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The UK government is coming under renewed pressure from business leaders and trade bodies to provide limited company directors with tailored financial help to support them through the Covid-19 coronavirus outbreak.
Since mid-March, a series of financial packages have been rolled out by the government to support businesses and sole traders whose ability to work and earn money has been negatively impacted by the coronavirus.
But there are growing concerns that none of the measures announced to date provide adequate support for limited company directors, who draw a relatively small salary from their business, while the majority of their income is made up by dividends.
This is a setup that thousands of limited company IT contractors across the UK favour, because it is a tax-efficient way of taking money out of a profitable business, but it is liable to leave them out of pocket when claiming financial support from the government during the pandemic.
For example, under the terms of the government’s Coronavirus Job Retention Scheme (CJRS), limited company directors are eligible to receive 80% of their usual monthly salary, up to £2,500 a month, for three months if they furlough themselves.
However, the problem with the CJRS is that the scheme’s payouts are based on the salaries directors draw from their companies, and dividend payments are not included, leaving many limited company IT contractors with a sizeable shortfall in their monthly income.
By opting to furlough themselves, directors are also strictly banned from undertaking any work that would “generate commercial revenue”, leaving them with no means of plugging this gap.
An HM Revenue & Customs (HMRC) spokesperson told Computer Weekly: “Where furloughed directors need to carry out particular duties to fulfil the statutory obligations they owe to their company, they may do so provided they do no more than would reasonably be judged necessary for that purpose.
“They should not do work of a kind they would carry out in normal circumstances to generate commercial revenue or provides services to, or on behalf of, their company.”
Cost-cutting is not enough
Where IT contractors are concerned, there is, perhaps, a misconception that those who provide their services to clients through limited companies operate as “one-man bands”, but the reality is they will have their own staff, who can also be furloughed through this scheme.
Furloughing employees through the CJRS will reduce some of the company’s running costs, but furloughing themselves is a step many limited company directors are reluctant to take, said Dave Chaplin, CEO of freelancer tax consultancy ContractorCalculator.
If they do, they will then have no means of generating any new revenue to see them through the coronavirus crisis, but if they do not, they might not have any income at all to draw on as the situation continues.
“This shines a light on the glaring shortcomings in the various schemes,” said Chaplin. “Limited company directors typically receive their income via dividends, based on the profits their companies make. And now there are no profits, there is no future income.
“Some companies will have reserved profits to see them through tough times, whereas others won’t be in that same fortunate situation. But these people are being offered very little in comparison to employees.”
Furloughing their staff will help, but that alone will not be enough to see these businesses through the pandemic, said Chaplin.
“The worry is that, without more help, there will be no actual business for those employees to go back to when we emerge from this crisis,” he added.
And until such help arrives, limited company directors will be feeling the pressure to find ways to keep some money coming in, and the government should be stepping in to help alleviate some of it, said Chaplin.
“Shouldn’t the captain of the ship also be given some help to keep the ship afloat and on course, so that those ‘retained employees’ actually have a ship to return to when normal life resumes?
“This government purports to be the party of small business, so it should be living up to that claim in the midst of this economic and health crisis and helping the very people who create and run those businesses, not penalising them.”
Businesses on the brink
In a statement to Computer Weekly, HM Treasury said any limited company directors that are facing coronavirus-related financial difficulties do have a range of options open to them, including the CJRS scheme.
“Salaried company directors are eligible to be furloughed and receive support through the Coronavirus Job Retention Scheme,” a spokesperson said. “This includes salaried individuals who are directors of their own company.
“Those who do not qualify will be able to access a range of other support – including income tax deferrals, £1bn more support for renters, access to three-month mortgage holidays and the various business support schemes we have introduced to protect businesses during this time.”
Even so, the general consensus among trade bodies, including the Association of Independent Professionals and the Self-Employed (IPSE), and contracting stakeholders such as Chaplin, is that much more support is needed to make up the shortfall in dividend income that limited directors will see during this time.
IPSE is actively lobbying for more financial aid to be offered to limited company directors, because they do not qualify for help through the government’s Self-Employment Income Support Scheme, because they are – technically – employees of their own companies.
