During the last few weeks, the UK Government has introduced at great speed a range of schemes to support business. Here, IoD Head of Corporate Governance Dr Roger Barker explains more.
These emergency measures have included two important programmes:
The Coronavirus Job Retention Scheme – aimed supporting employers with the cost of their employees (‘furloughing’).
The Self-Employment Income Support Scheme – which supports the self-employed through grants of up to £2,500 per month.
In terms of the above framework, the issue of where to locate company directors who operate through personal service companies is a tricky issue. The problem arises because owner-directors wear several hats at the same time, and cannot be categorised in a simple manner.
In terms of their style of working, owner-directors have most in common with the self-employed. They provide goods and services to a variety of clients on an individual basis. In legal terms, they only differ from the self-employed by structuring their activities through a limited company – a structure that may well have been demanded by their clients as a condition of engagement.
Technically speaking, however, owner-directors are also employees of their own service companies. A basic principle of company law is that a company is separate from its owners – even if it is 100% owned by the owner-director.
Consequently, owner-directors can in a legal sense also be categorised as employees of their companies even if the nature of their working life is far more risky and entrepreneurial than that enjoyed by most people in employment.
In most cases, dividends will form the vast bulk of the owner-director’s personal income. It makes little sense for owner-directors to pay themselves a salary of more than £8,632 per year due to the current structure of UK national insurance thresholds – and most are advised not to exceed that limit by their accountants.
For the purposes of their coronavirus company rescue schemes, the UK Government has made a crucial decision - to effectively treat owner-directors as employees rather than self-employed. As we have described, this is only a very partial and inadequate reflection of their profile and activities.
The consequence of this decision is that the Coronavirus Job Retention Scheme is the main source of government support for owner-directors.
And because they are treated as employees (albeit of their own single person service companies) rather than self-employed, they are not eligible to benefit from the grants offered by the Self-Employment Income Support Scheme.
The latter is only open to those who have chosen to operate as sole traders rather than via a personal service company. The exclusion of owner-directors cuts them off from a potentially vital source of government support.
In contrast, the Coronavirus Job Retention Scheme is not fit-for-purpose as a support scheme for owner-directors. According to this scheme, owner-directors can apply to receive 80% of their PAYE salaries from the government if they agree to furlough themselves – and thereby accept significant restrictions on any further work that they can undertake.
However, as we have seen, this scheme is likely to deliver a negligible amount of financial support to owner-directors given that most of their income is disbursed to them through dividend payments rather than via a PAYE-administered salary.
Furthermore, the concept of furloughing company directors makes very little sense from either a business or legal perspective.
From a business perspective, the activities of owner-directors are no different in nature to those of self-employed sole traders. As with sole-traders, it appears wrong-headed to demand that owner-directors stop working or seeking business opportunities if they are to qualify for government support.
To ask them to do so is both counterproductive to themselves and to the economy as a whole – a fact that is recognised in the Self-Employment Income Support Scheme, which does not seek to impose any such restrictions on self-employed sole traders for similar reasons.
From a legal perspective, owner-directors are subject to the wide-ranging statutory duties of directors defined in sections 170-177 of the Companies Act 2006. In particular, section 172 requires them to promote the best interests of their company in the broadest possible sense, including with regard to its long-term prospects.
The idea that a director’s statutory duties could be hibernated into some kind of limited administrative activity is simply not congruent with this legal principle.
However, based on discussions with board members, I suspect that many owner-directors will assume that ‘fuloughing’ prohibits them from undertaking business activities to any significant extent, with adverse implications for both their own futures and for that of UK Plc.
The likely consequences, therefore, of effectively categorising owner-directors as employees rather than self-employed are twofold: to cut off an increasingly important part of our economy from meaningful government support; and to confuse – or even paralyze - an important part of the economy.
To address these issues, the Government should treat owner-directors of single-shareholder, single-employee, and single-director companies as self-employed persons as a matter of urgency.
Reflecting this, they should enable owner-directors to access the support provided by the Self-Employment Income Support Scheme, which is much more appropriate for their circumstances.
As well as reflecting the reality of being an owner-director, such a treatment would be consistent with how an owner-director is treated in other parts of the system – such as when they apply for credit from a bank or for Universal Credit.
In both of these cases, an owner-director is categorised as a self-employed person – and not as an employee.
Both recognise – quite rightly - that the economic situation of an owner-director is very different to that of someone in employment - and must therefore be treated in a different manner by the emergency measures designed to safeguard our economy.