What the furlough just happened? Views from Alpaca on the current situation for company directors
So, I’m conscious there is a real risk of “too much Richard and Alpaca” at the moment (something my wife is all too familiar with).
However, with a LOT of clients asking the same questions and a desire to help as many as possible, here’s my best take on the position as we see it.
NB: I have a 3 year old with chickenpox sat with me as I write this, so if I’ve made any glaring errors, sorry-not-sorry.
WAIT WAIT WAIT – START WITH COMPANY DIRECTORS
Ok, let’s just focus on Company Directors for now. Essentially, if you’ve been using the standard tax planning approach of “low salary, top up with dividends” you are currently… stuffed. Can’t really think of a softer way to put it.
I’ll deal with the obvious points in bullet form to get through them fast:
• But I’m essentially a freelancer
Not for the purposes of this scheme, even if you’re one of the c.900,000 sole Director companies in the UK. If you’re on the payroll as a Director, you’re employed, not freelance.
• So I can furlough myself, and claim…?
You can, and you can claim 80% of the salary that went through payroll. Probably about £575. If you’ve been on the minimum to tick over the NI threshold, that ain’t gonna help you I’m afraid. However, if you do make that choice, you can’t do any revenue-generating work for your business whatsoever.
• A-ha, well I’ll just increase my salary before the rules kick in then
Nope, they’ve thought of that. Your salary will be the one on your payslip as at 28 February 2020.
• Oookaay, but what if my salary genuinely varied over the last 12 months?
Essentially you use your “average” salary over the past 12 months or if it’s higher you can look at the corresponding month from last year (let’s say your salary on payroll was higher during the first half of last year, you can use March ‘19s figure for March ‘20’s pay).
• Am I being punished for something?
This gets political so I’ll shy away a little, but reading between the lines I can only assume the Government is afraid of being seen to reward “fat cat” company directors. I know, I know, there are 2m limited companies, almost 900,000 of those don’t employ anybody, and most of the tax planning was a legitimate strategy NOT designed to exploit the rules but simply to manage income within the rules. It’s definitely a gap – probably one the Chancellor intended.
• Ok so let’s move on, is there another way around?
Nobody has said it explicitly, but I guess the suggestion is that you go off and “get yourself a Cybil” (the Coronavirus Business Interruption Loan) but even that’s tricky. If your business was a bit wobbly, the banks might not accept the lending case. You’ll have seen in the press that some banks are also insisting on personal guarantees, which won’t help your stress levels right now.
• Hang on lads and lasses, I’ve had a great idea… I’ll get a Coronavirus Loan, and pay myself from that!
Ah but… Oh it keeps going, the word we’ve had from banks is that they’re not happy seeing Directors take “drawing” from the loans – and technically it’s not clear whether the businesses will be making profit to do so in these straitened times.
You could, I suppose, take the loan and put yourself on a small salary through payroll. If the bank squeaks, show them this blog and explain that you find yourself stuck firmly between Scylla and Charybdis. Answers on a postcard if this works. I wouldn’t try and pay yourself any more than the £2,500 furlough cap though, or you can expect HMRCs’ retrospectoscope to catch you one day.
• To shut or not to shut…
Some of you (like me) will also be considering your position as an employer. If I furlough, I effectively close down a business which IS still trading, just more uncertainly than it was last month. So I’m put in a position where the Government says “stand by your employees” but to do so I have to take a loan, personally guarantee it, and potentially not pay myself.
Nobody told me there would be days like these.
SO TELL ME GRASSHOPPER, ANY BRIGHT IDEAS?
Always, but these are very surreal times and we really can’t say for certain whether any of these might work for you. You’ll have noticed this is a guest blog from the team at Alpaca – we work very closely with TLC and other organisations, like Entrepreneurial Spark, to encourage innovation and clever thinking.
I make no apologies for the next few thoughts which are one fag packet short of a complete picture.
• Take the loan and put yourself on payroll – you’re not going to be able to furlough but if you’ve cut everything else and want to keep trading, I can’t see why this wouldn’t be allowed.
• Do you have SEIS status – or COULD you? If you don’t know what this is, drop me or your TLC contact a line. It is a tax-advantaged status designed to encourage investment in uncertain businesses, to promote entrepreneurialism. Surely this counts? If not, I’d welcome somebody from HMRC telling me what we’re supposed to do to survive.
• Sell something – not as flippant as it sounds. Many businesses, even little ones, will have a couple of trading companies. If one has a bit of cash in it, could you sell it intra-group and benefit from Capital Gains Tax relief? Could you sell shares to a family member?
• Consider leveraging other assets – Ok you’ve probably already thought of this but there are loads of other lenders out there and many have specialisms. Some like property, others machinery, some will invoice discount. Don’t assume just because your bank says no that there isn’t another funder out there. Again, shout if you want signposting or support.
• Get creative – collaborate, merge, JV, innovate – let somebody else take the fight to the Government and get your thinking cap on. Do you have a deadly rival who suddenly seems a lot more cuddly? Two rival businesses, one has a great finance function but poor sales, another has the inverse – go join up. Switch up your business model, find new clients, innovate.
DON’T YOU WANT TO TRY AND SELL ME SOMETHING?
Sure – go find an Alpaca and have a chat. We ALWAYS find another angle. Now’s your chance to be bold, because what other choice do you have. The platform is burning and you need to react. The winners will be the ones who adapt fast. You can moan about the unfairness of it all when we’re on the other side. For now, this is gonna hurt.
As Rocky said, “If I can change, and you can change, we all can change” (oh yeah, there’s a Rocky quote for EVERY business situation).