How contractor limited company directors can use the Coronavirus Job Retention Scheme

As the COVID-19 pandemic continues to prevent people from working, many contractors are struggling to understand the best way forward for them, particularly with the government’s financial aid packages lacking simplicity.

Among those most at danger of being left behind are Personal Service Company (PSC) directors, many of which are contractors who run their own limited company, writes Joanne Harris, technical commercial manager at contractor accountancy firm SJD Accountancy.

Last week, the chancellor announced details of the government’s Self-Employment Income Support Scheme (SEISS). There was no mention for PSC workers during the briefing by Rishi Sunak, but in the guidance issued following the speech, the government confirmed those operating through their own limited company would not qualify for the SEISS. Instead, HMRC is directing these PSC workers to the Coronavirus Job Retention Scheme (CJRS), if they have a PAYE scheme in place.

The Coronavirus Job Retention Scheme (aka ‘the furlough scheme’): an overview

The CJRS is a temporary scheme open to all UK employers for at least three months starting from March 1st 2020. It is designed to support employers whose operations have been severely affected by coronavirus.

Under this scheme, businesses can claim 80% of a furloughed employee’s (employees on a leave of absence) usual monthly wages, up to £2,500 a month, plus the associated Employer National Insurance contributions (NICs) and minimum automatic enrolment employer pensions contributions on that wage. Any additional earnings, such as commission or bonuses, are not included.

Any employees that were on the payroll on or before February 28th 2020 will be covered by this scheme. [Editor's Note: On April 16th, the government revised the coverage date to March 19th, with the effect that the CJRS covers any employees on the payroll on or before March 19th 2020]. But while on furlough, the employee cannot undertake work for or on behalf of the organisation and this causes problems where there is a sole director.

How does the scheme apply to PSCs?

To access the CJRS, businesses need to designate their workers as ‘furloughed employees.’ This involves writing to the employee to advise them and informing HMRC that the employee has been furloughed. A furloughed employee is an employee that remains on the payroll but is not working due to the coronavirus outbreak.

Quite understandably, this presents a problem for sole-director limited companies. A director has statutory duties which must be undertaken, so are they able to be furloughed?

This has been debated over the last week or two and some clarity was provided by Ben Kerry, head of labour markets at HM Treasury. In a CBI webinar, he confirmed that directors could be furloughed while still completing their statutory responsibilities.

So if you are an employee of your PSC; were on the payroll on February 28th  [Editor's Note: updated to March 19th] and are unable to work due to COVID-19, then you may be eligible to claim financial aid under the CJRS. However, it’s important to note this scheme will only cover your salary, so if you pay yourself dividends, these will not be included. And to reiterate -- while on furlough as a limited company employee, you cannot work.

Next steps

It is proposed that the CJRS will be up and running in April, with the intention being that the scheme will run for at least three months from March 1st 2020. The government has also announced this could be extended, if necessary.

In terms of how to claim successfully, the PSC director must submit information to HMRC about the furloughed employee (including themselves if they are the sole director), and their earnings through the CJRS online portal. The minimum furloughed period is three weeks and applicants should submit details via the incoming portal. HMRC will then reimburse the employer, your Personal Service Company, via BACS into a UK bank account.

Can PSC directors anticipate any further help?

It’s disappointing to see that PSC directors such as ‘Ltd’ contractors are, for now, only being pointed towards the CJRS, despite HMRC’s promise to ContractorUK the other day of extra guidance for them. It’s extra disappointing considering that such PSC workers are only going to be eligible if their business operates a PAYE scheme. Given that the majority of limited company workers typically pay themselves a low salary of around £719 a month, and the rest in dividends which are currently excluded from their earnings calculation, they could receive just £575 a month in financial support from the government during this vastly challenging pandemic.

The government has acknowledged that it would be difficult to support all types of workers, but there was also a promise that nobody would be left behind -- and at the moment, it appears these independent small business owners have been left out in the cold.

Friday 3rd Apr 2020