Can you furlough a sole director under the Coronavirus Job Retention Scheme (CJRS)? It’s a question that we’ve been asked a number of times.
A sole director cannot be furloughed completely as they still have to be present to undertake their statutory duties. Such things as on-going administration, book-keeping, tax-filings and banking would likely come under this heading.
However, part-furloughing is possible, with the director’s work and duties as an employee of the business, the subject of the furlough.
That means they cannot do any work they would carry out in normal circumstances to generate commercial revenue or provides services to or on behalf of their company.
Activities such as talking to customers and suppliers, marketing the business, posting on social media and taking work calls would fall into that ‘work’ category.
It is also important to stress that the scheme is only for any wage paid through PAYE to the director. It does not extend to dividends paid to directors.
The government has put nothing in place to provide financial support to shareholders where the amount of their dividend is affected by the coronavirus crisis.
Here’s what HMRC guidance says: “To be eligible for the grant, when on furlough, an employee cannot undertake work for, or on behalf, of the organisation. This includes providing services or generating revenue.”
It adds: “If an employee is working, but on reduced hours, or for reduced pay, they will not be eligible for this scheme.
“Where furloughed directors need to carry out particular duties to fulfil the statutory obligations they owe to their company, they may do so provided they do no more than would reasonably be judged necessary for that purpose.
“For instance, they should not do work of a kind they would carry out in normal circumstances to generate commercial revenue or provides services to or on behalf of their company.”
If the company has two directors then one could be totally furloughed leaving the other in charge of those statutory obligations.
Directors are eligible to make a claim through the system if they are paid through PAYE – and as with other employees any possible claim would be for 80 per cent of the salary paid to them, capped at £2,500.
Here’s an example of how the scheme could work:
A company’s sole director pays himself a basic annual salary of £8,632. The rest of their renumeration is made up by a dividend on the company’s profits. No amount of this dividend can be reclaimed from the government.
As a result of the coronavirus crisis and the government’s restrictions, the company, which is in the entertainment industry, shut down during March.
The director can be furloughed from the day that the company confirms in writing that is happening.
The amount claimed under the scheme for 2019/20 would be £8,632, divided by 12 and adjusted to deduct the number of days worked in March.
Employer pension contributions would then be added: there is no NI to add as annual salary is less than the Employers’ Secondary NICs threshold.
The amount being claimed for 2020/21 would be based on the same figures, with no adjustment for days worked.
At the moment the company can continue to claim for the director under the scheme until the end of June 2020.