Can company directors be furloughed?

The further information provided by the Government last Thursday regarding its Coronavirus Job Retention Scheme (CJRS) gave helpful clarification in some areas (see our briefing note on it here), but still left several unanswered questions. One that we have been asked by several of our SME clients is whether or not company directors are able to be ‘furloughed‘.

There is nothing specific in the guidance so far regarding this question. One thing that does seem clear is that if someone is a non-executive director they won’t be eligible for furlough, because they are not an employee. But what about other directors?

Directors who work in the business tend to wear two ‘hats’ – first, they have their role as a registered director (and are on record at Companies House) and second, they are also employees of the company.  (They may also be a shareholder, in which case they are wearing a third ‘hat’ – more about that below).

Therefore, in principle, as they are employees, could they be furloughed for that part and carry on with their director’s duties? The problem with that idea is that there is not always a clear line between the duties a director carries out as a registered director and those they carry out as an employee.  The statutory duties a director owes to a company are not something that could be put on hold for an indefinite period of time. Also, as we covered in our briefing note, furlough requires the employee not to carry out any work for the employer – how can that be possible if the director is continuing to carry out his or her statutory duties?

However, a representative from HMRC has now confirmed (in a webinar given to the CBI last week) that directors can be furloughed, but purely in terms of their employment. Their duties as a director will continue. We await formal confirmation of this information from the Government or HMRC.

It is also worth mentioning that as alluded to above, many directors are also shareholders, and where that is the case they will often tend to receive a relatively small salary and take the rest of their pay as dividends. This is because dividends are not paid through PAYE and there is no National Insurance payable on them. The CJRS only applies to PAYE, so if a shareholder director were furloughed, the company would only be able to recover 80% of the director’s salary (up to £2,500 per month) and not the rest of his or her remuneration.

For example:

• Helena is the Managing Director of a limited company. She is also a 40% shareholder.
• She receives an annual salary of £8,600 and dividends of £50,000 (i.e. a total of £4,883.33 per month)
• If she were to be furloughed, the company would be able to recover 80% of her salary, i.e.  £573.33 per month.

This will be disappointing news for shareholder directors in companies who are struggling. There have been calls for the situation to be rectified, but so far there is no news on this. We will of course keep you updated on any developments.