With things moving very quickly and news from different sources sometimes dis-jointed, I tried to organise it in some sensible intelligible form which will be helpful to you during these worrying times and at the same time tried to explain items (as far as possible) which are of concern and will effect majority of you, I tried to squeeze the whole article into one but soon realise it was too long, so I have decided to split the article into 3 separate articles i.e. those concerning Director / Shareholders, Self Employed, and finally Employers / Other issues, if you prefer to read the whole article in one email, it is also on our website., under Covid19 Tab.
In due course we will produce and streamline forms for loans and make them available those of you wishing to apply for Business Interruption Loans etc,
Company Directors & Shareholders:
For directors who take a relatively low salary and dividends, it is the salary figure only that can be included in this scheme, dividends are excluded. It will be the salary as at 28th February 2020 that is used to make the calculation. Often this will be 80% of £719 a month. However, many small companies are run by just one or two directors and have no other employees.
What government financial support is available to director/shareholders
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.
Although it may be possible for a company to furlough a director under the COVID-19 Job Retention Scheme there are potential issues for small companies to consider.
Company law dictates that director should be engaged under the terms of a service contract with their company.
A service contract does not automatically create an employment contract.
Many director/shareholders are remunerated in the most cost-efficient method for their company: a mixture of low salary topped up by dividends.
If the director’s company is adversely affected by COVID-19, the director may consider Furloughing for normally employee type duties, so, If as a director you were on the payroll, engaged under an existing written or verbal employment contract on 28 February 2020, and your services, in performing the duties expected of you as an employee or director are not required due to the effects of the ongoing crisis, the company may furlough you. ( see copies of sample letters of our website )
Can you furlough a sole director?
In deciding whether to furlough a director in respect of their duties as a company officer, it is assumed that the director will not be furloughed in respect of their duties as an officer of the company. This is because a company cannot operate without its director and all directors have ongoing fiduciary duties to their companies.
We, at Shaikh & Co take a view that most companies will need to have someone on hand, to handle on-going administration such as post, bookkeeping, tax filings and banking. We see no reason why a company cannot go into a ‘COVID-19 hibernation’ meaning that the director would have no day to day duties during that period, but we are uneasy recommending that a sole director is laid off completely.
Perhaps part-furloughing is possible and duties in working as a company officer could be agreed at say 1 day per week. Duties as an employee would then by furloughed. This would be evidenced by two contracts: a service contract and an employment contact.
HMRC states that ‘If an employee is working, but on reduced hours, or for reduced pay, they will not be eligible for this scheme and you will have to continue paying the employee through your payroll and pay their salary subject to the terms of the employment contract you agreed.’
The HMRC statement is at odds with the idea that a company could go into a period of hibernation. However, it is for the employer to agree the terms of any modification to an employment contact and for the directors to act in the best interests of the company.
Salary or dividends?
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 duties of a director as a company officer and an employment contract which covers duties as an employee. Above all it needs to be remembered that a furloughed employee is not allowed to work for the employer during the furlough period. Depending on the type of business, a company director may well need to work in some capacity during even a period of closure of the business.
Whilst writing this it has come to light that self-employed limited company directors can be furloughed as employees on their PAYE element (even if they are sole employee), technically they cannot then work for the same business, however it is thought that they are allowed to continue to carry out their duties as officer of the company such as statutory filings etc.
This area is full of complications and we await further guidance, the important advise is not to jump to any particular course of action which can then be difficult undo, remember the eligible payments in either case will be backdated to 1st of March, so we wait and see.
Employer National Insurance and Pension Contributions
Employer National Insurance contributions and minimum automatic enrolment employer pension contributions need to be paid for furloughed employees.
The employer can include in the grant claim 80% of the associated Employer National Insurance contributions and minimum automatic enrolment employer pension contributions.
Employer National Insurance Contributions and automatic enrolment contribution on any additional top-up salary will not be funded through this scheme.
Voluntary automatic enrolment contributions above the minimum mandatory employer contribution of 3% of income and above the lower limit of qualifying earnings (which is £512 per month until 5th April and will be £520 per month from 6th April 2020 onwards) will not be funded through this scheme.
Making a claim:
To make a claim as the employer, you will need:
- the PAYE reference number;
- the number of employees being furloughed;
- the claim period (start and end date);
- amount claimed (per the minimum length of furloughing of 3 weeks);
- the employer’s bank account number and sort code;
- Contact details; and
- Phone number
HMRC will retain the right to retrospectively audit all aspects of your claim.
An employer can only submit one claim at least every 3 weeks, which is the minimum length an employee can be furloughed for. Claims can be backdated until the 1 March if applicable.
Once HMRC have received the claim and the employer is eligible for the grant, HMRC will pay it via BACS payment to a UK bank account.
The scheme is expected to be up and running by the end of April and initially will cover March, April and May.
Finally the grant will be treated as taxable income and included in taxable profits for Corporation tax (limited company employers) or income tax (sole trader and partnership employees).
Please refer to further Bulletins 2 and 3 which will be following this and relates to Self Employed and Employer issues
We are here to help and support all our clients , we also have a Tab on Covid19 on our website where we have and will carry on putting useful guidance .
Stay safe and Healthy
Gulam M Shaikh