At a glance

• 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.
• Directors can be furloughed under the COVID-19 Coronavirus Job Retention Scheme (CJRS).
• There are potential issues for small companies to consider.
• The government has temporarily suspended the wrongful trading in insolvency rules in order to allow companies to have a breathing space during the virus crisis.

If the director’s company is adversely affected by COVID-19, 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.
• Directors should though be mindful of their company's prospects and take appropriate advice where needed.

See COVID-19: Insolvency & Directors

Joint and several liability of directors for deliberate claims under CJRS where company not eligible

Finance Act 2020 includes provision to make a company officer jointly and severally liable for Income Tax assessments raised on CJRS payments where:

• that officer deliberately made a CJRS claim where the company was not eligible and
• the company is insolvent, or
• HMRC can show there is a serious risk that the company will not be able to pay the Income Tax assessment.

See COVID-19 Coronavirus Job Retention Scheme

Furloughing

Furloughing for normally employee type duties:

• A director who was on the payroll and engaged under an existing written or verbal employment contract on or before 19 March 2020 ( prior to 15/04/2020 this date was 28 February 2020) may be furloughed if they meet the conditions of the scheme.

• 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 who must agree to it as well as agreeing to what their ongoing pay will be during the furlough period.

Can you furlough a sole director?

• 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.
• 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 ‘COVID-19 hibernation’ meaning that the director would have no day-to-day employment type duties during that period. From 1 July flexible furloughing means that part-time work can be undertaken with claims being adjusted accordingly.
• 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 that, prior to 30 June 2020:

• "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."
• "Where furloughed directors need to carry out particular duties to fulfil 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."

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 prior to 30 June. From 1 July part-time work is allowed.

Salary or dividends?

• Employers must have been paying a salary through a payroll to be eligible for the Coronavirus Employee Retention grant. There must have been a payment of earnings for the 2019/20 tax year notified to HMRC under RTI on or before 19 March 2020. See COVID-19 Coronavirus Job Retention Scheme for more details about directors who are paid annually. UDPATED 5/5
• Payments made to employees when furloughed will be calculated based on average monthly payrolled earnings for the 2019/20 tax year.

• It needs to be remembered that up to 30 June 2020 a furloughed employee is not allowed to work for the employer during the furlough period. You may undertake training as a furloughed employee.

• 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. As suggested above, we would normally expect to see a service contact which details the statutory duties of a director and an employment contract which covers duties as an employee.

National Living Wage (NLW)/ National Minimum Wage (NMW)

As no one is working during the time that they are furloughed. If they are paid 80% of their usual pay, this may well take them below the NLW/NMW and that is accepted. If however, they are undertaking training in that period, they must be paid the NLW/NMW for the training period and the employer must top-up any shortfall.

Low salary example

2019/20

The sole director of an events company pays themself a basic salary of £8,632 per year and the balance of their remuneration is made up by a dividend, calculated in March, based on annual profits to 31 March and paid on 5 April. The company is forced to shut down during March 2020 following COVID-19 restrictions.

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 Coronavirus Employee Job Retention scheme in 2019/20 will be £8,632 divided by 12 and adjusted to deduct the number of days worked in March, then you add any employer pension contributions, there is no National Insurance to add as annual salary is less than the Employers' Secondary NICs threshold.
• The amount claimed for 2020/21 would be presumably based on the same figures. There would be no adjustment for days worked as the rules state that you cannot be working and also be furloughed.
• In terms of dividends: if the company has profits to 31 March it will be able to vote and pay a dividend. No amount of the dividend can be reclaimed from the government.

2020/21
With no events booked for the foreseeable future, the company has no income.

• For April to October inclusive the company can continue to claim under the Employee Job Retention scheme though the amounts it can claim will reduce from 1 August.
• 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.
• The company could consider making a variation of the director's employment terms in order to increase the salary to market-rate pay. We think that it would be incredibly difficult to find any commercial justification in increasing a salary of someone who is furloughed and it is likely that HMRC would decline to pay it on that basis. More guidance is required from HMRC on this point.
• If the company has no retained profits, it may apply for bank funding in order to pay staff and the director. A bank is highly unlikely to offer loan funding to pay a dividend.

Additional support for small companies

• Employee job retention scheme: if you have other employees.
• Grant funding: if you have a business premises.
• Small business rate relief: if you have a business premises.
• VAT payment deferral.
• Emergency bank loans.
• Extension of Companies House filing deadline.

See our COVID-19: Financial support tracker for links.

See also: HMRC compliance update for the latest guidance and updates on HMRC concessions arising from the pandemic.