Since the announcement of the Coronavirus Job Retention Scheme there have been differing opinions and interpretations of the scheme for umbrella providers.

These fall in to 2 main areas:

1. What counts as pay for qualifying earnings?

2. How is holiday pay dealt with?

The first point to make is that umbrella companies we have dealings with all want to support their employees and pay as much as they can under the arrangements. The critical factor is getting the calculation correct as any errors could result in some of the grant being disallowed and HMRC seeking recovery of the monies from the umbrella company.

Umbrella companies operate with a range of different contracts, in most cases these are employment contracts making the umbrella an employer and the contractors, using umbrella companies, their employees. The status of employee is a legal status and therefore the umbrella employee must be treated aligned to this legal status.

Some of the market differences that are emerging on qualifying earnings across the market are, in part, due to these variations within the employment contract terms. The most contentious of these is whether any bonuses specified within the employment contract are contractual or discretionary, this is a key point.

The confusion comes about because of HMRC’s guidance on the area of Variable Pay. We have been clarifying this with HMRC:

‘For the purposes of calculating the reference pay, employers should include all the regular payments that they are obliged to make, following the published online guidance on how to “Work out 80% of your employees' wages to claim through the Coronavirus Job Retention Scheme”.

Variable payments that are specified in a contract and are always paid in reality can be included within the reference salary for calculating the subsidised furlough pay grant.

Whether a particular payment, made in the reference period, should be included in the gross pay grant calculation depends on whether it was a discretionary payment. The written terms of the employment contract are the starting point for assessing whether a payment was discretionary. Where there was no written contract the Statement of Employment Particulars provided under S.1 of the Employment Rights Act 1996 should be used. An employer should only include payments to which the employee had an enforceable right.’

The confusion arises from - Variable payments that are specified in a contract and are always paid in reality can be included within the reference salary for calculating the subsidised furlough pay grant.

Many umbrella providers have interpreted this to mean that as they always pay their bonus payments, even though they are discretionary, they can be included within the gross pay grant calculation under the scheme.

The next paragraph is what leads to confusion - Whether a particular payment, made in the reference period, should be included in the gross pay grant calculation depends on whether it was a discretionary payment. The written terms of the employment contract are the starting point for assessing whether a payment was discretionary.

This confirms that the test on whether a payment can be included starts with the contractual terms of the employment contract. Where these terms make it clear the payment is discretionary then it becomes unclear whether these would meet the criteria within variable pay.

Following this guidance, we then sought further clarity to ensure our interpretation aligned with HMRC’s.

‘Any payment that is discretionary cannot be included in the gross pay grant calculation. A payment should not be considered discretionary simply because there was discretion in whether or not to offer or accept the hours worked. Equally, a payment made in respect of variable pay is not automatically considered non-discretionary.

Where an employer can demonstrate that variable payments are specified in a contract and are always paid in reality, HMRC will accept that they can be considered non-discretionary, and included in the calculations. Employers should look at the terms of the employment contract in the first instance when determining whether a variable payment is discretionary.’

So this further confirms that the first test is the terms of the employment contract. It still fails to make it clear whether payments, when they are always paid, that are defined as discretionary can be included within the gross pay grant calculation under the variable pay option.

This is the most up to date guidance we have from HMRC on the subject and have not seen any further guidance that conflicts with this.

This confusion will result in many taking different views and outcomes. The risk for a provider if they get it wrong is the potential claw back that HMRC could make in the future. The likely outcome will be most providers take the low risk approach to protect their future business and pay on the NMW wage element of pay.

The Low Incomes Tax Reform Group has also produced extensive guidance and you can view this here.