Despite what has been billed a “very generous scheme”, the measures announced by Chancellor Rishi Sunak to support the self-employed have dealt a significant blow to small limited companies, who are excluded from support.
Directors of small limited companies who pay themselves a low salary and top up their income with dividends will not technically qualify as self-employed, and therefore unlikely to receive a payment from the Coronavirus Job Retention Scheme.
According to the Treasury, these companies are ineligible because it is impossible to know whether the dividends arise from their work or from investments. As such, the government is reluctant to subsidise those with extensive earnings.
According to Mr Sunak, the government will cover 80 per cent of the earnings of those who are already self-employed and have a self-assessment tax return for 2019, and only those with trading profits up to £50,000 per year. The scheme is expected to benefit 95 per cent of those who are majority self-employed
There were around 5.6 million ‘micro-businesses’ in the UK in 2019 accounting 96% of all businesses, according to the Parliamentary Business Statistics. Of this, around 2 million were small limited companies. These companies, which are for the majority, owner-managed, are classified as such if they have a turnover of no more than £632,000 with no less than 10 employees.
A government briefing accompanying Mr Sunak’s announcement acknowledges that the scheme does not apply to contractors trading via small limited companies, stating: “Those who pay themselves a salary and dividends through their own company are not covered by the scheme but will be covered for their salary by the Coronavirus Job Retention Scheme if they are operating PAYE schemes.”
Thousands of self-employees have found themselves with no work or pay after the government announced a range of restrictions to control the spread of the coronavirus.
As well as this, it also transpires that while the government has offered rate relief to businesses, if a small-limited company operates from home or ‘hot-desks’ they will be unable to claim a grant because they are ineligible for small business rate relief without a premises. Nor will they be able to claim the 80% furlough employment relief unless they are considering making themselves redundant.
Reacting to the Chancellor’s announcement, CEO of Nextfin Sacha Bright said: “Sunak’s announcement has abandoned a significant section of the labour market and portrays a fundamental lack of understanding of the operational running of micro-companies.”
Nextfin aggregates equity and debt crowdfunding investment opportunities from leading crowdfunding platforms for investors and refers to businesses to raise finance, but has been offering advice to businesses on how to stay afloat during the coronavirus pandemic.
He added: “The reason entrepreneurs/freelancers establish Limited Companies (Ltd), and pay themselves a minimum wage with the rest comprising dividends is because it is the most tax-efficient way.”
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