30 Mar COVID-19: Company Directors & Shareholders
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 COVID-19 Grant for the Self Employed 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:
The government has announced that it will temporarily suspend the wrongful trading rules, backdated to 1 March 2020.
Pre-COVID-19 wrongful trading rule
- 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.
New measures: as announced on 28 March 2020:
“Relaxation of these wrongful trading rules will reassure directors that the difficult decisions they have to make about the future viability of their business will not have to be unduly influenced by the exceptional circumstances which are entirely beyond their control.
Legislation to introduce these changes will be introduced in Parliament at the earliest opportunity. Provisions will be included to enable the changes to be extended if necessary.”
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 28 February 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.
- In our Opinion, 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 employment type duties during that period but we are uneasy recommending that a sole director is laid off completely as they still have to undertake their statutory duties. In such cases part-furloughing is possible: duties as an employee would be furloughed. Statutory duties would not be furloughed. In most cases statutory duties are not onerus. In terms of contracts, 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.’
- 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. This may include furloughing any member of staff.
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 statutory capacity during even a period of closure of the business.
I would like to Furloughed myself or my employees:
Additional support for small companies
- Business rates holiday Business Rates Holiday for Retail, Hospitality and Leisure for the 2020-2021 tax year. This applies to all businesses in these sectors. For more information please visit HMRC website
- Cash Grant of upto £25,000. These will be given to businesses in these sectors with rateable value between £15,000 and £51,000 (in England). Small businesses with a rateable value below £15,000 (in England) will receive a cash grant of £10,000. For more information click here
- Job Retention Scheme -Forloughed workers – 80% of the salary
- Support for Self employed individuals – 80% grant, based on your last 3 years profits.
- Business Interruption Loan Scheme – For more information please visit
- VAT and self assessment payment deferral – Under the government’s proposals VAT payments due before 30 June 2020 will not now need to be made until 31 March 2021. Self assessment payments on account due on 31 July 2020 will now not need to be made until 31 January 2021. No application is required but direct debit mandates need to be cancelled. For more information please click here
- Statutory Sick Pay Rebate: The Government will bring forward legislation to allow small and medium-sized businesses to reclaim Statutory Sick Pay (SSP) paid for staff sickness absence due to coronavirus. This refund will cover up to 2 weeks’ SSP per eligible employee who has been off work because of corona-virus.
- Covid-19 Corporate Financing Facility: On March 17, HM Treasury announced a number of measures designed to support businesses. The Chancellor set out a package of temporary, timely and targeted measures to support public services, people and businesses through this period of disruption caused by Covid-19.
- Business Rates Holiday for Nurseries : Nurseries in England* do not have to pay business rates for the 2020-21 tax year.