HMRC have now confirmed that directors, office holders and other non-employed workers can be included in the claims under the furlough grant.
However, this is only possible for salary that, prior to 28 February 2020 was included on payroll and subjected to PAYE tax//NIC deductions.
Any income received in other forms, i.e. dividends, is excluded from the furlough scheme.
It has been confirmed that in addition to employees, the furlough grant can be claimed for the following groups, if they are paid via PAYE:
- office holders (including company directors and directors of Personal Service Companies (PSCs))
- salaried members of Limited Liability Partnerships (LLPs)
The guidance below sets out specific considerations for those individuals who are paid via PAYE, but who are not necessarily employees in employment law.
Office Holders
Office holders can be furloughed and receive support through the furlough scheme where they have been on payroll before 28 February 2020 with PAYE tax/NIC deducted. 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. Where the office holder is a company director or member of a Limited Liability Partnership (LLP), the furlough arrangements should be adopted formally as a decision of the company or LLP, and confirmed in writing to the individual.
Company Directors
As office holders, salaried company directors are eligible to be furloughed and receive support through this scheme for salary that has been paid through the payroll and subjected to PAYE tax/NIC before 28 February 2020. The furlough pay is calculated by reference to that previously pay rolled salary.
Company directors owe duties to their company which are set out in the Companies Act 2006. If the company board of directors decide that one or more directors should be furloughed, 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 as it is a change to the terms and conditions of engagement.
When furloughed, the director should not do work that they would carry out in normal circumstances which could generate commercial revenue or provides services to or on behalf of their Company. If they do, the terms of the furlough will be breached.
Where furloughed directors need to carry out particular duties to fulfil the statutory obligations they owe to their Company, they may do so provided they do no more than would reasonably be judged necessary for that purpose and to comply with their legal statutory duties.
This also applies to salaried individuals who are directors of their own personal service company (PSC). The furloughed director of a PSC, must also only undertake statutory filing duties, and not carry out any work for the PSC or contact customers that could generates commercial revenue or provides services to or on behalf of their company. It is potentially more difficult for a PSC Director to be able to comply with this, as working will include checking/dealing with emails etc..
In all cases, only previously pay rolled income which has been subjected to PAYE tax/NIC before 28 February 2020 can be included in the furlough calculation. Where, in the 12-month period, the PAYE salary has been variable, the base salary for the furlough pay should be calculated as follows:
if the director has been on payroll for a full twelve months prior to 28 February 2020, calculate normal pay as the higher of either:
- The same month’s earnings from the previous year, or
- The average earnings from the 2019/2020 tax year.
If the director has been employed for less than a year as at 28 February 2020, calculate an average of their monthly earnings since they started in that capacity.
Once the monthly earnings have been worked out, 80% of the calculated monthly earnings subject to a maximum cap of £2,500 per month, can be paid and claimed as furlough pay. The corresponding Employer NIC and minimum employer pension contribution (if pension is paid) can also be claimed. If the Company pays the Director more than the maximum that can be claimed under the furlough grant scheme, the Company will have to bear the additional costs as these (plus the additional employers NIC and employers pension costs), as these will not be funded by the government furlough grant.
Claims are to be made via a new portal which HMRC hope to release by the end of April 2020.
Dividend income cannot be included, only income previously evidenced as subjected to PAYE tax/NIC.
Salaried Members of Limited Liability Partnerships (LLPs)
Members of LLPs who are designated as employees for tax purposes (‘salaried members’) are eligible to be furloughed and receive support through this scheme.
To furlough a member, the terms of the LLP agreement (or any such agreement between the LLP and the member) may need to be varied by a formal decision of the LLP, for example to reflect the fact that the member will perform no work in the LLP for the period of furlough, and the effect of this on their remuneration from the LLP. For an LLP member who is treated as being employed by the LLP the reference salary for this scheme is the LLP member’s profit allocation, excluding any amounts which are determined by the LLP member’s performance, or the overall performance of the LLP.
The HMRC guidance is constantly evolving, and we will continue to update as necessary. If you have any further queries, please contact Laura Parr in our Employment Tax team.
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