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Business Tax  •  Coronavirus Advice  •  Personal tax  •  Personal Taxation

Shareholder/directors and their limited options for Coronavirus support

By RJP LLP on 21 April, 2020

True to HMRC’s word, the Coronavirus furlough scheme portal went live on 20 April 2020 and in the first hour of operation over 67,000 claims were made. It is expected that the first payments will be issued on 30 April 2020. No one could argue that the chancellor’s various schemes to help people financially affected by the coronavirus are not generous and in the case of self-employed people, they are arguably exceptionally so because they do not require that they cease all work, although the delay until the money comes through in June is another matter.

One group of workers that have clearly fallen through the cracks are company shareholder/ directors who operate through their own limited companies; the chancellor’s self-employed income protection scheme is clearly aimed at sole traders who submit tax returns via self-assessment and not at company directors. From June, the self-employed are eligible for a taxable grant worth up to the lower of 80% of trading profits for three months or £2,500 per month. This available is provided they had profits of less than £50,000 in the tax year to 5 April 2019; have submitted a tax return for that year; are continuing to trade or would be were it not for the coronavirus; and have lost trading profits due to the coronavirus. Critically, self-employed workers are permitted to continue working in their business without losing their entitlement to the grant.

Problems arise for the many shareholder/ directors who work as consultants and freelancers and who operate through limited companies, frequently at the request of their clients. They are eligible to claim the Coronavirus Job Protection Scheme (the ‘furlough scheme’) because they are employees, however this creates two issues.

Firstly, many people in this position pay themselves a modest salary and dividends. Frequently their total income is less than £50,000 per annum, putting them on a level footing with sole traders, but their claim is restricted by their salary level and does not take dividends into account. Their claim will often therefore be  a fraction of the maximum amount of £2,500 per month.

For many of those affected this is better than nothing, however, the second issue is that they must not do any work for their company beyond the basic official requirements for a shareholding director, for example attending shareholder meetings, submitting returns. They cannot generate any revenues for the company or make contact with clients.

Whilst tax is a factor when deciding on operating structure, it is not the only one;  in many cases individuals use a limited liability structure because it is insisted on by their clients, or because it reduces their exposure to personal financial liability and professional negligence claims. It also creates a perception of larger size, which can be useful in securing contracts with corporate customers.

There is clearly a disparity between the amounts payable which has arisen because of the payment of dividends rather than salary, and it is not one that HMRC is likely to be sympathetic to. Therefore the options currently open to shareholder/directors are likely to remain limited; provided they do not work in their company, they may furlough themselves for the minimum 3-month period and are able to do this multiple times until the end of June 2020.  The grants payable will equate to the lower of 80% of their monthly salary and £2,500 per month. Alternatively they can seek a business interruption loan; however this may be difficult to secure given the qualification criteria required; see our article on how to apply for this support.

Note that companies can also defer the quarterly VAT due between 20 March 2020 and 30 June 2020; and shareholder/ directors can defer their tax payment on account due on 31 July 2020.

The chancellor is being lobbied to offer more support to shareholder/directors and is apparently ‘looking into it’ however nothing has been announced. As mentioned above HMRC is likely to be unsympathetic to these calls and given the volume of claims being made via the furlough scheme, an increase may not be forthcoming.

If you are affected by this situation and would like advice, please email partners@rjp.co.uk

 

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