COVID-19: Company Directors & Shareholders

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Many small companies are run by just one or two directors and have no other employees.

What government financial support is available to director/shareholders during the Coronavirus crisis?

• A director or company officer is an employee for PAYE purposes.
• A director cannot claim the by virtue of holding the office of a director.
• Although it may be possible for a company to furlough a director under the COVID-19 Job Retention Scheme there are potential issues for small companies to consider.
• Company law dictates that director should be engaged under the terms of a service contract with their company.
• A service contract does not automatically create an employment contract.
• Many director/shareholders are remunerated in the most cost efficient method for their company: a mixture of low salary topped up by dividends.

If the director’s company is adversely affected by COVID-19, the director has the following options, depending on the circumstances:

Potential insolvency

• If the company becomes insolvent: the director must immediately take advice from a qualified insolvency practitioner.
• As a director you should not allow the company to continue to trade on whilst you are knowingly insolvent: you potentially become liable for your company’s debts, including amounts due to HMRC.

Furloughing

Furloughing for normally employee type duties:

• If, as a director you were on the payroll, engaged under an existing written or verbal employment contract on 19 March 2020, and your services, in performing the duties expected of you as an employee or director are not required due to the affects of the ongoing crisis, the company may furlough you.

Can you furlough a sole director?

• In deciding whether to furlough a director in respect of their duties as a company officer, it is assumed that the director will not be furloughed in respect of their duties as an officer of the company. This is because a company cannot operate without its director and all directors have ongoing fiduciary duties to their companies.
• We (this website) take a view that most companies will need to have someone on hand, to handle on-going administration, such as post, bookkeeping, tax filings and banking. We see no reason why a company cannot go into a ‘COVID-19 hibernation’ meaning that the director would have no day to day duties during that period but we are uneasy recommending that a sole director is laid off completely. Perhaps part-furloughing is possible and duties in working as a company officer could be agreed at say 1 day per week. Duties as an employee would then by furloughed. This would be evidenced by two contracts: a service contract and an employment contact.
• HMRC states that ‘If an employee is working, but on reduced hours, or for reduced pay, they will not be eligible for this scheme and you will have to continue paying the employee through your payroll and pay their salary subject to the terms of the employment contract you agreed.’
• HMRC statement is at odds with the idea that a company could go into a period of hibernation. However, it is for the employer to agree the terms of any modification to an employment contact and for the directors to act in the best interests of the company.

Salary or dividends?

• There is no scheme in place for the government to provide financial support to shareholders where the amount of their dividend is affected by the COVID-19 crisis.
• If a company can no longer afford to pay dividends, it may be insolvent, directors should take appropriate advice.
• If the company decides to change the terms of the contract in order to pay a salary instead of a dividend, this must be agreed contractually between the company and its director. As suggested above, we would normally expect to see a service contact which details the duties of a director as a company officer and an employment contract which covers duties as an employee.

Above all it needs to be remembered that a furloughed employee is not allowed to work for the employer during the furlough period. Depending on the type of business, a company director may well need to work in some capacity during even a period of closure of the business.

Additional support for small companies

• Employee job retention scheme: if you have other employees
• Grant funding: if you have a business premises
• Small business rate relief: if you have a business premises
• VAT payment deferral
• Emergency bank loans
• Extension of Companies House filing deadline.

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