Last week the Chancellor announced plans to provide support to 95% of self-employed taxpayers, but where does this leave entrepreneurs who operate their business through a limited company?
Since the government confirmed plans to provide grants of up to £2,500 per month for furloughed employees, there has been some confusion as to what can be claimed, if anything at all, for company directors.
Within the latest HMRC guidance notes regarding the support available for the self-employed, it has been confirmed that:
“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.”
While it is reassuring that directors can benefit from the Job Retention Scheme, this will provide little comfort to most owner managed businesses. A lot of companies are owned and operated by their directors, who typically extract profits through a small salary topped up by dividend.
It means that those affected can only claim against a very small proportion of their income, and will effectively face a huge pay cut.
Company directors will undoubtedly be working to some extent to save their businesses – it is unclear if this means that they cannot claim at all in relation to their salary.
The Job Retention Scheme only applies to those who were on the company payroll as of 28 February 2020. Those directors who do not pay themselves a salary, but extract all of their remuneration in the form of dividends will not be entitled to claim anything in relation to their own income.
Many directors do not have an employment contract, however claiming the grant could create an implied employment contract, which could have a knock-on effect for employer pensions and auto-enrolment.
Owner-directors can apply for a business interruption loan, but we are aware that some lenders are seeking personal guarantees on top of the government’s guarantee, which could see their personal assets at risk as well as their businesses.
Business lobby groups are seeking urgent clarification from the Treasury on this, and at Crowe we are going to make similar representations. It seems particularly unfair that entrepreneurs who have taken financial risks to establish businesses, create jobs and pay their fair share of taxes will now have such little support in their time of need.
Finally, the Chancellor remarked about potentially levelling up the tax and NIC paid by employees and the self-employed in the future. This has been rumoured for many years, so it will be interesting to see how this develops and how the government seeks to recoup the cost of COVID-19 more generally.
Our insight Tax warnings for company directors looks at the important points to consider.
If you are a company director and would like to discuss your individual requirements please contact your usual Crowe contact.
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