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Coronavirus support –is it sowing both financial and social divisions?

Author

Andy Wood

Andy is a practical, creative tax adviser who assists a variety of clients in achieving their personal and commercial objectives in the most tax efficient manner.

Coronavirus support –is it sowing both financial and social divisions?

 

In truth, I’ve been a little surprised by the controversy that has been generated by the financial measures introduced by the Government in response to the Coronavirus.

Clearly, there are those who feel they have fallen between the cracks. I wrote an article a month ago on how the personal service company was one such element of our economy which had missed out. In addition, my colleague Thomas Slipanczewski wrote a superb piece regarding umbrella companies and agency workers.

This article is a response to some of the comments I have seen on social media. It is about some of the glee and ‘serves you rights’ I have seen directed at owner managed business owners who have had the temerity to complain they have been overlooked when it comes to Government support. Frankly, some of this has been from those who should know better.

 

Frankly, some of this has been from those who should know better.

 

Take me for instance. If that isn’t too self indulgent.

I have run my own limited company for many years since leaving practice. I now run the business with my wife, Angela, and we are both director shareholders. We now employ 14 staff.

Fortunately, our business (feverishly touching wood!) has not been significantly impacted by Coronavirus from a financial point of view. As such, all our workers remain working full hours and for full pay, albeit from home.

However, what if our work had dried up? If we were a practice that specialised in, say, providing accounting services to leisure and retail businesses? What if we were a leisure or retail business? How might things look?

 

However, this is far from being a ‘tax thing’.

 

Well, like most owner managers, we do not take a salary from the business of any note. However, this is far from being a ‘tax thing’.

This is simply that we do not know how much we should pay ourselves other than, perhaps at best, on a quarterly basis. So, from month to month, we don’t really take anything from the business. Indeed, from a legal standpoint, we can only draw distributable reserves which, in layman’s terms, means any accumulated profit.

Our staff and suppliers are all paid ahead of us.

Further, those dividends I spoke about are also after corporation tax as, unlike the salaries we pay, these are not deducted from the profits of the business when calculating the tax position.

 

Dividends, of course, are not subject to National Insurance Contributions (NICs) and that is a tax saving. However, it is not worth writing home about.

 

Dividends, of course, are not subject to National Insurance Contributions (NICs) and that is a tax saving. However, it is not worth writing home about.

If, in a parallel universe, I was running ETC bar and grill, and my business had been mothballed and I wanted to put myself on the subs-bench through furlough, then would this be possible?

In principle, yes.

However, I would only be able to obtain furlough payments in respect of the salary I had paid myself. My dividends would be excluded.

Further, I would also have to do no work for the business. It has now been confirmed that I can still continue to fulfil my statutory duties. This won’t just include the filing of statutory books – but will also include core principles such as promoting the business.

This last point does create some competing forces. For furlough purposes, I cannot enter in to revenue generating activity, but I am allowed to promote the Company. If a hot new lead comes in then at what time do I need to come off the subs bench to slot in the last minute winner?

Things are messy.

I do not see any philosophical argument as to why the income that I… receive is less worthy of support than that of employees or those self-employed persons…

But I digress.

As such, under the existing furlough rules, I won’t be getting a great deal. But I don’t see why not.

I do not see any philosophical argument as to why the income that I, and other OMB owners, receive is less worthy of support than that of employees or those self-employed persons added through the Self Employment Income Support Scheme.

The distinction between earned income and dividends is entirely arbitrary.

All of us who need support are worthy of support.

Let’s face it, the support on offer is the Government compensating us for the fact that the economy has been paused and many of us are staying at home or working in a reduced capacity. The benefits being paid are an income support scheme and I can see no reason why it should be limited to ‘earned income’.

It does not seem difficult to me to come up with a system which provides support for a business owner based on their dividends. This could be dividends reported on their tax returns in 2018/19 or an average as is the case for the self-employed scheme.

Of course, I am aware that there are disguised employees who have essentially left their jobs on a Friday and reappeared on a Monday working through a Limited Company. These are the types of company which were firmly in the sights of IR35 when it was introduced.

Existing rules should be used to counter PSC’s who are disguised employees and not be used as an excuse to deny support in these times. The argument re IR35 is for another day.

People have also pointed to how one distinguishes between dividends from own company and those from say investments. Quite clearly, the tax return will show that the taxpayer is an employee of the relevant company as well – so, in time, one can marry the dividend with the fact that they are a director as well. The furlough scheme already appears to have elements of process now, check later so this should not be a terminal objection.

I simply do not understand the financial dividing lines being created here. Even if these are inadvertent, the risk is that they are also creating social dividing lines too. You can see it already.

But, when the bar man delivers the tab for this support, then there will be an expectation that we ‘are all in the together’.

As all will be expected to contribute their fair share to pay this back, then support should be available regardless of the category of income on which they rely.

 

If you have any queries about this article, or tax matters in general, then please do not hesitate to get in touch.

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