COVID-19: Directors on PAYE and furlough rules

The following is our understanding of the current policy and how this will work based on the information published up to and including 30 March. It should not be relied on for advice at this stage but is intended to give an indication of how the scheme will work.

The Institute of Chartered Accountants in England and Wales have examined the HMRC guidance and suggest directors of companies who are paid via PAYE should be eligible for the coronavirus job retention scheme, under the same rules as other businesses and their employees. The note goes on to say that a Director can undertake their statutory duties without it being classed as work. This has been widely reported/interpreted as sole directors can furlough themselves but continue to run the business.

As with other employees, directors will need to have been on the payroll on 28 February and they cannot work while on furlough leave. As a director, this may be undesirable and harder to justify, especially if you are a sole director. If you plan to work through the slow down in order to give yourself the best chance when trading resumes, furloughing yourself is not a realistic option.

As we don’t yet know how this will be policed, or penalised, we are unable to recommend furloughing the sole director of a business that is continuing to trade, no matter how low the trade has fallen.

Please remember this only relates to PAYE income and not dividends.

We act for many limited companies where the director (who is also a shareholder) extracts their remuneration via low PAYE salary and the rest by way of dividend.  Our interpretation of the new rules is that it is not possible for a sole director to furlough (and take advantage of the coronavirus job retention scheme) if they are still performing duties.  It would be possible to furlough a director if there is at least one other director in the business who will be keeping the business ticking over.  There is no compensation (under the current rules) for a reduced dividend.

This is an area that is relevant to a lot of our clients and we are constantly researching this very fluid situation and will make a further announcement as more information becomes available.

This article is based on information provided by the  ICAEW which can be found here.