Coronavirus: Support for limited company directors
When someone has been working on a self-employed basis (i.e. as a sole trader) and their business begins to develop, the next step can often be to incorporate and provide their services via a limited company. There is a lot of confusion over what support such people can access during the current coronavirus situation – the Self Employed Income Support Scheme, the Job Retention Scheme, both or neither?
- the shareholder of the company and
- the employee of the company (that the company uses to supply the services that it is contracted to provide).
The company itself is a separate legal entity to its directors, employees and shareholders. We explain more on our website.
Once someone begins to work through their own company, they are no longer self-employed, even though they may carry on doing the work in a similar way to the way they have always done.
Therefore company directors do not qualify for the Self Employed Income Support Scheme (SEISS). To understand more about this, see the warning we give in our press release: COVID-19 grant warning for new limited companies.
The Job Retention Scheme (JRS)
When work is carried out by the company, the company invoices for the work performed and receives payment from its clients. Most company directors (who are the ones performing the work) get paid a salary from their company in respect of the services they provide their company and, provided the company is profitable, they may also get paid dividends in respect of their shares in the company.
To the extent that directors get a salary from their own limited company, this should be paid via the Pay As You Earn (PAYE) system, meaning that they can potentially access the Job Retention Scheme provided all the relevant conditions are met. One of the conditions is that the employer (in this case the company) must ‘furlough’ the employee. This usually means that the employee can do no work for the employer. However, we understand that director/employees can furlough themselves provided they are only undertaking minor statutory/administrative directorial duties, and not providing services or undertaking revenue generating ‘employee’ duties.
However, as directors often adopt a strategy of taking a relatively low salary (to stay below the relevant tax/NIC thresholds), supplemented by regular dividends, they may not be entitled to claim very much under the JRS (probably something like 80% of around £700 a month). Directors need to weigh up very carefully whether it is a good idea to furlough themselves to claim this money, given the stringent ‘no work’ rule that will restrict their ability to manage their business.
As dividends represent a return on the investment in the company by way of the shares owned, at the moment there is no government support available to cover loss of this type of income.
Can you be a self-employed director?
There is no reason why a company director cannot also have a completely separate self-employment which is nothing to do with their company. For example, Sarah has a company which carries out plumbing services and also has a small-scale cake-baking business which is carried out on a self-employed basis.
However, it would be unusual for directors to contract back to their own companies on a self-employed basis. This is due to the rules that exist around receiving money from a limited company if you are a director.
Directors are ‘office holders’ which means that any money relating to directorial duties must be subject to PAYE. For other company work NOT related to the role of director, in theory, it may be possible for them to do this on a self-employed basis, by being hired by their own company to carry out the work on its behalf. But this would only usually happen if they have some real specialist skill unrelated to the company's normal business and they provide this to other businesses as well as their own, for example. This would be very unusual in a personal service company scenario, particularly for those on relatively modest incomes, therefore we do not consider the possibility any further in this article.
But I am self-employed under IR35/the off payroll rules?
The IR35 rules/off payroll rules may be causing some confusion as to whether the SEISS can apply. These rules say that if a director looks like an employee of the end client they work for, but for their limited company, then they should pay the same level of tax/NIC as an ordinary employee. We explain more here on our website.
You can fall outside of these rules if you look like a self-employed person working for the end client rather than an employee (as per the general status tests). But this ‘self-employed’ determination only applies for the purposes of deciding whether IR35/the off payroll rules apply. It does not change the actual position of the director as regards the nature of the income paid out to them by their limited company - it would still be salary/dividends etc.
What if I pay 'extra' tax because I work in the public sector or am inside IR35?
If you work via a limited company in the public sector, under the off payroll working rules, it may be the case that your company invoices are being paid after deduction of PAYE tax and National Insurance. If this money is then routed to you as salary via your own limited company payroll (which can be done on a tax/NIC free basis), then this salary should count as income for the purposes of your company (as the employer) claiming a grant under the JRS.
Note, that some guidance has been issued by the Cabinet Office which may benefit some limited company directors working in certain areas of the public sector, which basically says that in some cases, the government will underwrite their pay up to the lower of 80% of earnings/£2,500, meaning they should not have to rely on the JRS. However, this is simply guidance and it is unclear, as yet, how wide an application it may have. For example, it is not clear that it would be all that helpful to a supply teacher working in a school.
If you work in the private sector and are inside IR35, you may have structured your remuneration differently to the low salary/high dividend strategy, given your tax position at the end of the year, meaning there might have been more salary put through your payroll to support a higher JRS claim by your company.
⚠️ For information: HMRC's guidance update from 9 April suggests that for those that work in the public sector, it would be possible for a Job Retention Scheme grant (of 80% of the monthly contract value, up to a maximum of £2,500) to be applied for by the 'fee payer' – based on the amount run through their payroll as deemed earnings of the director. As this would be passed on to the limited company by the fee payer, it goes without saying that it would not then be appropriate for the director to make a Job Retention Scheme grant claim based on that same money, to the extent it was run through their own limited company payroll. We have an outstanding query with HMRC as to whether those that fall within IR35 but calculate all their extra tax on their deemed payment at the end of the year through their tax return, might be able to claim a higher level of support from the Job Retention Scheme. We will post any updates to our website, so please check back.
What other support might I qualify for?
If directors don't qualify/claim under the JRS, they may need to claim welfare support, for example, if enough National Insurance contributions have been paid, a claim for new-style Jobseeker’s Allowance may be possible. If this cannot be claimed, or it doesn’t offer sufficient financial support, a claim may need to be made for means-tested benefits. For most people, this will be through universal credit (UC).
UC is gradually replacing six other benefits (called legacy benefits) including tax credits and housing benefit. If any of these legacy benefits are already in payment, they will stop when a claim for UC is made.
Confusingly, for UC purposes, there is a look through the limited structure and directors of their own companies are usually treated as self-employed (UC is different in this respect to legacy benefits and income tax).
We explain more on our specialist website Revenuebenefits.
The government have announced that the 'minimum income floor' which can be applied to the self-employed under UC, has been temporarily suspended for claims from people while they are sick or self-isolating due to the coronavirus now and for all claims from 6 April 2020. If you are self-employed and making a new claim for UC, you do not need to attend a jobcentre office to demonstrate you are gainfully self-employed.
If directors are looking at claiming support through benefits, we strongly advise that they speak to a welfare rights adviser where they will be able to go through things in more detail with them and help identify their best options. This is particularly important if they are already receiving any legacy benefits.
It may also be the case that a director's business may benefit from some of the business announcements made.