Whilst the Chancellor Rishi Sunak has announced unprecedented financial support for employees and the self-employed, there remains a noticeable gap in the coronavirus support measures. Entrepreneurs, contractors and freelancers who have decided to operate their business as a company rather than individually are feeling the economic hardship of the current crisis as keenly as others but fall between the cracks of the current policies. Is it a deliberate omission or the product of problem solving in an overly complex tax system?
On the surface, it might reasonably be suggested that the individual financial issues facing directors of companies are not a national priority at the moment. The assumption being that those who operate through company structures will have sufficient means to support themselves through the current crisis. The picture from a statistical perspective however appears to paint a different story.
According to national statistics, ‘Business Population Estimates for the UK and the Regions 2019’, over 96 per cent of the 5.9 million private businesses in the UK employ less than 10 members of staff, with an average turnover of £160,000. Similarly, Companies House figures show there were just over 4 million private limited companies in the UK this time last year.
At the centre of this statistical venn diagram are a considerable pool of company directors who would not consider themselves wealthy. Even assuming an above average net profit percentage of 20 per cent of turnover, the average taxable profits of such companies would be in the region of £32,000. That’s noticeably lower than the £50,000 profit threshold set by the Chancellor for the self-employed support package.
As it stands, company directors have been informed that they can utilise the same support package as employees. What that doesn’t take into account however is that many directors will withdraw their profits from a company in a different form to employees. Rather than drawing a significant salary, they will pay themselves a combination of a small salary (typically around £719 a month) and a dividend of their profits at the end of the year when these are known. Any furlough income support is likely to be limited to £575 a month.
In terms of the overall tax paid, there are some advantages between this approach and the amount of tax paid by a self-employed individual but it is often not substantial, as the company pays corporation tax at 19 per cent in addition to the individual income tax subsequently incurred by the company director. Indeed, for a small company, any such advantage can often be outweighed by the additional professional costs involved in operating a corporate structure.
How then could the Chancellor provide support for such individuals? The difficulty is trying to ensure fairness as support based on what is withdrawn from a company could unfairly penalise those who have quite legitimately sought to reinvest as much as they can back into their business.
One solution may be to look at the profits of the company and cap support in a similar way to a self-employed individual. Rather than look at the actual income paid, entitlement to any support could be determined by reference to a ‘deemed’ director’s income based, say, on their entitlement to the company’s profits through ordinary shares held. There are no doubt flaws in that approach but many company directors will be hoping for a creative solution of some kind that provides them with an equivalent safety net to their employees.