COVID-19 – An Analysis
The Governments response to the COVID-19 has been swift and comprehensive, the level of support given to business was also required since the guidance has been that employees where possible should work from home.
Taxes, grants, employees and self-employed
Support has been given to enable the delay of vat payments, payments for self-assessment has also been delayed and then tax burden has been removed or at least delayed helping them deal with the current crisis. This will almost certainly help businesses continue to trade and come out of the lockdown stronger. We can only applaud the Chancellor for these actions.
Thought as been given to employees in that employees that would have been made redundant have now been ‘furloughed’ and assistance given to companies to pay 80% of the wages up to £2500 per month. This will help to keep a lot of staff keep their jobs and avoid being made redundant.
Self-employed have been given help with taxable cash grants of up to £2500 per month or 80% of their average profits for the next three months. This is averaged over three years or based on information that HMRC have available, so long as one years tax return as been submitted. It is good to see that the self employed are seen as important part of the UK economy and they are supported through the current unprecedented times we are living in.
There are also cash grants to help with business that pay businesses rates and holidays for businesses in the leisure and hospitality sectors. It is obvious that the government are doing all that they can to encourage business to continue to run during the crisis and to support them as much as possible. The support made available is unprecedented outside of wartime.
The issue with one person Limited Companies
However, there seems to be a large population of the UK economy that has been forgotten in the Chancellors announcement that is limited companies that are owned and operated by a single person. Around 44% of the companies in the UK are estimated to be owned and run by a single person – that is around 723,000 according to the Office of National Statistics in 2015. I am sure that the number will have increased since 2015.
Most of these companies would pay themselves by using a combination of Wages, Dividends and Expenses. The wages would normally be at the rate of the national insurance threshold so in the region of about £8800 per year and the rest of the money taken as dividends. Dividends are not subject to national insurance but if you are a company director you are obliged to complete a self- assessment tax return and the dividends will be taxed 7.5% up to the 20% tax band limit, 32.5% above that and 37.5% for higher rate tax payers.
If you look at the majority of owner managed small companies the tax when you factor in personal and corporation tax, they pay would almost be on a parity to that of a self employed personal or employed person. So, this begs the question why are the owners of such companies being excluded from the generous support that the government is giving self employed and employed people?
A lot of small business owners make sacrifices for their business, work longer hours than employees and expose themselves to credit risk by giving personal guarantees on loans taken by their company. It looks like the government does not want to give help for these businesses are they are ignorant of the contribution that these companies make to the UK economy.
The reason may be a political one, it was very telling that during the announcement of the help for the self employed the Chancellor made reference to the fact that it is fair that everyone who receives the same benefits as employees also pays the same tax. Obviously, the government will be increasing the tax on the self-employed once the Coronavirus Crisis is over and the increase in Class 4 NIC’s announced by former Chancellor will now be back on the table.
The Directors and owners of one man companies should be entitled to share in the benefits the same as self-employed and employed if they are paying largely the same amount of tax, but it seems as though they are not largely in a game of point scoring by the government because of the way dividends are currently being taxed.
It is the governments task to design a tax system that is fair to everyone and to ensure that everyone as the access to the same amount of help when they need it, now is not the time for scoring political points if doing that results in directors of small businesses having to go to work and putting themselves in danger during the current COVID-19 crisis.
As things stand the single personal director company can only get support for 80% of wages that they pay if they ‘furlough’ themselves during the current epidemic. The cost to the economy will more than likely be felt for the next few years if companies close and less business are formed because the reward for taking the chance and starting a business as been removed.
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By Alan Oakes