I have decided there needs to be a change to the age old saying “Trick me once”.
For the current times, I am sure Ltd company directors- especially those who own small companies will appreciate my update:
“Tax me Once, I’m self-employed. Tax me twice- I’m forgotten!”
You see, the UK government has gone to some extraordinary lengths to protect the economy in some quite unprecedented times. Having assessed the risks, the UK government has launched 2 fantastic schemes to protect workers in the short term at least.
The Corona Virus job retention scheme is a fantastic scheme where employers can furlough workers who would otherwise be made redundant and claim back 80% of the costs of employing them. There is a maximum set at £2500 per employee, which is quoted as the median earnings level in the UK.
The downside for business owners is this isn’t immediately available, and they will need to fund the 80% costs in the interim while the government sets up the scheme allowing funds to be channelled to recipients effectively. I anticipate some businesses to go bust or default on the payments before funds are received.
The second scheme is for those designated self-employed. These will be sole traders, who pay relevant national insurance contributions and whose average net profit over the last 3 years is less than £50,000. Again, the maximum claim is £2500 a month with the same time limit of 3 months. Although the time limit is up for review if needed. The downside for self-employed individuals is they will need to wait until June to receive payment, and it will be back dated. Therefore, surviving whilst their businesses have effectively been shut down for a 3 month period.
It is worth pointing out here that many people feel they are self employed as they only have themselves, or very few people within their company. However, they run their business via a limited company structure, and as such legally are director employees of this separate legal entity, and not self-employed at all.
Running alongside this are some great schemes for those who pay business rates or get rate relief in the form of grants which are not repayable to help cover costs.
So, all of the above sounds pretty in order for what is currently happening with the Covid-19 outbreak in the UK. The government response has been quick, and substantial. However, it appears those that they have slowly but surely been taxing more and more have been forgotten.
As a small business owner, and one who runs my small business via a limited company, I can personally say I have been forgotten. I am able to of course furlough my staff which is great to protect their incomes, however, I have to personally fund this in the interim, whilst they are unable to work. I am unable to furlough myself as my business needs to remain open.
As a small business owner, we sublet space within other properties, and as such do not need to register for business rates. You see we only need a small office space to see clients, we don’t need any more than that. Therefore, we have no access to grant funding to pay our rent due. My business will get zero government support. So why is that?
From my own research – which has been extensive as I hoped to find a solution- I have determined the following. The government have set a cap at £50,000 – the higher rate tax threshold, for self-employed profits. It could be argued that profits below this level make it much less likely that it is viable to balance the cost and benefits of going via a limited company. However, many still do for lots of other reasons, mainly around the limiting of liability if you are recruiting employees.
In fact, more and more people have started running companies via Ltd structures as it has been made easier and easier to set them up [especially with the internet] and the government has somewhat encouraged this with legislation.
It would also of course be fair to say that the government has introduced double taxation on Ltd company directors over the past 10 years. Company profits are first taxed via corporation, and then dividends are tax from the net remaining figure. Hence my new saying “tax me twice”. I fully understand the counter argument to this is that if your profits are significant you have financially benefited from a better tax regime than being self-employed or PAYE.
So, what does all this mean for small Ltd company owners moving forward?
Well I think it is highly likely to see the demise of many of them. It’s possible I may be one of them. The government support for those small Ltd companies is not forthcoming currently and is highly unlikely to be enough to keep the owners afloat. Of course, the option is there to plunge the company, and yourself via director guarantee into significant debt via the government loan scheme for business, however I feel many will just say no and walk away. The consequences for the economy could be massive as thousands of businesses close, making hundreds of thousands of redundancies.
It has also become clear that when this all comes to a conclusion, and live tries to resume some normality, all of the support needs to be paid for. The truth is that the economy will not jolt back immediately. Generally, people will have less money, more debt, and a lot less confidence in spending. Booking holidays and going down the pub will be bottom of the list of expenditure, especially if you’ve been struggling to pay for your committed expenditure such as mortgage and utilities for a few months. Of course, you may also have just been made redundant too, with a poor job market and opportunities to attack for a new income stream.
The really good news for Ltd company directors is that they will then be remembered very quickly, as corporation tax will likely increase, and I believe will there be an equalisation of taxation between dividends and PAYE. We will be firmly back on the agenda. The bad news for the chancellor is loads of us may not survive to have the life taxed out of us to recover the country.
The real danger from Covid-19 is not the lives it will take, but the financial devastation it will leave behind for those fortunate enough to face that challenge.