Dividends excluded from job support scheme calculations
When first announced as a news story, published by government 26 March 2020, information regarding the support scheme for the self-employed included a telling paragraph. It said:
Those who pay themselves a salary and dividends through their own company are not covered by the scheme [the self-employed scheme] but will be covered for their salary by the Coronavirus Job Retention Scheme if they are operating PAYE schemes.
Clearly, this confirms that claims under the Coronavirus Job Retention Scheme will be based on previously submitted payroll returns that include director’s salaries (but not dividends).
Directors that have taken the lion’s share of their income in the form of dividends – and benefitted from significant NIC reductions for a number of years – will therefore be restricted in the amount of relief they can claim. Potentially, they will only be able to recoup up to 80% of their monthly salary – capped at £2,500 a month.
To make a claim, directors will need to furlough themselves. This is the new shorthand for laying yourself off. To qualify, you will also have to play no further active role in the business. For most directors this is a non-starter as directors, at the very least, have a legal responsibility to monitor and file ongoing returns to HMRC and Companies House, keep accounts up-to-date and manage numerous ongoing matters for their business.
What are the choices for directors?
If your company is unable to trade – perhaps one of the leisure, entertainment or other “closed down” service industries – you may be able to organise moth-balling activity in such a way that you can assert you are furloughed and collect 80% of your reported salary as a grant, up to the £2,500 limit.
If this does not meet your basic cash requirements there are other personal claims you can consider: Universal Credits or other relevant benefits.
If you want to consider ongoing trading, possibly at a reduced level, planning will be key. Directors will need to take care that they do not borrow money to support temporary losses if this results in insolvency. Insolvency in this respect means running out of retained profits and issued share capital.
Whatever your decision on these choices, please contact us, as planning and monitoring of your company finances will be paramount. The longer this disruption continues, the greater the strain and risk for small businesses will become.