While there hasn’t been any definite government guidance on whether Directors of Personal Service Companies (PSCs) or even a director generally can be furloughed there have been plenty of ‘best guesses’ from the likes of The Institute of Chartered Accountants in England and Wales (ICAEW) and others which is probably as good as we will get for now.
A tax colleague, Chris Bidgood, who is the Tax Director at Lees Accountants in Norwich sent me a great email this morning with some key messages that need to be considered by directors of owner managed companies. With his kind permission, I have copied the salient points below.
- To be ‘furloughed’ you must not be doing any fee earning work or other activity in furtherance of the business activities (e.g. no Business Development, work to generate fees etc). The only work that you may carry out in a furlough status is admin tasks to comply with Companies Act requirements such as maintaining accounting books and records, filing statutory documents etc.
- If you have employees that are not furloughed it does seem illogical that the Director can be furloughed as the business is still operating in some form. If the Director is supervising and directing staff it is difficult to justify a claim of ‘not working’. If there are 2 or more Directors then this should not necessarily prevent one or other being furloughed, but not all of them.
- The Sole Director should put in place a minute or a letter from the company to evidence they are furloughed and clarifying that they are not carrying on work. ICAEW suggest a letter which sounds sensible in a company with multiple Directors. In a sole director business, a minute seems equally sensible as it is effectively the director writing to himself in any event; the key thing is having evidence of the furlough. Suggested wording for a minute might be:
It was resolved that the director be furloughed with immediate effect. It was acknowledged that to be furloughed and thus for the company to be able to claim under the Coronavirus job retention scheme the director is not able to conduct any work on behalf of the company, save for fulfilling directors responsibilities such as filing of documents and maintaining statutory and accounting records as required by the Companies Act. The position will be reviewed periodically.
- The sum to be claimed is only PAYE salary. No dividend is included in this. For many directors, the extent of the claim will be small (i.e. 80% of the small salary they put through to use allowances.
- As the guidance states that salary must be paid before the claim can be made, this suggests that claiming businesses will need to switch onto monthly payrolls for this tax year. Bear in mind this means nil returns even when this scheme is over and amounts to 12 x the amount of filings. This may create an additional burden on either your payroll team (or your payroll service provider) and this should be borne in mind, especially if the directors claim is likely to be small and limited to a couple of months only. It may be that an annual scheme is still permitted but there does not appear to be firm guidance on that as yet.
- Bear in mind that any claim (income for the company) that is made will be subject to corporation tax. So, for the average Owner Managed Business or PSC director with salary of £8,632, the monthly claim would be as little as £575 (£8,632/12 x 80%). Corporation tax will be due on this at 19% of £109 leaving the net claim receivable of £466 each month. This is still better than nothing however the added burden of completing the payroll each month should not to be forgotten as failure to file a monthly Full Payment Submission to HMRC may result in a penalty of £100 for each missed filing! So as you can see, the benefits can very quickly be eroded.
There will probably be changes to this and, if further clarification comes about, I shall post it up. For now, the above information is a very good list of points to consider and, of course, if you have any questions, please get in touch.