Currently, there is no definitive guidance on the furloughing of sole directors. More and more companies are furloughing their employees and going into Covid hibernation, business owners and sole directors are concerned that when they have taken a low salary, and then taking dividends as their principal wage – in line with the performance each year of the company, that now they are in a position where there are no options for them in order to maintain a liveable income to cover any ongoing liabilities they may have. Furloughing is only an available based on your PAYE salary, you cannot consider dividends as part of a claim.
After reviewing guidance from the Institute of chartered accountants we have concluded that the best approach is that of a pragmatic one. HMRC of reserve the right to challenge any claims made during the furlough period indefinitely. You should take a sensible view as to whether you can truly consider yourself furloughed, as you will not be able to perform services on behalf of the company, or perform any other revenue generating activity for the company.
Furloughed employees may not supply service, or undertake revenue generating activities on behalf of the company. The minimum furlough period is three weeks.
Companies with multiple directors
If you are one of many directors, and have either a verbal or written employment contract, you may be furloughed. These contracts needed to be in place as of 28 February 2020. Where there is a verbal contract, you should be able to evidence that you were included on a PAYE scheme registered payroll for the company as of 28 February 2020. When you are furloughed, you have the same restrictions as employees with the furloughed status. This means that you are unable to provide services, or be involved with any revenue generating activities of the company. This means not taking emails, not answering phone calls, or doing anything that could be deemed of service to the company.
Companies with the sole director
If you have either a verbal or written employment contract, and are paid through PAYE scheme registered with the payroll, you may be entitled to furlough yourself. This comes with the same restrictions as mentioned in the section above. HMRC may challenge your furlough claim, but for small companies and micro-companies where the sole director is also the only employee, it is reasonable to assume that any activity of the company can be delayed for the furlough period with good planning. Telephone calls can be answered by answerphone, and emails can be replied to with an auto reply.
HMRC have updated their guidance to cover acceptable claims for sole directors and Personal Service Companies, stating that a director may carry out their statutory obligations whilst furloughed – meaning a sole director can be furloughed. This comes with the same caveat that these duties must not be providing services on behalf of, or generating revenue for the company.
Considerations when furloughing a Sole director
We cannot give legal advice, and all changes to employment status are subject to employment law. Your statutory duties as a company director are subject to company law, you should must take independent advice where you are unclear on the effect of what you are planning to do.
Please see our thoughts on sole-director furloughing, and COVID company hibernation:
- Honestly consider whether your company can be mothballed for your furlough period, If this is not the case then it is unlikely to be worth furloughing a sole director.
- Ensure that you have a reasoned argument should HMRC challenge your furlough claim, and accept that ultimately your claim may be rejected depending on circumstance.
- You need to follow the same process for yourself, as you did for your employees in order to furlough. This includes varying your own employment contract.
- You cannot furlough yourself before you have furloughed 100% of your employees.
- Your furlough date must be that of the day that any staff are officially furloughed, and any shutdown and run down procedures have been completed.
- You should also consider that somebody will need to make payroll furlough claims, at least every three weeks throughout the period of furlough. If you’re using an outsourced payroll service (like ours), then you may be able to delegate this task to them.
- Suppliers will still expect to be paid, you will be able to set up advance payments with your bank future payments.
- VAT returns are still due to be filed, as are any other statutory filing obligations.
- The ability to file a claim is something HMRC are working towards, but it is not in place yet. There may be a lead time of at least 1-2 months from the end of April to receive money. If cash flow is an immediate issue, consider the Coronavirus Business Interruption Loan Scheme.