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.
  • There is no specific support available for shareholders. 
  • Where trading companies lose profitability, they may not be able to pay dividends to shareholders.
• 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 the company not eligible

Finance Act 2020 includes a 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.
• The company is insolvent.
• 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 normal 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 CJRS.

• 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 Job Retention Scheme grant. 
• 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. This is unlikely to be effective for the purposes of CJRS. 

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.

What's new?

What about directors and annual salaries? 

Under the original Coronavirus Job Retention Scheme (CJRS), directors paid annually were eligible to claim provided they met the qualifying conditions, which include:

• Being notified to HMRC on a Real-Time Investigations (RTI) submission on or before 19 March 2020.
• The notification is for a payment of earnings in the 2019/20 tax year.

Directors who were paid annually at the end of March 2020/start of April 2020 were not eligible.

• Their last payment notified under RTI (assuming that an annual payroll was run in the previous tax year) was before 5 April 2019 and no further payments were then notified until after 19 March 2020.
• They will not have a payment of earnings for 2019/20 returned under RTI before 19 March 2020 as the pre-5 April 2019 payment will have been in respect of 2018/19.

Conversely, a director who was paid an annual salary in say February 2020, would have been eligible for the grant as they would have been notified to HMRC on an RTI submission on or before 19 March 2020 for a payment of earnings in the 2019/20 tax year.

Under the third version of CJRS, annually paid directors previously excluded will qualify. They would be furloughed from 1 November to 30 November 2020, with the reference date of 30 October 2020.

HMRC give the following example:

• The director of W Ltd is paid a fixed amount of £7,500 each year on 30 March, for the period 6 April to 5 April (the tax year).
• The director could not be claimed for under CJRS prior to 1 November 2020, because they did not receive a payment of earnings in the tax year 2019-2020 which was reported through RTI by 19 March 2020. They were paid £7,500 on 30 March 2020.
• W Ltd furloughs the director for the period 1 November to 30 November 2020 and claims for the director under CJRS extension. Their reference date is 30 October 2020.
• W Ltd calculates 80% of the employee’s wages:
  
  1. Start with the wages payable to your employee in their reference period. If you’re claiming for a full pay period, skip to step 4. The reference period is the last salary period ending on or before 30 October 2020, so the year to 5 April 2020. The wages payable in this period were £7,500.
  2. Divide by 365 (the number of days in the period 6 April 2020 to 5 April 2021).
  3. Multiply by 30 (the number of furlough days in November).
  4. Multiply by 80%.
• £7,500 ÷ 365 × 30 × 80% = £493.15
• The director is not due to be paid until 30 March 2021, but employers can only claim CJRS in advance if the payroll run is imminent. If W Ltd claims CJRS for November 2020 in respect of this director, they will need to pay them (and operate PAYE) earlier than usual.

It is important to note that costs which can be recovered in a claim period are only those which “relate to the payment of earnings to the employee during that period”. In this example, the director's pay date has been brought forward. 

• Where claim and payment dates do not match CJRS could be invalid.