I have a client who is a director of a limited company which he intends to wind down. He is also on the payroll as an employee and would like to take £30,000 from the company as a tax-free redundancy payment. Can he do this?

This is a question we are being asked more regularly following both the COVID-19 period and also changes to the Off Payroll Worker Regulations. First, we need to look at the definition of redundancy. HMRC determine a redundancy as:

An employee who is dismissed shall be taken to be dismissed by reason of redundancy if the dismissal is attributable wholly or mainly to:

  • the fact that his employer has ceased, or intends to cease, to carry on the business for the purposes of which the employee was employed by him, or has ceased, or intends to cease, to carry on that business in the
  • the fact that the requirements of that business for employees to carry out work of a particular kind, or for employees to carry out work of a particular kind in the place where he was so employed, have ceased or diminished or are expected to cease or diminish”.

Where a director is an employee of the business, it follows that they can be made redundant like any other employee. The difficulty arises in Owner Managed Businesses where the Director is also the decision maker.

In most cases, as the sole owner/director of the business, they technically have the voting power to veto their own redundancy. In addition, most Directors of OMBs do not have a formal contract of employment so are not necessarily categorised as an “employee”.

It is therefore unlikely that a director can make themselves redundant and make a claim to either statutory redundancy pay or the £30,000 ex gratia limit that would be available in employee redundancies.

Should the liquidation of the company will occur under a Members Voluntary Liquidation (“MVL”) and directors would be prohibited from any claim to redundancy pay.

However, the Director may be entitled to redundancy pay if his company becomes insolvent and enters a formal liquidation procedure (for example a Creditors Voluntary Liquidation).

HMRC confirm that redundancy pay can become payable subject to the following conditions (EIM13760):

  • Must be included on the payroll and taking a regular salary
  • Must be a director of the company for at 2 years
  • Company must be insolvent and liquating, not dissolving.

The onus on making this payment will fall to the company, however, due to its insolvent nature there is unlikely to be adequate funds in the business to allow for this.

In this situation, the redundancy claim will then be passed over to the Redundancy Payments Service (“RPS”) who will fund the redundancy pay owed to the director. This payment will be at the statutory level only meaning that if the director had an enhanced redundancy package as part of their contract, this will not be honoured.