Problem with Martin's idea about furloughed company director working freelance

koru

Martin's video from 8 April suggests a possible solution to the problem that a company director on furlough cannot do any work for the company. He suggests that they could freelance themselves and work outside the limited company. I initially thought this was a genius solution, but unfortunately I think it is (or at least might be) foiled by a part of the government's rules, where the director is also a controlling shareholder.

Specifically, my concern is the Treasury Direction to HMRC about how to apply the furlough scheme (downloadable here: https://www.gov.uk/government/publications/treasury-direction-made-under-sections-71-and-76-of-the-coronavirus-act-2020). This says at para 6.2:  "An employee has not ceased all work for a person if the person works for a person connected with the employer (see paragraph 13.4) or otherwise works indirectly for the employer." If working freelance is working for a person connected with the company, the director will not satisfy the requirement to have ceased work.

Sadly, I think this connection rule applies. If the director goes freelance they would be self-employed, so the person they are working for is themselves? And I think they will be connected with the company if they are a controlling shareholder of the company.

Para 13.4 of the Treasury Direction says: "whether a person is connected with an employer must be determined in accordance with section 993 of the Income Tax Act 2007". That section in turn says:
"(6) A company is connected with another person (“A”) if—

(a) A has control of the company, or

(b) A together with persons connected with A have control of the company.

(7) In relation to a company, any two or more persons acting together to secure or exercise control of the company are connected with—

(a) one another, and

(b) any person acting on the directions of any of them to secure or exercise control of the company."

Unless there's a way to argue that if you are self employed you are not working for anyone (including yourself), I think this foils Martin's idea. 

Any thoughts?

Hermann

It seems to me if you were able to go freelance and then take on the exact same work from the exact same client then there was not a genuine reason to be furloughed from the company as the work was clearly still available.

I think Martins got this one horrendously wrong.

If was clearly different work for different clients then perhaps it could be considered a second job but that doesn't seem to be what he's describing.

koru

Yes, it would not make much sense if you were allowed to keep working whilst claiming to be furloughed. Though as Martin points out, the relief for the self employed does not prevent them from continuing to work, so perhaps it made sense to look for a loophole. Unfortunately, I don't think the loophole works.

koru

Another concern from that Treasury Direction is that the admin work the director is permitted to do is perhaps narrower than Martin suggests.
Para 6.1 says:
"An employee is a furloughed employee if-
(a)  the employee has been instructed by the employer to cease all work in relation to their employment,..."

So, the basic rule is no work whatsoever. Para 6.6 is the only exception:
"Work undertaken by a director of a company to fulfil a duty or other obligation arising by or under an Act of Parliament relating to the filing of company accounts or provision of other information relating to the administration of the director’s company must be disregarded for the purposes of paragraph 6.1(a)."

So, you can only do work that is a statutory duty or obligation. So, if the director does any admin work that is not a statutory duty or obligation, they cannot be a furloughed employee. What's more the only statutory obligations that count are filing accounts or providing information relating to the administration of the company.

Perhaps you could argue that filing PAYE/VAT/CT returns is the provision of information. So if the only work you did was just filing those returns or accounts, perhaps that's OK. But is that enough for a company to keep ticking over, even in hibernation?

I can't see how any of the following is a statutory obligation, so any of this would mean you are not furloughed: bookkeeping, billing customers, collecting debts, paying creditors, negotiating with employees/suppliers/customers, marketing, sorting out your filing, designing new webpages, telling customers how you are dealing with the lockdown, applying for the furlough scheme. I can't see how most businesses could keep operating without doing some of these things for at least 3 weeks. 


It did sound as if Martin talked some govt departments into agreeing a more generous interpretation that, frankly, is not consistent with para 6.6. For instance, marketing to clients is categorically not a statutory obligation, so the advice he received from one department that this is OK clearly cannot be reconciled with the Treasury Direction. Can we rely on interpretations by govt depts that are clearly untenable and were only provided privately to Martin?

Jeremy535897

Thanks koru, very interesting stuff. On your point about an individual being connected with a company he owns, and therefore not being able to work for himself, my response is that "work for yourself" is a casual sort of phrase, and is irrelevant here. You might have a smallholding, not run commercially necessarily, as well as your consultancy company. All farming is a trade, according to tax legislation (section 9 Income Tax (Trading and Other Income) Act 2005), and as you are "working for yourself" you would not be able to furlough yourself from your consultancy company. It's not a nice legal argument, but I guess it just feels right. It's a bit like recognising that you can't sell something from business you own number 1 to business you own number 2 and make a supply for VAT purposes, or a profit for tax purposes.

