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Government’s Coronavirus Support For Self-Employed Excludes Small Limited Companies

Posted 10 months ago

Government’s Coronavirus Support For Self-Employed Excludes Small Limited Companies
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Despite what Chancellor Rishi Sunak has heralded as a “very generous scheme” for the self-employed, this latest government stimulus package appears to exclude an integral part of the self-employed labour market: ‘micro-companies’. 

According to Mr Sunak, the government will cover 80% 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% of those who are majority self-employed. 

According to the Parliamentary Business Statistics, there were 5.6 million micro-businesses in the UK in 2019, accounting for 96% of all businesses. These companies, better known as ‘micro-entities’, are effectively owner-managed. Many are freelancers or what you might call “self-employed”. Most banks class them as self-employed for the purpose of a mortgage application where they own more than 25% of the company. To be classed as a micro-business the annual turnover must not be more than £632,000 and must have no more than 10 employees. 

Yet, despite a raft of measures designed to aid struggling businesses, very little to none will apply to micro-businesses:

  1. While the government has offered rate relief to businesses, if a micro-business operates from home or ‘hot-desks’ they cannot claim a grant because they are not eligible for small business rate relief.
  2. They do not benefit from any of the rate relief the government has recently announced if they don’t have premises. 
  3. If they do not qualify for a banks’ lending criteria then they will not qualify for a Coronavirus Business Interruption Loan (CBIL) 
  4. Directors of these micro-businesses cannot claim the 80% self-employment relief; nor the 80% furlough employment relief unless they were considering making themselves redundant and then who would then run the business? They are often just one-man-bands. 

Today’s announcement has seemingly abandoned a significant section of the labour market and portrays a fundamental lack of understanding of the operational running of micro-companies. 

The majority of entrepreneurs/freelancers establish Limited Companies (Ltd), paying themselves a minimum wage with the rest comprising dividends. One of the differences between being paid by an employer and running your own business is having to sort out how your limited company pays you. This is as a result of accountants advising freelancers and the self-employed as this is the most tax-efficient way to pay themselves; by taking a combination of salary and dividends from your limited company. 

CBILS loans are designed for established, profitable businesses. That's if it's based on the original Enterprise Financial Guarantee (EFG) scheme which guarantees up to 75% of the loan if a company doesn't have sufficient assets to secure a loan. Most banks also require a personal guarantee and first charge over the business. 

A personal guarantee means that the bank can demand full payment from the guarantor in the event of any default.

Banks are profit-making businesses, and by their nature as such, are risk-averse and are reluctant to lend if there is any possibility they will not get their money back.

In essence, personal guarantees shift the risk from the bank and the government on to the business owner themselves. 

If a personal guarantee is signed and a first charge applied it is done so on the understanding that, should the business fail, the bank will seize and sell all the assets of the business - and even go after the owner’s assets which will include their home, savings and anything of value. If doing this does not then satisfy the debt, the bank will then ask the government to pay the 80% that is left on the guarantee. If the bank suspects they will lose anything which is highly likely in the current environment they will not lend. The CBIL loan will not support any early-stage business or a business that was struggling before the Virus if it is based on the EFG scheme.

Recently, CEO of Nextfin, Sacha Bright, authored an article before the outbreak of Coronavirus on the government’s cuts to entrepreneurs' relief. The risks of personal guarantees are a prime example of why this was an error. Business owners are forced to take many risks to simply grow their enterprise. They can employ thousands of people, and as such need to be encouraged and rewarded, not demoralised. 

Author: Sacha Bright & Oliver Murphy

Disclaimer

To the best of our knowledge, the information we have provided is correct at the time of publishing. Sacha Bright is not a solicitor or accountant and we recommend that you seek professional advice on any topic discussed. Nextfin is not liable for any damages arising from the use of or inability to use this site or any material contained in it, or from any action taken as a result of using the site. 

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