Everyone at Crunch has been focused on helping the thousands of clients and Crunch Chorus members who have been able to access the government schemes, with advice, guides and articles on all the COVID-19 support available.
Whilst we applaud the government for moving so quickly to help many millions of people, now both of the main schemes are available, we feel it’s important to highlight the plight of the thousands of hard-working entrepreneurs, small business owners and self-employed people who cannot access any of the government grants, or those whose support is limited to just a fraction of their usual income.
We have sent the following letter to the Chancellor of the Exchequer:
The Rt. Hon Rishi Sunak, MP
Chancellor of the Exchequer
House of Commons
By email firstname.lastname@example.org
Government grant support for limited company directors and the self-employed throughout the Coronavirus (COVID-19) pandemic
E-Crunch Ltd (‘Crunch’) provides fully online accountancy and tax services to over 11,000 freelancers, contractors, and small businesses. We also represent a community of over 50,000 small business owners who subscribe to our online services.
Over the last 10 weeks, we have heard from hundreds of our clients who are experiencing significant financial hardship as a result of the government’s lockdown. While the vast majority remain supportive of the government’s action to date, and many have taken up the government support available, a significant proportion cannot access any meaningful financial support by way of a direct government grant to help them through the Coronavirus crisis. The situation affects:
- Directors of limited companies paying themselves only a small amount of salary or no salary at all
- Self-employed people who are ineligible for support because their earnings are slightly above the government’s threshold for entitlement or because they have only recently set up their businesses.
The following paragraphs provide some analysis and feedback from our clients which we believe justifies the widening of the government’s grant support, and suggestions on how this could be achieved in practice.
Government grant support for limited company directors
As you are aware, directors of small limited companies, usually a sole director and shareholder, pay Corporation Tax on their annual company profits, and Income Tax based on the amount of salary and dividends taken from the company.
In the 2019/20 tax year, 93% of Crunch clients who were directors of limited companies decided to pay themselves a low annual salary of £8,632 or less. While many of our clients have accumulated profits in the company to help them through the Coronavirus crisis, around 90% have less than £50,000 of such profit available. In the 2019/20 tax year, 86% of our clients who were directors paid themselves less than £42,000 in dividends from their limited companies.
These are powerful statistics and indicate that the overwhelming majority of our clients operating limited companies do not have the financial resilience to continue through the Coronavirus crisis. These individuals are vital to the future prosperity of the UK and to help the economy recover from the inevitable recession we are facing. They require additional support as a matter of urgency to help their limited companies survive.
Our analysis shows the government grant support available to these hard-working entrepreneurs through the Coronavirus Job Retention Scheme (CJRS) is significantly less than that being offered to permanent employees. It is also less than the amount available to those who are self-employed and eligible for the Self-Employed Income Support Scheme (SEISS). This is despite the amount of tax paid by individuals being broadly the same.
Based on an annual employee salary of £50,000, and available business profit available to distribute of the same amount, we’ve calculated the following amount of tax paid for the 2019/20 tax year and the monthly salary support available from the government’s schemes. We have excluded the support available for minimum pension contributions and National Insurance payments from the analysis.
|Employment status in 2019/20 tax year
||Monthly grant support from the government
||Source of grant support
|Limited company director paid a salary of £8,632 in 2019/20 tax year
I am sure you will agree the value of support available to directors of limited companies is significantly reduced when compared to employees and the self-employed earning a similar amount and paying similar amounts of tax. We are sure this is an unintended consequence of the rules surrounding the CJRS scheme for directors taking a low salary from their company which the government should seek to rectify.
We are therefore asking the government to find ways to provide further grant support to directors of limited companies to include the individual’s income from dividends paid by their company. The government should allow dividends taken from a directors’ own limited company to be included in the calculation of grant available towards the same grant of £2,500 per month available to an employee or self-employed individual. The further CJRS grant should be made available and backdated to 1st March 2020, mirroring the support available for those in direct employment.
Crunch is already helping hundreds of our clients navigate HMRC’s CJRS portal and we believe the modifications needed to the system to accommodate this change would be minimal. The government could use a combination of Self Assessment tax returns made by directors and additional certification of earnings by an accountant where needed. This would ensure the extension of entitlement was not used inappropriately.
Government grant support for the self-employed
The government’s rules surrounding the Self-Employed Income Support Scheme (SEISS) prevent any self-employed individual claiming where income from self-employment exceeds the average of £50,000 over a three year period. This results in an obvious ‘cliff-edge’ to entitlement and does not follow the principles of CJRS where support is capped at £2,500 regardless of the total amount of income from employment.
We believe the grant support available under SEISS should be extended to any individual regardless of the amount of earnings from self-employment while retaining the cap of £2,500 per month. The rules surrounding the majority of income being secured from self-employment in order the access the SEISS would not need to be changed. We believe the adjustments needed to HMRC’s online portal would be minimal and entitlement should be backdated to 1st March 2020, ensuring arrangements are consistent with the CJRS.
The SEISS should also be extended to include those businesses which began trading in the 2019/20 tax year. With a further extension of the furlough rules likely, the government has an opportunity to consider the earnings of the self-employed for the 2019/20 tax year by encouraging the submission of Self Assessment tax returns (for the 2019/20 tax year) immediately. HMRC would then have up-to-date information to enable assessment of SEISS claims for individuals who commenced self-employment in the 2019/20 tax year.
While all of the measures introduced by the government to support businesses through the Coronavirus crisis are welcome, we believe that it’s vital that you provide fair and equivalent support to directors of small limited companies and the self-employed when compared to those in employment.
Most entrepreneurs who have set up their own business have none of the benefits or safety net of employment. The marginally lower tax paid by these individuals when compared to employed people is, in our view, a fair trade-off. The recovery of the economy will, as it has in past recessions, rely heavily on entrepreneurs setting up businesses to assist with the economic recovery of the nation, underpinning the need to provide more equitable support in this area.
As highlighted above, the government can take further steps to ensure this through the package of measures it has available to help these individuals by extending the scope of CJRS to include earnings from dividends, and SEISS to extend the grant to those earning above the threshold amount and those who started a business in the last tax year.
We look forward to hearing from you.
We have copied this letter to my constituency MP, Caroline Lucas.
CEO and Founder of E-Crunch Ltd
Rt Hon Caroline Lucas MP