Lockdown: Tragedy of the Self-Employed
The UK government released guidance that suggests that directors can be furloughed and take up other types of work in a self-employed capacity, while retaining their statutory duties. Even if the work is in the same field. But is there a point?
by Ethar Alali
During the pandemic, it has become clear that the single person limited company directors of service companies have had a hard time of late. The advice has come through that UK Limited company directors can furlough themselves as long as they maintain their statutory duties. Dividends don’t count for furloughing and can continue to be claimed from the company as long as it remains in profit. Take too much, and it’s liable for the tax. So most boards and single person directorships have taken the sensible step of forgoing their dividends just in case the company makes a small profit at the end of the year, which results in a tax bill that is not coverable by what’s left in the bank, because dividends were paid early.
However, it is also clear that many new directors may not be able to survive on this. As a result, having to consider furloughing and entering self-employment with another firm or perhaps taking on temporary employment, even doing the same job, elsewhere.
This leads to the edge-case question, does taking related work as self-employed or employed individuals, offer any advantage to the individual, the limited company or both? The answer is yes, to the individual, and it makes no odds to the limited company. At least in the short term. Once revenue hits are considered.
To understand why, it’s worth an example.
Once upon a time: ACME and OCRA
Suppose ACME Limited is a pure services micro-business run by James Pickleson. It normally turns over £5,000 a month of which it pays James, who normally is paid £12,500 (his personal allowance) and takes £2,000 as dividends. From March 31st 2020, during the COVID-19 outbreak, his clients have seen a slow-down in business, so told James there will be less work. James decides that ACME Limited will furlough James from the 1st April for the foreseeable future and will not top-up his earnings by the remaining 20%, even though they can if they wish. Under the furloughing scheme, this means James will be given the pro-rata equivalent £10,000 from ACME and UK Gov will pay that to ACME in return, backdated from the start, until around the end of April 2020 or whenever the system is live.
However, James decides to carry out some other work in a personal capacity, as James “the Joiner” (Sole trader) for a different firm and from that, he earns £2,000 in April. To the end of April, James has therefore earned (net of National Insurance):
£1,011.67 for each of January to end of March and £809.34 (Furlough) in April from ACME Limited. Totalling £3,844.35
£2,000 from his joinery work
This totals £5,844.35. In that time, ACME has had revenue from January to end of March of £15,000. Leaving £9,155.65 profit at the start of April. Given no revenue comes in during April (as James is the only employee and he is furloughed), it ends April having paid James £809.34 in furlough pay, but receiving no revenue from client work in the interim.
Also, ACME Limited claims back £809.34 from UK Gov for April, which restores ACME’s furlough payment to James. Meaning ACME Limited has not increased or decreased its outgoings, but has no income during April. Yet, still has £9,155.65 in profit
From this, James chooses to claim his annual dividends which are due in May, which is fine. As they do not contribute to salary and he doesn’t have to work to receive share income. Meaning for the year, James has taken £8,653.69 (£6,653.69 in furlough + normal pay, plus another £2,000 joinery work), while ACME is sat at £9,155.65. A total of £17,809.34 and no tax is due on anything but the profit component.
In another universe, Gems runs OCRA Limited, doing the same thing as James. The revenue and costs are the same, but unlike James, Gems decides to continue to do their joinery work via OCRA. In such a case, OCRA cannot furlough Gems. So the calculation becomes:
£1,011.67 for each of January to end of April from OCRA Limited. Totalling £4,046.68. Because gems is still working, she can’t claim back the furlough from UK Gov.
OCRA Limited has taken £15,000 in total from January to March. But also takes £2,000 in joinery work in April. A revenue total of £17,000.
This means that Gems has taken only £4,046.68 By the same time that James has taken £5,844.35.
In May, Gems has taken £5,058.35 in total salary, while James has taken £8,653.69
Looking at the company position for OCRA, the total company revenue is £17,000, paid out £5,058.35 to Gems, leaving £11941.65. Which of course, total 17,000 between individual and company.
The net result is OCRA+Gems = 17,000 and ACME+James = £17,809.34
ACME+James gets more cash by £809.34 (the company furlough amount given back by the government). In effect, the furlough cash from UK Gov has the net effect of creating money for James during this period.
Conclusion
This might be a life-saver for many. The question is whether or not people will be able to find enough work in their field or not. It will be interesting to see what happens with as time goes on. The reality is that many limited companies will not survive this period. Especially since UK GDP is now forecast to lose between 14% and 35% by the end of this year, which is then going to be followed by a No-Deal Brexit. This period in the UK’s history will create a fundamental and likely permanent change in the way UK society operates. It will need a global effort to get out of it. But the UK has closed its doors. So recovery may well be a way off yet.
