Under the Coronavirus Job Retention Scheme, all UK employers will be able to access support to continue paying part of their employees’ salary for those employees that would otherwise have been laid off during this crisis. (Please see our earlier briefing at https://srcadvisory.com/blog/important-coronavirus-business-interruption-loan-scheme) We examine the impact of this legislation on owner managed companies.
Key points to remember are that
• It will be for the employer to claim payment under the Scheme.
• Every employer is eligible
• It appears that it will apply to ‘workers’ – not just employees, provided they are on the PAYE payroll; if they are not on the payroll they are excluded.
• The Scheme will provide for reimbursement to the employer of 80% of the worker’s ‘wage costs’.
• The worker must have been on the payroll as at the end of February.
In the absence of detailed guidelines from either HM Treasury or HM Revenue & Customs , we are not sure whether owner managed company directors can be furloughed but if you do have to put your company into hibernation then you need to tell your account manager and the payroll team that you need to be furloughed. They will need the date from which this takes/took effect.
Some commentators now think that furloughed pay may be based on the 12 weeks’ pay to the end of February, using regular basic pay and not overtime or bonuses. If this is the case then adjusting your pay for March will not be effective, However, we would not advocate amending prior periods as this is likely to be provocative and be challenged.
Assuming for the moment that if you were to increase your salary for March, to reflect the uncertainty of future profits and ability to pay dividends, that may achieve the by-product of maximising the government support available:
e.g. a salary of say £3,200 taken in March would of course give rise to a Pay As You Earn (PAYE) liability within the company (although any income tax withheld under PAYE can be off-set, when calculating your personal income tax liability under Self-Assessment). The employee and employer National Insurance (NI) contributions would be a cost to the business, but the employer NI contributions are an expenses for corporation tax. The figure of £3,200 would entitle you to the highest level of furlough payment: £2,500 per month.
However, just because this maximum amount is available, it does not mean that you should necessarily claim it. For example a director who has hitherto been drawing the standard £719 director salary per month and say £10,000 per year in dividends, has a current £1,552 total gross income per month, should switch his/her salary for furlough purpose to a comparable amount.
This approach minimises the risk of a successful challenge from HMRC immediately or within the usual enquiry timeframes, assuming that HMRC officers are not granted additional powers to combat abuse of the scheme. It is also possible that new criminal law offences could be introduced to combat abuse of the scheme.
In order to benefit from the government funded support for furloughed workers, you will need to have a formalised service agreement as a salaried director, as opposed to an informal arrangement to receive remuneration as an officer through a resolution to grant a fee. One consequence of this is to bring your company into the national minimum wage regime.
Once your company is within the national minimum wage regime, it may well prove impossible to bring your salary down again later to below the minimum pay threshold, due to counter-avoidance legislation.
A director’s service agreement is very similar to a contract of employment. Both documents outline the rules, duties and reciprocal obligations that govern and underpin the relationship between the director and the company. By accepting the terms of the agreement, both director and company will be entering into a legally binding contract.
As soon as you have a service agreement in place in order to fall within the furlough rules, this may lead to lack of flexibility when the pandemic ends and the economy returns to normal.
Ultimately the decision to move from a highly tax efficient dividend based remuneration model to a salary based one is a trade off against financial security now vs a loss of tax efficiency in the short-medium term future.
SRC-Time regularly assist clients with the tax implications of running their owner managed businesses and achieving tax efficiencies.
Our expert team is available to provide you with advice and can be contacted on 01273 326 556 or you can drop us an email at email@example.com or speak with an account manager to get any process started.
Here at SRC-Time, we will endeavour to keep you updated with all the latest information regarding financial aid at this testing time. Please note that the Government makes fresh announcements every day so please ensure that you have the latest information.