For example, IPSE’s director of policy, Andy Chamberlain, made the case to the Treasury Select Committee on 21 April for the CJRS to be extended to include dividend payments to limited company directors.
Alasdair Hutchinson, policy development manager at IPSE, said that, as things currently stand, the limited company contractors that make up the association’s membership are feeling “utterly despondent” and “completely left behind” by the lack of government support.
“Our research shows that 69% of limited company contractors do not feel government measures are enough to sustain them,” said Hutchinson.
“The chancellor’s Self-Employment Income Support Scheme was very generous to the people it covered, but there were several holes in the package – particularly limited companies and people who have only recently become self-employed.”
There has been speculation, in the meantime, that small business minister Paul Scully is working on a support package that would be more closely tailored to the needs of limited company directors, based on a report in the Financial Times in mid-April.
As such, it would ensure there are measures in place to support limited company directors who pay themselves in dividends, but there are – as outlined in the article – technical and taxation issues that are complicating the delivery of such a scheme.
Read more about IT contractors and coronavirus
- IT contractors who provide services through their own limited companies will not be able to access government scheme to support self-employed through coronavirus outbreak.
- While many firms have seized on the government’s decision to delay the roll-out of the IR35 reforms to rethink their approach, others are sticking by their decision to ban limited company IT contractors from their workforce.
- IT contractors, already facing life-changing tax bills as a result of the government’s controversial loan charge policy, are now facing a double hit of payment demands relating to their past involvement in loan remuneration schemes.
One stalling point is the fact that it is difficult to distinguish between dividends paid out to individuals as a form of salary, and those generated through property investments and shares.
To sidestep this issue, Hutchinson said the government could consider rolling out tax breaks or grants to limited company contractors as an alternative means of support.
“We [IPSE] suggest the small business minister considers schemes based on either a temporary tax break or targeted grants for limited company contractors in need,” he said. “Either way, we urge him and the chancellor to act quickly to extend their support package to this vital and varied section of the workforce.”
Ian Cass, managing director of the Forum of Private Business (FSB), whose members include businesses with between one and 50 employees, wrote to Scully earlier this month with concerns about how limited company directors are being left behind by the government’s coronavirus support measures.
This will, he wrote, impede the ability of these firms to “bounce back” once the pandemic ends, leaving many of them with no choice but to shut up shop or sell up.
“Owner-operator directors who run their own limited company often work long hours, take the most financial risk, bailed themselves out after the 2008 crash and, as a result, have little reserves as a shock absorber to fall back on, and they have been working on smaller margins since then,” said Cass in the letter to Scully, seen by Computer Weekly.
“They will have to rebuild their personal life and finances when this crisis passes and restart their business from scratch, and my big concern that is that the longer this lockdown goes on, with no support for them, the older ones will shut the business down.
“If that were to happen, the UK economy would become less competitive and diverse, but also poorer too, and all because these companies missed out on government support for understandable but avoidable reasons.”
As a possible solution, Cass put forward a proposal for the Treasury to introduce grants that would cover 80% of the average monthly income of a limited company director, based on their salary and income dividends, up to £2,500 a month for the duration of the lockdown.
The amount they would receive would be based on the contents of their last three annual tax returns, he said.
“HMRC should be able to track this, as most will be paying VAT and should have their own digital online account, and I would imagine national insurance details could also be used.”
Computer Weekly understands that Scully has directly responded to the FPB’s letter, but, at the time of writing, no additional support for limited company directors has been announced.
Scully’s remit as small business minister falls under the Department for Business, Energy and Industrial Strategy (BEIS), which Computer Weekly contacted to see if there is any additional support in the pipeline, and received the following statement in response.
The department said: “We regularly engage with businesses of all types to understand how best we can support them through this turbulent period.”
In the meantime, it remains a case of wait and see for limited company IT directors and IT contractors about the toll the pandemic will take on their businesses if the government continues to ignore the calls of IPSE, the FPB and others for more support for this sub-section of UK businesses.