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

Jeremy535897

jfinnie said:

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.

Yes that is the anti avoidance legislation I was referring to, although if you fall foul of it, it only affects the future.

jfinnie

Jeremy535897 said:

jfinnie said:

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.

Yes that is the anti avoidance legislation I was referring to, although if you fall foul of it, it only affects the future.

I don't know, having read far more about something than I ever intended to out of morbid curiosity, it seems if HMRC are able to show financial, economic and organisational links (the examples of which I found would seem satisfied by this sort of arrangement) that then late registration applies and you could be pursued for the VAT retrospectively...

But ignoring that as a thing, just on the general principles of what is being suggested by Martin in that video, it's hard to see how doing work outside of the business for the express purpose of leaving the business able to furlough that director to get some benefit from the govt. wouldn't be deemed as an equally obvious and nefarious way of carrying on...  It seems very clearly at least not in the spirit of what was intended.

Jeremy535897

jfinnie said:

Jeremy535897 said:

jfinnie said:

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.

Yes that is the anti avoidance legislation I was referring to, although if you fall foul of it, it only affects the future.

I don't know, having read far more about something than I ever intended to out of morbid curiosity, it seems if HMRC are able to show financial, economic and organisational links (the examples of which I found would seem satisfied by this sort of arrangement) that then late registration applies and you could be pursued for the VAT retrospectively...

But ignoring that as a thing, just on the general principles of what is being suggested by Martin in that video, it's hard to see how doing work outside of the business for the express purpose of leaving the business able to furlough that director to get some benefit from the govt. wouldn't be deemed as an equally obvious and nefarious way of carrying on...  It seems very clearly at least not in the spirit of what was intended.

If it weren't for lockdown, I'd say you need to get out more. To answer your question, there are actually two rules, but the one you quote is where the division is essentially fake (no separate bank account, no assets in one entity etc). If you do it properly, but just fall foul of the organisational links tests, that only applies for future supplies.
I totally agree that if this is not what 2.5 of the directive is aimed at, what is?

jfinnie

Jeremy535897 said:

If it weren't for lockdown, I'd say you need to get out more. To answer your question, there are actually two rules, but the one you quote is where the division is essentially fake (no separate bank account, no assets in one entity etc). If you do it properly, but just fall foul of the organisational links tests, that only applies for future supplies.
I totally agree that if this is not what 2.5 of the directive is aimed at, what is?

I'm not going to disagree with getting out more.
It does seem that the advice from Martin is over the line here...  I wonder what he'd say on the matter...

koru

Jeremy535897 said:

I totally agree that if this is not what 2.5 of the directive is aimed at, what is?

Having thought a bit more, I reckon that the primary effect of para 2.5 (n the context of whether going freelance is abusive) would be to make it easier for HMRC to apply para 6.2 in a wide manner. Legislation (and quasi-legislation such as a Treasury Direction) is usually interpreted based on the strict meaning of the words and the spirit of the rules is usually irrelevant. So, on a strict interpretation it might be crucial whether, legally speaking, being self employed constitutes working for oneself or not working for anyone. But an anti-abuse rule might mean that the interpretation of 6.2 should be more purposive.

So what is the purpose of 6.2? We know for sure that if a person has two employments they can be furloughed from one and continue the other. They can also take on a new second employment and be paid for this. So, I think it is fairly clear that the reason they added para 6.2 was to make sure that this did not create the opportunity for shareholder directors to claim furlough subsidies when this is not necessitated by a shortage of work. They wanted to make sure closely-held companies cannot furlough a shareholder employee and then hire the same person in some other way to keep doing the work they would have been doing if they had not been furloughed. I can't really see any other reason for creating 6.2.

To me, this suggests that HMRC could certainly foil Martin's freelance idea if they wanted to. Even if being a self-employed freelancer is not working for yourself (and so it is not working for a person connected with the company they have been furloughed by), HMRC could probably say that the spirit of 6.2 was to prevent this, so they can interpret 6.2 to prevent it.

What I'd like to know is whether HMRC is willing to turn a blind eye to a modest use of Martin's idea. As I said, if you were just using it to keep doing a small amount of work, but far less then what you did as company director, I can see that HMRC might feel it is still fair to claim the furlough subsidy.

It would be great if Martin could get some more clarification on this. 

Jeremy535897

I agree with you koru. As the government admitted from the start, dealing with self employed people was always going to be difficult. One person companies are more similar to sole traders than employers. Often they are only using companies because customers insist, or to limit liability. The grant that is appropriate to them is the one that fits the self employed, that would allow them to continue to protect and carry out their business. The CJRS's purpose is stated to be to preserve jobs, rather than reward employees (although it has morphed somewhat). But preserving the director's job is incompatible with an instruction that they can't preserve the business that employs them during furlough. That's what happens when you use a botch.

koru

There's another problem which I think will be a huge one for most company directors. My understanding is that their salary is often discretionary, decided at year end. In that case, it might not count at all for the CJRS.

Para 7.3 of the Direction says:

"In calculating the employee’s reference salary ..., no account is to be taken of anything which is not regular salary or wages."

Para 7.4 tells you what regular salary means:

"In paragraph 7.3 “regular” in relation to salary or wages means so much of the amount of the salary or wages as-

(a)  cannot vary according to any of the relevant matters described in paragraph 7.5 except where the variation in the amount arises as described in paragraph 7.4(d),

(b)  is not conditional on any matter,

(c)  is not a benefit of any other kind, and

(d)  arises from a legally enforceable agreement, understanding, scheme, transaction or series of transactions."

So, you can only claim 80% of the monthly average of the director's salary for 2019-20, but only on salary that was not variable or conditional and was a legal entitlement under a contract. Most OMB directors are not paid that way.

Jeremy535897

It is an interesting question. It may well be that there is no contract in writing at all. You then have to work out what the terms are. I would argue that in this case there is no difference between "salary" and "bonus". If one derives from the implied contract, both do. I think the target of the legislation you quote is where the boss says to his employees that the business has done really well over the last month, and he wants to share some of it with his employees by giving them a discretionary bonus because of their hard work, even though he is under no contractual obligation to do so.