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Coronavirus Job Retention Scheme: can directors furlough themselves?

A frequent question we are asked at TopSource & Payroll Bureau during the pandemic lockdown is: can directors of their own companies furlough themselves in order to qualify for the Coronavirus Job Retention Scheme (CJRS)? By being furloughed, the government means being on a leave of absence.

The government has provided some clarity on this but more will be needed before the CJRS goes live by the end of April 2020.

Jim Harra, Chief Executive of HMRC, told the Treasury Committee of MPs on 8 April 2020 that the scheme should be up and running on 20 April. Claims will then be dealt with within 4 to 6 working days, so the cash should be in the employer’s bank account by the end of April.

Currently, two schemes have been launched by the government to help businesses and individuals cope financially with the Coronavirus lockdown and the restrictions on movement. These are:

  • Self-Employed Income Support Scheme (SEISS)
  • Coronavirus Job Retention Scheme (CJRS)

Whilst the first is aimed at the unincorporated self-employed and members of partnerships where profits are less than £50,000 per year, the second is aimed at

The government has said that directors may qualify for CJRS, but it is not entirely clear on what basis and whether that is legally correct. Further clarification is
urgently needed so that people can make informed decisions.

What is CJRS?

Briefly, CJRS was the first of the government's initiatives to help bail out individuals and businesses during the Coronavirus lockdown. Some details have been published on how it will work, but more information is promised before the scheme launches.

With CJRS, employers will be able to use an online portal to claim for 80% of furloughed employees’ usual monthly wage costs, up to £2,500 a month, plus the
associated Employer National Insurance contributions and minimum automatic enrolment employer pension contributions on that wage.

Employees that can be claimed for

Furloughed employees must have been on the PAYE payroll on 28 February 2020, and can be on any type of contract, including:

  • full-time employees
  • part-time employees
  • employees on agency contracts (but not working)
  • employees on flexible or zero-hour contracts

The scheme also covers employees who were made redundant since 28 February 2020, if they are rehired by their employer. Employees hired after 28 February 2020 cannot be furloughed or claimed for in accordance with this scheme.

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. While on furlough, the employee’s wage will be subject to usual income tax and other deductions.

If an employee is working, but on reduced hours, or for reduced pay, they will not be eligible for this scheme and the employer will have to continue paying the employee via the payroll in accordance with their employment contract.

To be eligible for the subsidy, employers should write to their employee confirming that they have been furloughed and keep a record of this communication.

Why directors might qualify for the CJRS

There is evidence to show that directors might qualify. However, where a director/shareholder takes a low salary which is topped up by dividends, only the
PAYE salary element is covered by CJRS. Dividends do not qualify and thus the grant may be correspondingly low.

Where a company has a number of directors, it may be more straightforward to see how some could be furloughed and receive the grant, as there would be a continuing director.

A husband and wife run company, for example, could see a situation where one spouse is furloughed and the other carries on running the business. But if they both need the money, as their salaries were below, say, the NIC limit, then they may both consider being furloughed.

It is much less clear and easy where a company only has one director/shareholder.

Official guidance for company directors

On 4 April 2020, HMRC provided some guidance for company directors as follows:

“As office holders, salaried company directors are eligible to be furloughed and receive support through this scheme.

Company directors owe duties to their company which are set out in the Companies Act 2006. Where a 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 one or more individual directors’ furlough is so decided by the board, this should be formally adopted as a decision of the company, noted in the company
records and communicated in writing to the director(s) concerned.

Where furloughed directors need to carry out particular duties to fulfill the statutory obligations they owe to their company, they may do so provided they do no more than would reasonably be judged necessary for that purpose, for instance, they should not do work of a kind they would carry out in normal circumstances to generate commercial revenue or provides services to or on behalf of their company.

This also applies to salaried individuals who are directors of their own personal service company (PSC).”

The guidance is welcome, but it would be helpful to have a clearer view of what HMRC regards as "statutory duties", so that there are no misunderstandings later. A list would be helpful.

So, for example, presumably such statutory duties would include being able to comply with all regulatory requirements such as filing accounts, submitting forms P11D, and even making the claim for the CJRS.

Unofficial guidance issued prior to HMRC guidance

During a Daily Coronavirus webinar hosted by the CBI on 27 March 2020, Ben Kerry, Head of Labour Markets, HM treasury, stated:

“With respect to Directors and owner managers, that does not disqualify them from being furloughed so long as they are on PAYE payroll. I understand that they will have some statutory duties and obligations such as filling up their accounts and they will still be allowed to undertake those statutory duties whilst they are being furloughed so that would not count as doing work. So one of the key conditions of the furlough scheme is that the employee is not allowed to work for the employer, but if you are the owner-manager and you do have statutory duties then you can continued to undertake those duties while being on furlough.”

ICAEW statement

Three days later on 31 March 2020, the Institute of Chartered Accountants in England and Wales (CAEW) issued a statement saying it believes that individuals who are directors of their own family companies and who are themselves paid via PAYE should be eligible for CJRS. It stated:

“We are awaiting full details of how the scheme will operate from HMRC, including for directors paid via PAYE but not receiving a consistent, regular monthly salary. We understand the intention of the scheme is to include those on irregular earnings, but full details on how the amount of the grant will be calculated for these individuals have yet to be released.”

“As with other businesses, such directors would need to have been on the payroll on 28 February 2020 and they cannot work while they are on furlough leave. We do not yet know the extent to which minor directorial duties would be disregarded, or whether the requirement that a furloughed employee should do ‘no work’ would prohibit this.”

“It is ICAEW’s view that in such times as we find ourselves, a pragmatic view should be taken.”

We await to see if that pragmatic view prevails once the scheme is up and running.

Why directors might not qualify for the CJRS

Whilst the above evidence points to the positive, concerns are still there that directors will lose out.

If someone is furloughed, they cannot then work for their employer during the duration. That makes it difficult for a furloughed director, who is put in a position
where they effectively can no longer run their own company.

It is hard for a director to justify being furloughed, especially if they are the sole director.  They would certainly need to notify all the company’s suppliers, customers and other business contacts that the business was suspended until the end of the Coronavirus restrictions, or when they chose to unfurlough themselves.

The furloughed director should not be spending their time laid off engaged in, for example, business planning for when conditions improve. That would be contrary to the rules.  So this is an undesirable situation.

Questions to ask include:

  • Is there a genuine contract of employment between the director and the limited company?
  • Was a ‘statement of written particulars’ issued?
  • What did each party do in pursuance of the contract?
  • Does the contract actually give rise to an employment relationship?
  • How was remuneration accounted for as fees or wages?
  • How and for what reasons did the contract come into existence (for example, was the contract made at a time when insolvency was foreseeable)?