COVID-19 measures: implications for shareholder directors

Last updated 27 March 2020

Business owners who operate through a company typically take their income as a low salary and top up with dividends.  The recent announcement for the self-employed and the measures for employees appear to miss shareholder directors.

How do the current COVID-19 measures help if you are a shareholder director?  Sadly, the short answer is “not a lot”.

Can the Employee measures help?

One of the key measures for employers is the Coronavirus Job Retention Scheme.  Under the CJRS, employees who are retained but not working, i.e. “furloughed”, are paid and the employer can claim a grant to cover 80% of the furloughed employees’ salary costs up to a maximum cap of £2,500 per month.

But can directors be furloughed?  As a condition of furloughing is that the individual must not undertake any work of any kind for the employer it is difficult to see how a company with a sole director could access this scheme.  To demonstrate that a director had been furloughed the company would have to have evidence of “no work” – this could, perhaps, include making it known you are closed for business until further notice, but that clearly would be counterproductive to a speedy turnaround when restrictions are lifted.

Also the relief available is only on the salary element of your income from the company, so for the typical NIC threshold salary of around £720 per month, 80% of that will only be £576 per month. There are conditions which prevent higher relief being claimed where the salary has recently increased, so an increase in salary prior to furloughing may not improve the position.

Can I claim the relief for self-employed?

Many shareholder directors would describe themselves as self-employed: they work for themselves; they are their own boss.  However, a person trading through their own limited company is not self-employed for tax purposes.  The trade is carried on by the company and not the individual.

So the shareholder director which includes subcontractors operating through their Personal Service Company (PSC) cannot benefit from the measures for the self-employed.

What next?

For companies with reserves there may be the potential to weather this storm and take dividends to cover living expenses.  However, where those reserves are now being depleted by trading losses there may be less scope to smooth out this unprecedented downturn.

Although there is not a measure currently aligned to the circumstances of many shareholder directors, we hope that as the government works through the process of keeping work happening wherever possible, that business owners and subcontractors are not forgotten.

Businesses globally need people who are flexible, resourceful, independent, and entrepreneurial to rebuild the economy when restrictions are lifted.  Failing to support business owners could mean that more businesses fold in this period and in turn the job security of many employees and self-employed individuals could be affected.