Mary McDonagh, Partner at Kilsby Williams
Many company directors will be rightly wondering if they are entitled to the same support as company employees announced over the recent weeks by the UK Government, as a way of supporting those affected financially by the coronavirus pandemic.
At Kilsby Williams, we have been exploring whether the grant funding provided under the Coronavirus Job Retention Scheme (CJRS) can apply to directors of owner-managed companies.
Many directors will have structured their remuneration by way of a low salary, usually at a level just below the NIC threshold, with the bulk of their income made up of dividend payments. So, can these directors make use of the Coronavirus Job Retention Scheme? The simple answer is yes, but only based on their PAYE salary.
HMRC has confirmed: ‘People who are paid a salary by PAYE can be furloughed for the job retention scheme, but dividends are not covered by that or the self- employed scheme.’
Directors can be furloughed provided they meet the necessary conditions; they must be an employee on PAYE and on the company’s payroll on 28 February 2020. As a result, directors who have not taken a salary from their company will not qualify. For eligible directors, the company can claim 80% of their salary. However, companies and their directors who mainly reward their directors through dividends will not benefit because dividends are not included as part of the amount that can be claimed.
The key issue is that the director must stop working in the business to be eligible for the scheme. Our current understanding is that statutory duties can be carried out by furloughed directors but no services or revenue-generating work. The grant is open to full-time and part-time directors and those whose salary is paid annually.
Other than meeting their statutory duties as a director, we understand that if a director is still working, even for reduced hours or pay, the company will not be able to claim the grant.
Subject to further guidance, we believe that the grant claim will be calculated based on 80% of the director’s ‘regular wage’ or £2,500 (whichever is lower). The regular wage is the higher of the same month’s earnings from the previous year or the average monthly earnings in the 2019-20 tax year.
The claim can be backdated to 1 March 2020, but is only available from the date the director is actually furloughed. The scheme is currently due to last for at least three months from 1 March 2020.
So, for example, a furloughed director who has been receiving the minimum wage of £719 per month (annual salary £8,632) over the last tax year, would mean their company would be eligible to claim grant funding of £575 per month whilst the CJRS lasts.
Legal advice should be sought on the employment law implications of furloughing directors. However, we would suggest that it is advisable for a company to write to advise the director that they have been furloughed and a copy of this should be kept on the file to support any claim. The company should continue to pay the director when furloughed to claim the grant when the CJRS portal is launched, which is due to be in April 2020.