Can I still pay dividends in a world full of furlough?

Can I still pay dividends in a world full of furlough?

Tue 07 Jul 2020

The current economic environment has been described in many ways from “challenging” to “brutal” and “utterly depressing”. In the UK Over 9m employees are and have been on furlough since 1st March and over £25bn paid out by the Government via the Coronavirus Job Retention Scheme (CJRS). However, following ‘Independence Day’ on 4th July, we have seen more businesses across the UK go back to work  and sales start to be made again. As work starts to return, one question that has been asked is whether, in the UK, dividends can be paid at all?

Business owners, as well as those on furlough have also had to really think about personal finances during this time and how they can keep the business going whilst ensuring they can pay bills etc. The CJRS arrangement and a range of other Government support measures have helped here.

Before considering meeting personal finance requirements from dividends, it is important to remember that dividends must be paid from qualifying distributable reserves and are based on shareholdings. It is not just salary rebranded as a dividend which is a compliance area HMRC into which has been carrying out detailed reviews.

The relationship in the UK between dividends and furlough

Using the Government’s CJRS arrangement has been key to protect jobs and give employers cash to pay their employees over the last few months. Where businesses are considering paying dividends and have used CJRS for furloughed employees, there are currently no rules, legislation, guidance or directions that prohibit this. Within the recent Government direction that was approved on 25 June 2020, the following instruction was included:

  • Integral to the purpose of CJRS is that the amounts paid to an employer pursuant to a CJRS claim are used by the employer to continue the employment of employees in respect of whom the CJRS claim is made whose employment activities have been adversely affected by the coronavirus disease or measures taken to prevent or limit its further transmission.

Therefore, the main requirement for UK businesses is to be able to clearly demonstrate that the employee’s employment activities have been “adversely affected” by the Coronavirus with the payment used to continue their employment. There is no mention of CJRS not being applicable if you make profits, have a turnover over a certain limit, make redundancies, or if you decide to pay out bonuses or dividends, nor that in such cases your CJRS claim will be rejected or retrospectively over-turned.

However, reputation and retrospection will be critical. The Government could change / modify the rules in the future given the reactive nature of the CJRS guidance and directions to date.   Demonstrating the right behaviours and robust governance will be key in managing the risk of HMRC successfully challenging any claims that have been made.

Will there by naming and shaming if CJRS has not been claimed correctly or used as intended?

Currently there are no proposed rules or regulations to impose naming and shaming on those employers found to have used the CJRS arrangement incorrectly. However, public pressure and scrutiny on pay/dividends will be at a heightened state given the amount the Government has paid out in CJRS claims to date (over £25bn).

Therefore businesses need to consider the possibility that naming and shaming could be applied, akin to how ‘naming and shaming’ operates for National Minimum Wage rules.  Retrospective legislation could potentially be introduced to restrict dividends and bonuses being paid where public funds have been claimed via CJRS – employers could be made to pay CJRS back where this has occurred.

Will we get a penalty if we pay dividends whilst we have claimed under the CJRS arrangement?

In terms of penalties, paying dividends itself will not crystallise a penalty – either under the normal Schedule 41 provisions, or the CJRS provisions in the draft Finance Bill 2020. Therefore, from a strict position, no penalties are proposed just because qualifying dividends have been paid where CJRS has also been claimed.

What about Time To Pay (TTP) Arrangements?

Alongside CJRS, many businesses have deferred their income tax and NIC liabilities. HMRC are now in the process of formalising these deferrals into TTP so that historic deferrals can be paid over the next few months, or longer, depending on what is agreed.

In terms of agreeing TTPs, HMRC are traditionally less sympathetic to requests for instalment arrangements if there is evidence of recent dividends paid to shareholders. Quite often, they also expect other investors such as Loan Note holders to take a deferral of interest in the supporting cash flow projection too.

What should we be doing next?

Businesses need to ensure they are behaving with integrity and in the spirit that CJRS was intended to be used. Where the media / the public become aware that businesses have not acted reasonably, this is likely to generate negative attention and impact on the long term success of the business given the reputational damage that could arise.

There is a balance to strike as businesses will still need to reward individuals to help them grow in the future, otherwise key talent may look to leave and go elsewhere.

Reviewing pay and reward structures, as well as considering the wider compliance and risk aspects attached to dividend and bonus payments will help organisations ensure they have the right structures in place as they look to grow in the post Covid-19 climate. One area that has been discussed more recently is Enterprise Management Incentive schemes (EMIs) and this is something many organisations are looking at, given the tax advantages associated with these arrangements where set up correctly.

We can help with reviewing the compliance risk, supporting with pay and reward strategy and establishing clear governance processes. Please do get in touch if you need any assistance.

For a further discussion of the tax issues around dividends and CJRS, please get in touch with a member of the Mazars employment tax, personal tax, corporate tax or tax investigation teams.