The question of whether office holders can be furloughed and receive support through this scheme has now been confirmed. An office holder may be a director, a company secretary or Chairman who performs a role for the business but is not clearly an employee. The furlough, and any ongoing payment during furlough, will need to be agreed between the office holder and the party who operates PAYE on the income they receive for holding their office, for example a company or Limited Liability Partnership (LLP).
Company Directors – the specific, practical issues
As office holders, salaried company directors are eligible to be furloughed and receive support through this scheme. Directors who draw only dividends from a company are not eligible. There is still no specific comment on whether individuals who operate the IR35 rules within their Personal Service Company and are taxed on ‘deemed salary’ may be able to make a claim.
The challenge in this area is that Company Directors owe duties to their company which are set out in the Companies Act 2006. The seven general duties under the Act are:
- To act within the directors’ powers
- To promote the success of the company and to act in good faith
- To exercise independent judgement
- To exercise reasonable care, skill and diligence
- To avoid conflicts of interest
- Not to accept benefits from third parties
- To declare interest in proposed transactions or arrangements.
These duties are overarching responsibilities to the company whilst the Director is in office and so could be said to result in the director continuing to ‘work’ regardless. This would seem to potentially defeat the ability to furlough a company director.
HMRC have however confirmed in the current guidance that, where a company (its board of directors) considers that it is in compliance with the statutory duties of one or more of its individual salaried directors, the board can decide that such directors should be furloughed.
Where one or more individual directors’ furlough is so decided by the board, this should be formally adopted as a decision of the company, noted in the company records and communicated in writing to the director(s) concerned.
So, where does this leave the director who has enduring fiduciary duties to the company of which he is a director? HMRC has drawn a distinction between duties which are required to fulfil the statutory obligations they owe to their company, and work of a kind they would carry out in normal circumstances to generate commercial revenue or provides services to or on behalf of their company. The former is permissible during a period of furlough, the latter is not.
It would seem then we can identify the two sides of this line clearly where a company director has, say, a technical role within a company designing new products as well as duties more generally as a company director. If the ‘day job’ is no longer undertaken, the furlough would appear to be easy to support. Where a senior company management role is undertaken, this may be more difficult to distinguish. As a general rule in many private companies, roles are performed as a result of an evolutionary process rather than adherence to a specifically agreed framework of operation.
It is also worth considering where there is more than one director, only one maybe be required to remain active keeping the company running and dealing with ongoing commercial issues. Although there is a minimum period of three weeks furlough required to make a claim for the grant, directors could agree between them to rotate this role. This would provide more clarity of the position.
Our primary focus is supporting you and your business through this uncertain time. Please contact the Mercer & Hole team to discuss.