Furloughing directors – the do’s and dont’s
The government has confirmed that directors can be furloughed under the Coronavirus job retention scheme. However, the wider issues concerning directors’ duties and responsibilities must be considered, as the situation brings potential pitfalls.
Many companies are making use of the Coronavirus furlough scheme. As office holders, salaried company directors are eligible to be furloughed and their companies can receive support from the Coronavirus Job Retention Scheme (CJRS) for furloughed directors’ salary. The CJRS support available is by reference to salary paid via PAYE and does not extend to remuneration via dividends.
The board can decide that one or more of the company’s salaried directors should be furloughed. Where this happens, it should be formally adopted as a decision of the company, noted in the company records and communicated in writing to the director(s) concerned.
One of the key elements of the CJRS is that an employee who has been furloughed cannot be asked to carry out work for their employer (although they can take part in volunteer work or training). This note addresses the thorny question of what activities a company director can still carry out for the company while on furlough.
Of course, company directors owe duties to their company which are set out in the Companies Act 2006. A director is still responsible for these duties even if they have been placed on furlough – these duties are not suspended. This raises questions about exactly what tasks a director is allowed to carry out while on furlough, and unfortunately the government guidance has not been precise.
HMRC guidance states that “where furloughed directors need to carry out particular duties to fulfil the statutory obligations they owe to their company, they may do so provided they do no more than would reasonably be judged necessary for that purpose”. The HMRC guidance also provides that furloughed directors should not do work of a kind they would carry out in normal circumstances to generate commercial revenue or provide services to or on behalf of their company.
The Treasury Direction relating to the CJRS seems narrower than the HMRC guidance, as the Treasury Direction provides that work undertaken by a director to fulfil a legal obligation to file company accounts or provide other information relating to the administration of the company is permitted (paragraph 6.6). However the Treasury Direction does not expressly state that a furloughed director is permitted to carry out other activities in order to fulfil other statutory directors’ duties.
Some commentators have argued that there is inconsistency between the Treasury Direction and the HMRC guidance. We understand that the Institute of Directors has asked the government to clarify the extent to which a furloughed director can act to save their company.
Another point to consider is furloughing directors who are also EMI option holders, as this has additional complications. This topic is explored in more detail here.
The HMRC guidance states that the CJRS also applies to salaried individuals who are directors of their own personal service companies. Typically a personal service company has only one individual director, but there are many other owner-managed businesses which will have only one sole director in office.
Unless a company is proposing to suspend all of its commercial activities during the Coronavirus period, it is difficult to see how a sole director could be furloughed given the requirement for that director not to generate commercial revenue or provide services to or on behalf of the company. If a sole director is furloughed, potentially there would be no one left in the company to deal with the day-to-day work such as raising and paying invoices, managing cash flow, generating business and actually carrying out the work.
Due to these complexities, we strongly recommend seeking professional advice before a director is furloughed.