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In a recent article for The London Economic, CEO of Nextfin Sacha Bright was approached to comment on the measures Chancellor Rishi Sunak had implemented and how they fell way short in protecting the owners of small limited companies, who did not qualify for government-backed income support.
According to the Treasury, these companies are ineligible because it is allegedly impossible to know whether the dividends arise from their work or from passive investments. As such, the government is reluctant to subsidise those with extensive earnings.
Clearly, Rishi Sunak appears to be more concerned about subsidising small limited companies who don’t really need support, so has neglected the majority of those who do. As well as this, there are erroneous rumours that small limited companies do not pay National Insurance, and as such should not be entitled to government relief, as this reader’s comment demonstrates:
“So Sacha doesn’t want to pay any significant National Insurance by taking dividends instead, but when the s*** hits the fan, he wants to be bailed out by the government. As a business advisor, he must have realised the effect of adopting the dividend route for years unless he is bloody stupid. Dividends are supposed to represent a return on investment of capital, not a 50,000% return on a £1 share. Yes “everyone does it” but governments have been trying to do something about it for years (original IR35 legislation came into force 20 years ago under Labour). Sorry, no sympathy.- James.
This response is misguided in the respect that some entrepreneurs often contribute far more in taxation than someone on PAYE.
Dividends are drawn from the profits of a business and owner-managers pay income tax on those profits. While it is correct that there are no National Insurance contributions paid on dividends, Sacha Bright’s business, like many other micro-businesses in the UK, employs 5 staff, all of which he pays 13.8% on top of their wages in National Insurance contributions.
Owner-managers also pay VAT, Corporation Tax, Income Tax and sometimes vast amounts in business rates, thus generating millions in NI contributions and tax revenues. As such, these entrepreneurs make a huge contribution to the economy through job creation and taxation, despite what the comment has alleged.
The reason entrepreneurs establish Limited Companies (Ltd), and pay themselves a minimum wage with the rest comprising dividends is because they are advised by their accountants that this is the most tax-efficient way to draw on their earnings. So, in essence, they are being punished despite not being at fault.
With around 2 million small limited companies operating in the UK, they undoubtedly create employment. Yet, in doing so, entrepreneurs take huge risks such as, but not limited to, re-mortgaging their home.
The crux of the issue here is simple: seeing that owner-managers have always contributed taxation via employer’s NI contributions, not to mention the raft of other taxes they’re liable for, there surely has to be some incentive for them to own their own business as well as collect the taxation from their employees free of charge?
Millions of employees having been furloughed will no longer have jobs to return to if the government does not take the necessary steps to protect owner-managers and early state businesses. This will have an effect that transcends business. If individuals are unable to work, the cost of unemployment rises, not to mention the negative impacts on their mental health which will put the NHS under added pressure.
The reader also refers to IR35. Those who pay taxes through this have equally not been given the support they need, this includes building contractors on the CIS scheme that are owner-managers.
The lack of support available will undoubtedly have significant ramifications. Individuals with young families have gone from operating a fully functional small business to having all operations and transactions cease.
The negative response from this reader highlights the invalidity of the common misconception that somehow all business owners are somehow wealthy and don’t pay tax. While this may be true in some cases, the fact of the matter is that many owner-operators struggle to make ends meet. And while they have been given support in relation to the welfare of their staff, the government has made no provision to help protect them.
A solution to this, as outlined by Stephen Hazel-Smith and Sacha Bright, would be for the government to pay a sum of £2,000 per month for three months thus enabling owner-managers to survive. And for those few who are financially stable, provide them with the option to donate said sum to charity or NHS workers as a bonus.
As we enter unprecedented times, it is important to remain apolitical, charitable and treat everyone equally.
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.
Tagged: News Entrepreneurs
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