You might well argue that Martin's example involves working for the same clients as my hypothetical consultancy company, not a smallholding totally unconnected with them, as Hermann does, but my counter argument is that my example destroys the technical analysis at source, so you look no further.

Having said all of that, the reason for using a company may be that your customers insist on it, so Martin's solution may not be practical.

I will finish by pointing out what I believe totally destroys Martin's idea, and you need look no further than Treasury Directive paragraph 2.5, which says:
"2.5 No CJRS claim may be made in respect of an employee if it is abusive or is otherwise contrary to the exceptional purpose of CJRS."

jfinnie

It doesn't seem there could be any way that a director doing work on a self employed basis that could / should have been done within the business they are a director of in more normal times could ever be promoting the success of the business by engaging in such activities on a self employed basis.
In likelihood they would probably need to be working with equipment that belongs to the business.
Even if not, likely working with knowledge or opportunity belonging to the business.
Of course, if they knew someone else in the same trade, nothing to stop them going and working for them on their opportunities for their clients.  But it seems anything that sees you anywhere near clients that you had worked for or were courting as a business previously is almost certainly going to be well over the line.

Jeremy535897

jfinnie said:

It doesn't seem there could be any way that a director doing work on a self employed basis that could / should have been done within the business they are a director of in more normal times could ever be promoting the success of the business by engaging in such activities on a self employed basis.
In likelihood they would probably need to be working with equipment that belongs to the business.
Even if not, likely working with knowledge or opportunity belonging to the business.
Of course, if they knew someone else in the same trade, nothing to stop them going and working for them on their opportunities for their clients.  But it seems anything that sees you anywhere near clients that you had worked for or were courting as a business previously is almost certainly going to be well over the line.

Good point. Normally there would be a restrictive covenant, if the employee was independent of the employer, although their enforcability is moot.

koru

Jeremy535897 said:

I will finish by pointing out what I believe totally destroys Martin's idea, and you need look no further than Treasury Directive paragraph 2.5, which says:
"2.5 No CJRS claim may be made in respect of an employee if it is abusive or is otherwise contrary to the exceptional purpose of CJRS."

But what is the purpose of the CJRS? Para 2.1 says:
"The purpose of CJRS is to provide for payments to be made to employers on a claim made in respect of them incurring costs of employment in respect of furloughed employees arising from the health, social and economic emergency in the United Kingdom resulting from coronavirus and coronavirus disease."

That is so general that it tells us nothing about whether it would be abusive to claim CJRS whilst still earning income (by doing as a freelancer what your company normally does).

If you were just freelancing to do a small amount of work that came in, but this amounted to a small proportion of what the company normally earns, I think there is a decent argument that it would not be abusive to be claiming CJRS as you have a reasonable need for income support. If, however, the director had as much work (or close to it) to do as normal, I'd say it would be abusive, because there was no commercial need to put the director on furlough. Anyone who made a claim in that scenario should be ashamed and would deserve to have it turned down. 

jfinnie

I'm sure it runs deeper that this and I imagine there must be case law around it.
You'd think one obvious scenario where this sort of thing may have been covered extensively would be a director of a VAT registered business doing work outside of their business (but in the line of their business) in order not to pay VAT and offer a cheaper price to persons not registered for VAT (although in all likelihood in that scenario it's probably everything being evaded, and not just the VAT!).   I'd be surprised if that isn't something that has been well tested already, and you simply don't have the option of doing it legitimately.
Or maybe not, maybe it is completely legit to operate that way.  I'm missing a trick if so...

Jeremy535897

jfinnie said:

I'm sure it runs deeper that this and I imagine there must be case law around it.
You'd think one obvious scenario where this sort of thing may have been covered extensively would be a director of a VAT registered business doing work outside of their business (but in the line of their business) in order not to pay VAT and offer a cheaper price to persons not registered for VAT (although in all likelihood in that scenario it's probably everything being evaded, and not just the VAT!).   I'd be surprised if that isn't something that has been well tested already, and you simply don't have the option of doing it legitimately.
Or maybe not, maybe it is completely legit to operate that way.  I'm missing a trick if so...

On VAT, you can have two problems. The first is that if the sole trade uses the company's assets (as you pointed out in an earlier post), the company should charge for their use plus VAT, which would be irrecoverable by the non VAT registered sole trade. The second is the anti avoidance legislation regarding the splitting of one business into two or more businesses so that each stays below the VAT registration limit.

jfinnie

From a quick google it looks dangerously like this is flying very close to being (if it isn't for sure) dis-aggregation in the case of VAT specifically (if the business was VAT registered but the director taking on work on a self employed basis wasn't).  I wonder if similar tests to those applied for dis-aggregation testing of separate "businesses" will be applied to some furlough cases for testing the validity of claim.