Covid-19: Company Directors & Shareholders

In a relief to many small businesses, Ben Kerry from HM Treasury has clarified that company directors of owner managed businesses can ‘furlough’ themselves and claim grant under the Coronavirus Job Retention Scheme.

  • A director or company officer is an employee for PAYE purposes.
  • A director cannot claim the COVID-19 Grant for the Self Employed by virtue of holding the office of a director.
  • Although it may be possible for a company to furlough a director under the COVID-19 Job Retention Scheme there are potential issues for small companies to consider.
  • Company law dictates that a director should be engaged under the terms of a service contract with their company.
  • A service contract does not automatically create an employment contract.
  • Many director/shareholders are remunerated in the most cost-efficient method for their company: a mixture of low salary topped up by dividends.

If the director’s company is adversely affected by COVID-19, the director has the following options, depending on the circumstances:

1. Furloughing

Furloughing for normally employee type duties:

  • If, as a director you were on the payroll, engaged under an existing written or verbal employment contract on 28 February 2020, and your services, in performing the duties expected of you as an employee or director are not required due to the effects of the ongoing crisis, the company may furlough you.

Can you furlough a director?

  • The guidance is silent on this but, in a webinar with CBI on 27th March 2020, Ben Kerry from HM Treasury confirmed that a director can do so provided they were paid via PAYE as at 28 February 2020. Company Directors can complete their statutory duties, even if furloughed. This is the only work allowed.
  • Being a Director or Manager of a company does not disqualify you from the JRS.
  • In addition, Directors or Managers will be able to continue undertaking their statutory duties while furloughed, such as filing company accounts etc.
  • HMRC states that ‘to be eligible for the subsidy, when on furlough, an employee can not undertake work for or on behalf of the organisation. This includes providing services or generating revenue.’
  • Therefore, in order to qualify for furlough, directors:
  • Can undertake their statutory duties, such as filing accounts and tax returns, dealing with post and banking but
  • Cannot undertake services or generate income

 

2. Salary or dividends?

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 COVID-19 crisis.

If a company can no longer afford to pay dividends, it may be insolvent, directors should take appropriate advice.

If the company decides to change the terms of the contract in order to pay a salary instead of a dividend, this must be agreed contractually between the company and its director.

Above all, it needs to be remembered that a furloughed employee is not allowed to work for the employer during the furlough period. Depending on the type of business, a company director may well need to work in some statutory capacity during a period of business closure.

3. Potential insolvency

The government has announced that it will temporarily suspend the wrongful trading rules, backdated to 1 March 2020.

Pre-COVID-19 wrongful trading rule:

If the company becomes insolvent, the director must immediately take advice from a qualified insolvency practitioner.

As a director you should not allow the company to continue to trade on whilst you are knowingly insolvent. You potentially become liable for your company’s debts, including amounts due to HMRC.

New measures: as announced on 28 March 2020:

"Relaxation of these wrongful trading rules will reassure directors that the difficult decisions they have to make about the future viability of their business will not have to be unduly influenced by the exceptional circumstances which are entirely beyond their control.

Legislation to introduce these changes will be introduced in Parliament at the earliest opportunity. Provisions will be included to enable the changes to be extended if necessary."

We anticipate HMRC will provide further details in due course and we will provide updates as more information becomes available. In the interim we recommend you regularly check the Gov.uk website which is being updated regularly.

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