Economically speaking, they are the #Excluded, the #Forgotten and the #Too-Complicated-To-Help. I am talking about the huge chunk of self-employed businesses and small company owners who have missed out on support during the Covid crisis. These are businesses configured as limited liability companies: some 946,000 owner-director companies, 1.57 million micro businesses – companies turning over £632,000 or less and employing ten people or fewer – or around two million actively trading small companies who altogether employ around 7.5 million people. The government has in place a scheme called the self-employed income support scheme (SEISS), but it only supports self-employed workers and businesses that are not incorporated as limited companies.
If this sounds complicated, instead imagine two friends Hilary and Sam who, three years ago, both set up companies providing personal fitness training. They both employ two other trainers and, generally speaking, make a profit of £20,000-£40,000 a year, out of which they pay themselves. Hilary’s clients tend to be individuals; she hasn’t incorporated her company, and just works as self-employed while employing people. Sam, though, provides fitness training to companies that have insisted that he is incorporated as a limited company. He pays himself from the profits, too, in the form of a dividends – some years are good, other years not so.
When Covid-19 hit the UK, both found that their staff could be furloughed, but the difference is that Hilary also received support through SEISS yet Sam did not receive any support at all because he had to operate through a limited company. For those who do not know, tax is still paid on dividends – corporation tax when it is within the company – and then taxed a second time when it becomes the personal incomes of the shareholder. These are not hedge fund owners receiving pay-outs, but small businesses paying themselves once they have covered the salaries of staff and covered their costs. The same is true for freelancers who are owner-directors.
At the start of the pandemic, this issue about exclusion was raised many times by many people with the government. HM Treasury and HMRC both threw their hands up in the air in despair, declaring that it was too difficult to properly identify limited companies such as Sam’s that needed help. To their credit, they did appeal for help. The issue for the Treasury is that they only want to support small businesses and the self-employed who are actively working and established. They want to avoid fraud and non-trading companies or shell organisations that own assets. And that is fair enough.
Fortunately, the call for help has been picked up by tax expert Rebecca Seeley Harris and supported by the Federation of Small Business (FSB), Association of Chartered Certified Accountants (ACCA) and the campaign network #ForgottenUK. Rebecca is one of the leading experts on employment status and tax, and advises many organisations that engage freelance workers. She was a senior policy adviser to the Office of Tax Simplification. She has taken forward the brief to help those directors of limited companies with a scheme – the directors’ income support scheme (DISS) that:
- creates parity with SEISS; and
- is not open to abuse by non-trading companies; and
- can use existing information and tools that HMRC already has and will be simple to administer and set up.
The proposed scheme is based on the trading profits of the company, which are contained in the CT600 corporation tax return. Any verification can be self-certified because, unlike the self-employed, the director of a limited company has certain duties in law. The director would only be able to claim for one directorship in the entity in which they have the greatest income. Directors who are active can be identified through Companies House returns. As for SEISS, an honest declaration is needed by directors that they intend to continue to trade and either:
- are currently actively trading but, are (or have been) impacted by reduced demand due to coronavirus; or
- were previously trading but temporarily cannot do so due to coronavirus.
As with SEISS, it will only be open to firms that made profits of £50,000 or less. It is estimated that with eligible profits, directorship and ‘persons with significant control’, eligibility would be at 70%. With an estimated four million directors, with 70% eligibility (2.8 million) and 75% take-up (2.1 million) claiming an average £2,900, the cost would be circa £6bn. The alternative is that if these firms and these self-employed workers are not supported, their businesses face collapse and along with it future tax revenue.
We have reviewed this plan at Labour Business and think that it is a solid proposal. We are in good company as ACCA and the FSB obviously think so too, and it has also been reported on extensively by the The Financial Times. The grant will go into the company, and any monies taken by individuals will be subject to tax, so 20% to 40% of any monies spent will come back to the Treasury in any case.
The proposal is now sitting in an inbox in the Treasury. Whether the government seriously wanted to help or not does not matter. I hate to paraphrase a recent slogan, but there is an ‘oven-ready deal’ to help our small companies that meets the government’s own criteria for a working scheme. There are no politics here – just a workable solution.
It is suggested that the post-Covid recovery will be led by small businesses, as it was after the financial crash. To have any chance of that taking place, we need to keep the tens of thousands of small businesses afloat. I urge the government to support this proposed scheme. I urge Labour MPs and our shadow teams to get behind it and save our small firms. It is in our own best interests.