Staffing and the Covid-19 crisis: further details of the CJRS published

HM Treasury has issued (15th April 2020) a direction on the Coronavirus Job Retention Scheme (CJRS). This direction is given under sections 71 and 76 of the Coronavirus Act 2020 and so has more legal force than the guidance and announcements issued to date.

The direction sets out more detail about how CJRS will operate – see here for a more general update on the Treasury's direction. However, the direction leaves unanswered a number of key questions affecting the position of staffing and umbrella companies. That is regrettable but probably inevitable – this is a huge new policy initiative and in any normal era the wording of relevant legislation implementing this sort of government measure would take (at least) a year or two to develop and involve two or three consultation processes. We imagine there will be further clarificatory announcements in coming weeks.

We fully understand that many staffing and umbrella companies are very keen, so far as possible, to do the right thing to help their workers in these difficult times (at no small cost to themselves in terms of administrative burden and Apprenticeship Levy liability), and are having to make decisions now about whether or not to apply under the CJRS.

At the same time, the immense debt burden being built up as a result of government intervention at the moment means there is a very real risk of strong action in coming months where HMRC feels that claims have been made under CJRS which should not have been made – and no doubt the press will launch investigations into companies which appear to have abused the system. And so decisions about use of CJRS will have to be made carefully.

This briefing offers some thoughts about decision-making processes.

When can HMRC require repayment of a wrongly made claim under the CJRS?

The direction appears to accept that there are areas in which application of CJRS is unclear and so starts by effectively setting out what the purpose of CJRS is, saying that – broadly-speaking – if people are not within the spirit of the scheme, they will have to repay. This vague approach is unfortunate given the risks well-meaning staffing companies and umbrella companies will be exposed to, but probably an inevitable consequence of the speed with which the CJRS has had to be designed.

Specifically, the direction says the purpose of CJRS is as follows:

• "…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"; and
• the payment must only be used to reimburse the employee. As such no margin is deductible to cover payroll administration costs.

There is no mention here that the "employer" has to technically be insolvent or have had a specific reduction in turnover to qualify (as has been the case with similar measures in some other countries) and HMRC guidance has recently separately suggested that: "It is designed to help employers whose operations have been severely affected by coronavirus (COVID-19) to retain their employees and protect the UK economy. However, all employers are eligible to claim under the scheme and the government recognises different businesses will face different impacts from coronavirus."

The direction then starkly warns anyone looking to use the scheme that:

• "no CJRS claim may be made in respect of an employee if it is abusive or is otherwise contrary to the exceptional purpose of CJRS";
• "payment must be returned to HMRC immediately upon the person making the CJRS claim becoming unwilling or unable use the payment for the purpose of CJRS"; and
• HMRC may require information "at any time (whether before or after payment of the claim) to establish entitlement to payment under CJRS".

It then goes on to lay out various qualifying criteria building on what has been previously published, but without resolving some of the key areas of uncertainty for staffing and umbrella companies.

There is nothing about the personal liability of directors of companies which make claims that are deemed abusive or contrary to the exceptional purpose of CJRS, but under general principles it is possible that directors may have personal liability in more extreme cases.

There is nothing about the personal liability of directors of companies which make claims that are deemed abusive or contrary to the exceptional purpose of CJRS, but under general principles it is possible that directors may have personal liability in more extreme cases.

How can you minimise the risk of a repayment claim?

The repayment risk means that organisations wishing to make use of CJRS need to be sure that the payments are in accordance with the rules of CJRS. And where there is still uncertainty about how those rules will apply (as is the case in a number of areas relating to agency and umbrella workers) they will need to be confident that the their claims under CJRS are consistent with the purpose of CJRS.

In relation to this, any enforcement regime may be subject to principles of reasonableness. Relevant tax legislation may offer a clue as to what "abusive" will be deemed to mean in the context of CJRS, and says (to quote extracts for clarity from relevant HMRC guidance):

• "…arrangements are abusive if, having regard to all the circumstances, the entering into or carrying out of the arrangements cannot reasonably be regarded as a reasonable course of action in relation to the relevant [tax] provisions.
• "…the first part of this test looks at the relevant [tax] provision in its entirety and considers whether the action taken by the taxpayer in relation to the arrangements is consistent with the action that would be expected to be taken in order to obtain the outcome intended by that relevant provision.
• "The second part looks at whether, in light of all the possible views that could be held in relation to the arrangements, the view taken is a reasonably held view.
• "For example, even if HMRC or some parts of the professional community were of the view that entering into the [tax] arrangements was not a reasonable course of action, if a reasonably held view is that it was reasonable, the arrangements would not be regarded as abusive."

