Coronavirus: furloughing directors

The following summary reflects further interpretation of the government guidance over the last few days and, in particular, by the Institute of Chartered Accountants in England & Wales, who have been liaising with HMRC to develop existing guidance and provide further clarification for affected businesses.

At the time of writing, we still do not have any concrete answers from the government on furloughing directors. Furthermore, we understand that the Job Retention Scheme will not be governed by statutory legislation, but instead HMRC intends to adopt a sensible and reasonable approach, especially for the more “difficult” scenarios, such as directors being furloughed and claiming the grant. This note partly reflects our Institute’s and other bodies’ current understanding of how the rules will work and our suggestions to you as a result.

Our Observations

As stated in our last update, many clients are asking whether directors in owner managed companies can be furloughed, if the 80% grant can be claimed, and on what income this is calculated. In that release we stated that we thought, along with some other commentators, that if due to the impact of COVID-19, a director is unable to generate any income for the limited company and can only undertake “statutory fiduciary duties”, this would seem a reasonable basis for furloughing that individual.

Whilst it is currently clear that only director’s salary, and not dividends, can potentially be subject to the grant claim, what tasks a director in an owner managed company can still do whilst being furloughed is not currently covered by a single “black and white” answer that fits all scenarios. Every case should be considered on its own merits, but subject to this and any further clear clarification from HMRC, we offer the following guidance and suggestions:

  1. A single director can potentially furlough themselves if he/she is unable to perform such tasks, as a result of COVID-19, which previously generated income for the business and that income stream has now totally stopped. If a single director previously generated all the company’s income (e.g. was hands-on selling goods through close interaction with customers) and this income fell to zero as a result of COVID-19, we suggest that this is a good starting basis for being furloughed. If all a director is able to do is effectively act as steward for the company, ensuring that the minimum statutory duties are adhered to, but the company is not able to actively trade to earn income in the furlough period (minimum 3 weeks), then there is likely to be a strong case for a claim. You would need to look at what other tasks the director is still doing and assess the case on its own merits.
  2. In a company with more than one director (for example where there might be a financial director, sales director and operational director), if COVID-19 meant that two out of the three directors were unable to undertake any of their normal day to day roles (e.g. sales and operations), possibly coupled with a drop in income for the company, at the very least we would suggest that it should be possible for these two directors to be furloughed and the grant claimed in respect of their salary. As for the remaining director, you would need to look at his/her day to day role and ongoing tasks beyond minimum statutory/fiduciary duties, to decide whether that person too could be furloughed. Much would depend here on the ability of the company to still generate some income in any given period.

Either of the above approaches could of course be challenged by HMRC and we would urge you to document your justification for individual directors being furloughed in each relevant period. An example of potentially good evidence to support a director being furloughed would be VAT returns filed for the furloughed period if they show no turnover at all.

If any further guidance or clarification comes to light, we will let you know.

For further information or advice on any of the issues raised, or to find out more about bookkeeping, management accounting and payroll support during the Coronavirus, please call us on 01225 325580, email, or contact your usual client director.

Please note that this is only a summary of the main issues and should not be construed as advice. Every effort has been made to ensure factual accuracy at the time of publication (3 April 2020), however, the government response to the Coronavirus situation is changing 24-7, so it should not be relied upon completely.