made in arrears, meaning that applications can only be submitted in relation to a pay period once the employer has paid the employee. As with the CJRS, HMRC will conduct checks and there will be sanctions and repayment requirements for incorrect or fraudulent claims. It is anticipated that the requirements and potential pitfalls will become clearer once the scheme has become operational. But useful insights can be gained by looking at the issues that have arisen in relation to the Kurzarbeit scheme.
During the pandemic, Kurzarbeit has become very popular in Germany. In March and April 2020, 750,000 employers applied for the scheme on behalf of more than 10 million employees. These numbers are more than 10 times higher than during the financial crisis of 2008. In August 2020, 4.6 million employees were still benefiting from Kurzarbeit. It is estimated that the total cost of the scheme could amount to €30bn. Against this background, politicians from across the political spectrum have demanded a review of each application. This detailed review has already started and will be continued by the German authorities. It has, to date, raised suspicions that payments were wrongly made in over 2000 cases. The causes for overpayment range from innocent mistakes to fraudulent activities by the employer. The most common causes for overpayment are that companies either innocently or fraudulently declare that there is a shortage of work in circumstances where, on review, this is found not to be the case, or circumstances where the employer claims payments under the Kurzarbeit scheme where the employees continue to work full time or longer hours than declared. The factual extent of a release from work is therefore likely to be the focus of reviews, especially in circumstances where the claim is made in relation to part-time workers. Other, mainly fraudulent categories of overpayments include employers submitting inaccurate and inflated wage records, leading to overpayments to the employer and employers correctly claiming moneys under the scheme but only paying a part of the funds received on to their employees.
Conclusion
Once HMRC’s ‘quasi amnesty’ has passed, if companies have not come forward, any errors later detected, however innocent, may be treated as fraudulent. That has a number of potentially serious consequences. In addition to being ‘named and shamed’, there will be a 100 percent penalty imposed, unless it can be mitigated down and a criminal investigation cannot be ruled out. HMRC has stated that it has already identified 27,000 ‘high risk’ cases in relation to the CJRS. As that equates to 2 percent of claimants (by number) and the error rate (by value) is considered to be 10 percent, 27,000 may be just the tip of the iceberg. HMRC will have to administer the new measures and investigate the CJRS and JSS claims, while simultaneously maintaining the administration of the UK’s tax system. And, during this period, the UK’s withdrawal from the EU will be completed (in one way or another), and the tax consequences of that will need to be managed as well.
Hartley Foster, Philippe Freund and Andre Happel are partners at Fieldfisher. Mr Foster can be contacted on +44 (0)20 7861 4257 or by email: hartley.foster@fieldfisher.com. Mr Freund can be contacted on +44 (0)20 7861 4096 or by email: philippe.freund@fieldfisher.com. Mr Happel can be contacted on +49 (0)69 204 342 159 or by email: andre.happel@fieldfisher.com.
© Financier Worldwide
BY
Hartley Foster, Philippe Freund and Andre Happel
Fieldfisher
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The partial employment schemes in the EU and in the UK