3 April – The Government’s much heralded Job Retention Scheme is now active and many employers are starting to place staff on furlough in order to preserve their jobs for when the Coronavirus crisis reduces to a level where we can all return to work.
The Job Retention Scheme, or furloughing, allows the employer to keep an employee on the payroll, maybe on reduced pay and the business will receive a grant of 80% of the employee’s February 2020 salary, up to a maximum of £2,500 a month.
That is fine, buts leads to two key questions for director shareholders in small businesses:
- What happens if they have been paying themselves a small salary and taking dividends on top?
- Can a director furlough themselves?
Low salary plus dividends
Under successive governments, dating back over the last 20 years, the separation of income tax and national insurance under different sets of rules, has enabled them to promote a low basic rate of income tax, ignoring the impact of national insurance.
Gordon Brown, as Chancellor once said national insurance is not tax.
Like it or not, and in recent years governments have not liked it and watered down the benefit with Dividend Tax. However, where a director shareholder is able to choose their optimum mix of salary and dividend, a large majority have opted for a £719 per month salary, plus dividends.
They will probably have benefitted for many years from this simple, non aggressive form of tax planning, but under the Job Retention Scheme they are now left high and dry. 80% of £719 a month does not go far.
We await to see whether an adjustment will be made to perhaps allow the inclusion of certain dividends as earnings for furlough purposes, but this would in my opinion be a tricky and risky area for any tax payer to go down. Most probably, it is what it is. The director shareholder has benefitted in the past and this is the price they now pay.
Can a director furlough themselves?
The answer seems to be yes, but this is a hugely tricky and ambiguous area, drawing a distinction between the job they may be doing for the company, for which they receive a salary and their duties as a director, for which they may now seek to argue they do not.
The company of course will continue whilst the director is on furlough and their statutory duties as a director will continue.
How can they then fulfil these duties if they are on furlough, without falling foul of what will undoubtedly be severe anti avoidance provisions?
On furlough, an employee is not allowed to work for the company. Arguably, checking work email, monitoring bank payments and even posting on social media may be considered work.
Just tweeting could be enough to jeopardise a limited company’s Coronavirus Job Retention Scheme grant claim, potentially leading to severe penalties.
The £719 salary for the tax year 2019/20 does increase to £791 per month for 2020/21, the optimum level for many, but this will be of little help or support to thousands of companies, including personal service companies, which may well have already seen their trade disappear due to the lockdown.