COVID-19: What does it mean to be furloughed?
How does furloughing work for contractors?
The Government has implemented a number of schemes designed to help protect the UK economy during the Coronavirus pandemic, one of which is the funding of furloughed workers.
If you work as a contractor through your own limited company/PSC, you can, in effect, furlough yourself. Here we look at what it means to be furloughed and what level of grant you can claim.
To furlough or not to furlough?
If your contract is deferred or cancelled as a result of Coronavirus you may be able to find an alternative means of generating an income but if not, then furloughing yourself is likely to be the next best option.
Furlough grants are available through the Government’s Coronavirus Job Retention Scheme and allow you to claim a grant of 80% of your usual monthly wages, up to a maximum of £2,500 per month.
This is a sticking point for many limited company contractors. If, like most limited company directors, you have paid yourself via a small salary (circa the personal allowance or National Insurance threshold), topping up your income with dividends, then the amount you receive will reflect 80% of the salary element only. This is likely to be in the region of £600 – £800 per month depending on levels of salary you pay yourself. Plus, the grant is subject to tax and National Insurance in the usual way, though your Employers’ National Insurance element can be claimed back too.
Most limited company directors will have picked a salary level based on tax planning advice for the tax year. In most cases, it will not make sense to change the salary level previously picked but you should seek advice from your accountant. Therefore, most limited company contractors should continue to pay themselves a salary, if possible.
Another important point to bear in mind is that if you furlough yourself, there are a number of restrictions on what you can actually do with your time.
If you are furloughed, you cannot undertake any work which might constitute ‘providing services or generating revenue’. As a contractor, this would mean thinking twice before doing any personal marketing or pitching for work during the furloughed period, you certainly couldn’t undertake any voluntary or paid-for work for clients whilst receiving a furlough payment. So it does have its down-sides. You can, however, carry out ‘particular duties to fulfil the statutory obligations (you) owe to (your) company’ which includes maintaining your financial records.
The furlough rules do, however, allow you to carry out training, so if you were thinking of improving your professional skills, now is a good time.
The minimum furlough period is three consecutive weeks, though you can furlough yourself several times whilst the scheme is available, if that’s appropriate to your circumstances provided each furlough period is at least three weeks long.
Claiming a grant
Currently, the Government has committed to funding furloughed workers for March, April, and May but says the scheme may be extended if necessary. If you wish to furlough yourself, you do not need to do anything just yet though you will need to apply online in due course. HMRC expects to have the online application system set up by mid to late April. Payments made in respect of the CJRS will be made soon after applications but details of the exact timing are yet to be released.
What to do next
You can find out more about the Coronavirus Job Retention Scheme here but if you would like tailored support and advice, please do get in touch with our team of expert contractor accountants who will be pleased to help.