Contractors’ Questions: Can I furlough my spouse in our Arctic Systems-like company?

Contractor’s Question: Is furlough acceptable for Arctic Systems-like companies, just as it for one-person PSCs? Due to the coronavirus pandemic still killing my market, I am not currently in a contract. The good thing is my company has enough money to continue to pay monthly salaries to myself and my wife. But it does appear that the company could claim the furlough payment.

This scenario must apply to many other small husband-and-wife companies like mine. What’s the best advice and would she be applicable too for the furlough and the associated cash, even though I’m the main income generator / the in-the-field worker, for the business?

Expert’s Answer: Given IR35 reform and Covid-19, the landmark Arctic Systems case (which was ruled in favour of the IT contractor in question), feels like a lifetime ago!

Arctic: a refresher

As a quick recap, the setup in Arctic Systems was a husband-and-wife PSC, with each owning shares. Mr Jones was a fee-earning IT consultant and Mrs Jones took care of the company's admin. Both drew low salaries around the level of the personal allowance.

This landmark case gave the green light for this remuneration setup and continues to operate to this day. Many contractors continue to provide shares to spouses, and spouses often take care of the company's admin in return for a small salary. 

Possible, but palatable?

In the context of the Coronavirus Job Retention Scheme (CJRS), it is possible to furlough employees and claim 80% of their salary back from HMRC. As I'm sure all contractors are aware by now, the CJRS only extends to salaries and not dividends, and employees who are furloughed cannot undertake any work for the company.

Technically, it is possible for you to furlough her and reclaim her salary from HMRC, but remember you'll need to take care of your own admin! Her position as a shareholder is distinct from that as an employee, therefore she could technically continue to receive a dividend while furloughed.

It then just comes down to what feels right. You can technically furlough her. You could argue that you're doing it because while you're not receiving contract income now, you need to firm-up your position for the future. Others will argue that the CJRS should only be used to retain jobs that are genuinely at risk as a result of Covid-19. That's your call to make.

The expert was James Poyser, co-founder of contractor accountancy firm inniAccounts.

Tuesday 2nd Jun 2020