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The measures that the Chancellor of the Exchequer announced to protect the incomes of the vast majority of the population during the coronavirus pandemic are to be applauded. The government acted swiftly, decisively, and – for the most part – fairly.
However, two groups of people were left high and dry: self-employed people who earn more than £50,000, and entrepreneurs and small business owners who pay themselves a low salary and top up with dividends.
Small businesses and the self-employed deserve a fair deal. They are the engine of the UK economy. The UKs 5.8 million small businesses make up 99.3% of all private sector businesses and contribute a staggering amount to the UK’s local and national economy. Small businesses account for around half of the turnover of the entire private sector and employ more than 16 million people – 60% of total UK employment.
So how is it fair that a self-employed person or small business owner whose average profits are £50,001 receives nothing in support, whereas a furloughed employee on a salary of £50,001 continues to receive the £2,500 cap under the Coronavirus Job Protection Scheme (CJPS)? This needs to be revisited: the Chancellor should remove the profits cap for the self-employed. They would still subject to the £2,500 cap on earnings, meaning the system would treat employees and the self-employed the same.
Secondly, entrepreneurs and SME business owners who pay themselves a low salary and top up with dividends also appear to be hamstrung: where they are also directors of their companies, it seems impossible for them to claim under the CJPS, since to furlough directors would imply that there was nobody running the company and that would be a breach of the Companies Act 2006.
This is no fancy scheme designed to take advantage of a tax loophole, but a clearly set out and long-accepted tax planning strategy. It also enables entrepreneurs to invest in their business. We’re not talking about fat cat captains of industry that take multi-million pound bonuses that have no benefit to the rest of us, we’re talking about hard-working entrepreneurs who are putting money back into their businesses and fuelling the growth of the economy.
The Chancellor justified this move by citing the difficulties in tax treatment for people with differing employment, self-employed, or business owner status. Yes, the tax system is complex. But entrepreneurs are simply following the law by paying themselves a low salary and dividend. This crisis is not the time to penalise self-employed. The government needs to make clear whether directors may also be placed on furlough without breaching the law.
Another problem is that payments to self-employed people will not be available until June. While it’s appreciated that these are no ordinary times, and that HMRC needs to build a new system for this as well as for the CJPS, a wait of at least eight weeks will see many businesses go to the wall. Small firms are frequently the victims of late payment – and the pandemic means this will be exacerbated over the immediate weeks.
Many business owners will end up on universal credit as a result – but because the help for the self-employed was announced days after that of support for employees, they’ll find themselves at the back of the queue. And with almost one million people in the UK applying for universal credit since the lockdown, don’t expect them to get any support quickly.
The Conservative Party often boasts it’s the party of small business. It has long celebrated and advocated entrepreneurship. Margaret Thatcher, was, famously, the daughter of a small businessman. So why now penalise those who it has sought to encourage through a crisis that is no fault of their own?
The numbers of people who are self-employed has risen sharply since the last financial crash of 2008, when many employees who lost their jobs took the bull by the horns and set up themselves. It took these people courage to start up their own business at a time of extreme hardship. Let’s not let coronavirus take their livelihoods away again. This is a time to treat them fairly.
David B Horne is a chartered accountant and founder of Add Then Multiply