As such, the first key action will be for staffing and umbrella companies to keep contemporaneous notes of why they felt their claims under CJRS were consistent with the purpose of CJRS citing relevant guidance etc. and legal advice in support of their claim. It is possible that, if they make a claim incorrectly but in good faith based on what they reasonably thought the rules provided for and supported by legal advice, the relevant payment will not need to be returned.

Some of the possible areas of uncertainty which could lead to repayment disputes

Some areas of continued uncertainty are set out below. If any apply to you, we would recommend you take specific legal advice on the risk of your claim being deemed "abusive" or "contrary to the exceptional purpose of CJRS" before making any claim under CJRS. This will help you build your defence.

• Can you pay a dividend in relation to a period in which you have claimed under CJRS?
• Can you claim a furlough payment in respect of a worker whose assignment would in the normal course have ended by the time of the claim? The public sector payment of supplier rules (issued by the Cabinet Office) state that payments to supplier agencies should not be made beyond the natural expiry of the relevant worker's assignment. Although it could be argued that the government has decided not to include this as a condition of the CJRS, it may be necessary to limit claims to temps and umbrella workers who would, but for Covid-19 , still be working on the assignment from which they were effectively stood down.
• What steps do you have to take to make sure the worker does not work for your end client (other than via you) while on furlough?
• What, if anything, can you charge a worker who is on furlough for and how?
• In calculating a reference salary (against which the 80% payment is calculated), no account is to be taken of anything which is not "regular salary or wages". To be "regular" the amount of the salary or wages must not be conditional on any matter. However, where does this leave payments under pay when paid arrangements – such clauses would be unlawful under the Conduct Regulations, in any event, in contracts with PAYE temps – and what about varying/discretionary bonuses? It would seem that such payments should be excluded from reference salary when claiming the grant. Different "employers" have different engagement terms and so it will depend on what the worker is contractually entitled to receive and whether the right to payment of all or certain elements of pay is, as a matter of contract, conditional or not. Staffing and umbrella companies should not assume that a blanket approach to this is safe.

Some other developments

The direction has confirmed that the eligibility date will be pushed back to 19 March 2020, the day before the scheme was announced. The direction states that "employees" should be on PAYE payroll on or before this date and "employers" must have sent HMRC a Real Time Information submission notifying payment in respect of the "employee" on or before this date.

The direction confirms that work undertaken by a director of a company to fulfil their statutory duty or other obligation relating to the filing of company accounts or provision of other information relating to the administration of the director’s company is acceptable – but no other work. This may make the application of CJRS to directors (including Personal Service Company directors ) narrower than previously thought.

Whether workers on furlough accrue annual leave (and therefore holiday pay) while on furlough is still not clear. This is a complicated area, which will largely depend on the wording of the contracts of relevant agency and umbrella workers. We understand that there may be further guidance on this point within the next week or so. Until then the position remains unclear.

A final word about the resurgence of aggressive tax avoidance schemes in the staffing supply chain

Although not related to the claim of grant under the CJRS, we also think that HMRC will, in the medium term, go on the attack like never before against tax avoidance schemes relating to how staffing services are charged for and workers are paid. HMRC has already issued a spotlight guidance note about the reappearance in the last month of certain types of (in their view) unlawful tax avoidance schemes targeting healthcare workers returning to NHS duty.

Covid-19-related pressures on margins and income tax and National Insurance Contributions rises will almost certainly fuel further use of these tax avoidance schemes; and staffing suppliers – needing to stay as competitive as possible – will come under pressure to use or allow use of such schemes. Staffing suppliers and, ultimately, users of contingent workforces will need to be increasingly vigilant about how workers are being paid to avoid tax risk and reputational damage – and the IR35 experience of many companies in the last few months shows that tax departments at major end users have become increasingly concerned about unlawful tax avoidance schemes in their supply chain. Remember: if it looks too good to be true, it probably is.