FAO Company Directors Operating a Payroll Scheme
As previously promised, we now have some clarification for small companies run by just one or two directors and have no other employees with regards to what government financial support is available to director/shareholders during the coronavirus crisis.
A director or company officer is an employee for PAYE purposes. A director cannot claim the Coronavirus Grant for the self-employed by virtue of holding the office of a director.
It is possible for a company to furlough a director under the Coronavirus Job Retention Scheme, however there are potential issues for small companies to consider.
If the director’s company is adversely affected by coronavirus, the director has the following options, depending on the circumstances:
Potential insolvency
The government has announced that it will temporarily suspend the wrongful trading rules, backdated to 1 March 2020. (as per my previous email)
Directors should though be mindful of their company's prospects and take appropriate advice where needed.
Furloughing
Furloughing for normal employee type duties.
A director who was on the payroll and engaged under an existing written or verbal employment contract on 28 February 2020 may be furloughed. The minimum period for furloughing is 3 weeks.
HMRC guidance says that where a company board decides to furlough a director, this should be formally adopted as a decision of the company, noted in the company records and communicated in writing to the director being furloughed.
Sole directors
A sole director company will probably not wish to furlough a director in respect of their statutory duties. This is because a company cannot operate without its director and all directors have ongoing fiduciary duties to their companies.
However, a sole director company may furlough the director in respect of their employment duties.
Potential issues
Most companies will need to have someone on hand, to handle on-going administration such as post, bookkeeping, tax filings and banking. These kinds of duties can be performed by a director in his statutory capacity.
A company can go into a ‘Coronavirus hibernation’ meaning that the director would have no day-to-day employment type duties during that period.
A sole director cannot be laid off completely as they still have to be present to undertake their statutory duties. In such cases part-furloughing is possible: duties as an employee would be furloughed. Statutory duties would not be furloughed. In most cases, statutory duties are not onerous. In terms of contracts, this would normally be evidenced by two contracts: a service contract and an employment contract.
If you have two directors then one could be totally furloughed leaving the other in charge of statutory obligations.
HMRC guidance for employers states the following.
"To be eligible for the grant, when on furlough, an employee cannot undertake work for, or on behalf of, the organisation. This includes providing services or generating revenue."
"If an employee is working, but on reduced hours, or for reduced pay, they will not be eligible for this scheme."
A director must act in the best interests of their company. In the case of a single director-employee, you may furlough yourself but you must be unfurloughed if you start working to generate revenue.
Employers must have been paying a salary through a payroll to be eligible for an Employee Retention grant. Payments made to employees when furloughed will be calculated based on average monthly pay rolled earnings for the 2019/20 tax year.
The director can only be furloughed from the day that the company confirms they are being furloughed. This should be confirmed in writing.
The amount claimed under the Employee Job Retention scheme in 2019/20 will be total salary in the year divided by 12 and adjusted for the number of days worked in March, plus any employer pension contributions, there is no National Insurance to add where the annual salary is less than the Employers' Secondary NICs threshold.
The amount claimed for 2020/21 would be presumably based on the same figures.
The company can continue to claim under the Employee Job Retention scheme, until the scheme ends.
In terms of dividends - these can only be paid if the company has retained profits. If there are not profits, a dividend can only be voted again once the company returns to profitability.
Please note there is no scheme in place for the government to provide financial support to shareholders where the amount of their dividend is affected by the Coronavirus crisis.
Should you decide after considering all of the facts mentioned above that your Company is not currently trading or generating income and this is likely to be the case for the foreseeable 3 weeks, please email confirming this and the actual date you ceased undertaking employment duties and we will arrange to email the appropriate paperwork for approval and signing, thus allowing a claim for 80% of your average wages.
Finally, if your Company is holding sufficient retained profits and you wish to declare a further dividend please advise.