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9th April 2020

Coronavirus: Job Retention Scheme – Can directors be furloughed?

9th April 2020

Coronavirus: Job Retention Scheme – Can directors be furloughed?

Claire Merritt

Posted: 9th April 2020

T: 023 8048 2112

E: Email Me

In light of the Coronavirus Job Retention Scheme announced by the Chancellor on 20 March 2020, this blog discusses the ability for directors to be furloughed after updated guidance was released by the government on 4 April 2020. It also discusses the implications that arise in relation to directors who manage their own Personal Service Companies.

The Coronavirus Job Retention Scheme

By now you will probably have heard about details of this scheme and how it operates. For a summary of frequently asked questions, please see our recent blog “The Coronavirus Job Retention Scheme – FAQs for employers“.

Under the scheme, employees are not able to undertake any work for their employer during the period of furlough leave. Employers are therefore not able to call on furloughed employees if they need them to do work.

Directors

Prior to the updated guidance, there was a question surrounding whether directors could be furloughed. Directors have 7 statutory duties to fulfil in their overall role of managing the company on a day-to-day basis, as set out in the Companies Act 2006. One of those duties is to promote the success of the company, which may initially seem incompatible with the concept of being furloughed, as an employee cannot undertake work for or on behalf of the organisation whilst on furlough.

However, government guidance, which was updated on 4 April 2020, confirms that directors, as office holders of the company, are eligible to be furloughed provided they are paid via PAYE. You can access the government guidance at “Claim for your employees’ wages through the Coronavirus Job Retention Scheme“.

Where the company, acting through its board of directors, considers that it is in compliance with the statutory duties of one or more of its individual salaried directors, the board can decide that such directors should be furloughed. Where the decision to furlough one or more directors is taken, this should be formally adopted as a decision of the company, recorded in the company records and communicated in writing to the director/s concerned.

The guidance goes on to state that directors will continue to be able to carry out their statutory duties whilst furloughed, provided they do no more than would be reasonably judged as necessary. They should not therefore do work which they would normally do to generate commercial revenue or provide services to or on behalf of the company, but undertaking statutory duties such as filling out their accounts will be compliant.

Personal service companies

IR35 legislation was first introduced in the public sector to govern arrangements where an individual structured their working arrangements to pay less tax and national insurance by setting up a Personal Service Company (PSC), in some cases creating a situation of “disguised employment” between client and contractor. For a full summary of IR35, please see Claire Merritt’s blog “New IR35 tax rules“. Due to the current Coronavirus epidemic, reforms to the private sector have now been pushed back to April 2021.

However, given these unprecedented times, individuals who are directors of their own PSC may be facing a very present issue with regards to financial difficulties. Whilst the updated guidance from the government will provide some reassurance by stating that the Job Retention Scheme also applies to directors of their own PSC, this is caveated by the fact that such directors must be paid via PAYE.

Some directors may well receive most of their own income from dividends the company generates. This generally means a tax and National Insurance savings and so may not themselves be paid via PAYE (or only receive a limited amount through it).

Even if a director is on the PAYE payroll and also receives dividends, the grant they can receive under the Job Retention Scheme only applies to their salary, not their dividends. Therefore, if they receive their whole income from dividends, this Scheme would not be available to them. Potential alternatives for these individuals will therefore have to be considered.

Alternatives for directors of PSCs

The Self-Employed Income Support Scheme was first announced by the Chancellor on 26 March. For more details, see our recent blog “Coronavirus: New financial protection for the self-employed“.
In order to qualify, someone must show that:

  1. their self-employed trading profits are less than £50,000; 
  2. that more than half of their income comes from self-employment; and
  3. they have a tax return for 2020.

However, dividend income is not included in the calculation and so the Scheme is not designed to help such directors.

Directors could potentially seek to utilise the business interruption loan, however some banks are asking for personal guarantees on top of the government’s guarantee and so the individual could be placed under a high amount of personal risk in doing so.

The VAT and tax deferrals may provide some help to those running a PSC.

Therefore, whilst the government should be applauded for creating schemes to help deal with these unprecedented times, the unfortunate “domino effect” that it could have on directors of their PSC paid via dividends will be something that many will be hoping the government will address soon.

If you would like further guidance on this topic, please contact a member of the Employment team.

Our page “Coronavirus – Legal advice and guidance” is continually being updated with advice and guidance as and when updates come in from Government or other regulatory bodies.

This blog was co-written by Adam Wheal, Trainee Solicitor and Claire Merritt, Partner.

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Claire Merritt

Posted: 9th April 2020

T: 023 8048 2112

E: Email Me