Introduction
There is a lot of confusion regarding what financial support is available to workers in the freelance sector following several key coronavirus announcements over the last two weeks.
Unless you, as an employee, are furloughed, by your employer (e.g. your limited company) then you are not eligible for the Coronavirus Job Retention Scheme. To furlough an employee is an employment law matter, not a tax issue.
Furloughed employees cannot work for their employer, including writing emails, answering the phone or administering the running of the business. The employer must put them into this 'temporary' employment state e.g. by writing to them.
Strictly, an owner-manager directorcannot be furloughed as they have ongoing duties and responsibilities as a director.
We would suggest that you stay up to date with developments by revisiting our blog site articles regularly as we shall updating them as and when new information becomes available.
What is a freelance worker?
Around 5.4 million people in the UK are categorised as freelance or self employed based on their tax position. To understand a person’s entitlement to financial support under the various coronavirus scheme it is necessary to determine their freelance / self-employed status. Such individuals could fall into the following two main categories.
(a) Self-employed sole traders and partners
(b) Limited company contractors
Categories of freelance workers
Self-employed sole traders
This category applies to those who provide their individual services and not through a limited company. They will pay income tax and self-employed Class 2 & Class 4 National Insurance. As they are not employees, they are not entitled to Statutory Sick Pay (SSP) or the Coronavirus Job Retention Scheme (CJRS). Of course, if they employ workers themselves then they may be entitled to reclaim under the 80% CJRC scheme.
The self-employed may be eligible for the Coronavirus self-employed support scheme.
Alternatively, the self-employed may be entitled to claim for Contributory Employment and Support Allowance (ESA) or Universal Credit.
Limited company contractors
These are individuals who through their own limited companies. They will typically be a sole/majority shareholder of the company and also a working director/employee. They may work inside or outside of the IR35 rules. We will assume in this category that they are outside the IR35 personal service company off-payroll rules.
Limited company director-shareholders are not entitled to SSP unless they have an employment contract with their limited company and this also applies to their entitlement to other statutory payments e.g. statutory redundancy pay
Some people might think that it is an automatic assumption that you are an employee of your own limited company but, it is not.
There have been various legal cases on this subject. The general understanding from past court cases is that if you have a controlling interest in the company or are the sole shareholder or sole director etc that you cannot claim statutory redundancy pay unlikely ‘normal’ employees.
If the individual wants to demonstrate that they are a normal and proper employee then they would need a formal contract of employment, and not one just prepare in haste because of current events with coronavirus. A formal written contract of employment is not a legal obligation. However, a written statement of particulars is. This should have been issued on starting the current position.
Dividends paid to a director-shareholder are as a result of them being a shareholder i.e. not as a result of being an employee of the company. Dividends payments are therefore not salary and not covered by the CJRS, even though dividend payments normally make up the largest proportion of income extracted from a limited company by their director-shareholders.
We are still waiting to see if director-shareholders are entitled to the (80% of salary) Coronavirus Job Retention Scheme and whether any additional amount will be available as a grant to take into account the large proportion of company profits that are generally paid out through dividends to such freelance workers. We are not confident that dividends would be taken into account in the future.
HM Treasury announcement - a ray of hope
Ben Kerry from HM Treasury says “directors can be furloughed. Although someone can't work while on furlough, directors can continue to carry out their statutory duties.”
HMRC‘s Gov.Uk website says:
Company directors are eligible to be furloughed and receive support through this scheme. Company directors owe duties to their company which are set out in the Companies Act 2006. The board of directors should decide is a director should be furloughed. This should be formally decided and minuted in the company records and communicated in writing to the director(s) concerned.
Furloughed directors should not do work of a kind they would carry out in normal circumstances to generate commercial revenue or provides services to or on behalf of their company.
This means that whilst directors of owner-managed businesses can make a claim under CJRS, if they are furloughed and not performing income generating work for the business, they can continue to run the business from a 'statutory perspective'. The latter term has not been defined by HM Treasury.
According to the Companies Act 2006, general ‘statutory’ duties of the directors are:
Section 172 'Duty to promote the success of the company'
(1) A director of a company must act in the way he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole, and in doing so have regard (amongst other matters) to:
(a) the likely consequences of any decision in the long term,
(b) the interests of the company's employees,
(c) the need to foster the company's business relationships with suppliers, customers and others,
(d) the impact of the company's operations on the community and the environment,
(e) the desirability of the company maintaining a reputation for high standards of business conduct, and
(f) the need to act fairly as between members of the company.
As it is a statutory duty to promote the success of the company in all these matters that leaves a good bit of scope for what the director can actually do.
We would say that dealing with employees, e.g. ensuring they are paid and kept up to date on the situation; chasing debtors and dealing with creditors; seeking out ways to finance the company’s expenditure, either via banks or the government etc are all within a directors duties to promote the success of the company. So long as these duties do not stretch to generating new revenue for the company, then in our opinion, companies should be able to furlough their directors and claim the 80%.
Directors cannot therefore claim 80% of their salary. This is normally set at £719 pm in 2019-20 which is the tax efficient amount that most owner-manager directors receive, which is tax and national insurance free. Of course, it may be better to do some profit generating activity i.e. trading work, if they can, and make profits of at least £575.20 pm!
When calculating claim values for directors of owner-managed companies they can only claim for their salary that has been subject to PAYE, and not to any dividends paid to those directors as a shareholder.
Whilst furloughed directors, and other employees, cannot do any (income generating] work for the employer that has furloughed them, they can undertake training, work for other employers, work on a self-employed basis or as a volunteer.
A standalone portal is to be made available , probably around mid to late April 2020, to allow furlough grants to be reclaimed from HMRC. The various accountancy organisations are requesting that accountants be given access to this new portal, as well as employers, so as to be able to help their clients with the process.
HMRC will reserve the right to investigate claims and cross-reference them to RTI payroll data submitted before 28 February to check for spurious and fraudulent claims.
We are waiting for more details and clarification.