We’ve been inundated with questions around furlough and the self employed.
The most common question is “Can directors furlough themselves?”
In theory directors can be furloughed in the same way as other employees. However, a condition of furloughing is that the individual must not undertake work of any kind for the company during this time. This is harder for a director to justify, particularly if they are the sole director. It may be necessary for a sole director to notify all suppliers, customers and other business contacts that the business has been suspended pending the end of the Coronavirus crisis. In many cases this is impractical and undesirable because the director may wish to use this time working on improving the business so that when trading recommences the business performs well quickly. In these circumstances, furloughing is not permitted. Remember also that this only relates to PAYE income, not dividends.
For companies with more than one director, in theory one director could stay at the helm whilst the others are furloughed – is that really going to work? One director continues to be paid £719 p/m and does everything whilst the others are paid 80% of that i.e. £575 p/m.
The second most common question is “why doesn’t the self–employed income support scheme apply to directors of owner managed limited companies?”
Well the clue is in the title, its for self employed people, that means Soletraders and Partners in a trading partnership not directors.
But as frustrating as that is, directors are not actually missing out on much, because:
• The maximum that can be claimed at the moment is 3 months at £2,500pm =£7,500
• It’s a “grant” = taxable income
• So after accounting for income tax @ 20% and Class 4 nic @ 9% you will net £5,325.
• The grant will be paid in June in a lump sum and the tax/nic will be due 31/1/22
So what can I do?
For most small businesses the bank loan is going to be the major lifesaver
Don’t forget you also get VAT deferral, PAYE & CT time to pay and in some cases rates relief & council grants
Here is the very latest HMRC guide to furlough for employers – https://www.gov.uk/guidance/claim-for-wage-costs-through-the-coronavirus-job-retention-scheme
Here is the very latest guide for furloughed employees – https://www.gov.uk/guidance/check-if-you-could-be-covered-by-the-coronavirus-job-retention-scheme
Remember that (unless its already in their contract) employees need to agree to the variation of their contract terms if you are reducing their wages under furlough.
The options available will be different for your own circumstances and may changes and things progress.