Rises in corporation tax might change the way business owners structure their future earnings but how might the existing, and now extended, Covid financial support schemes influence those setting up brand new firms?
Despite the existence of the Self-Employed Income Support Scheme, the Institute for Fiscal Studies have found that around 1.8m self-employed people and around 700,000 company owner/managers are not eligible for it.
Why is this?
There are over 5m self-employed people, some with low earnings right through to those with very high levels.
The Supreme Court ruling in the Uber case also highlighted that many “workers” who are subject to many of the same terms as employees but with no employment rights could also be included.
The Covid-19 pandemic meant a realisation for some that self-employed earnings are not the same as dividend income.
The headlines tell the story of a self-employed person asking where their support is - where in reality, they have set up a limited company and are extracting profits as dividends.
Although it might be obvious to financial professionals, there are clearly a large number of people who feel like the door to any kind of dividend support scheme has been firmly shut in their face by the government and little has been done (in their eyes) to communicate why it is not willing to explore the option.
The difficulty the Treasury has is that they cannot offer support to every person receiving dividends – despite the cries of “I pay my taxes” and “look at my tax returns” - because there is no simple way to tell whether the dividends are payable to a company director, a silent investor, or even a shareholder of a public company.
To interrogate the returns of millions of people would no doubt involve an enormous amount of extra time and money and possibly invariably be wrong.
What might change?
Post financial crisis, a wave of people became self-employed through necessity rather than choice. Setting yourself up to work via your own limited company was once seen as the lowest risk strategy that came with a tax advantage – and many other companies (pre IR35) were happy to engage the services of people on this basis as they would not need to pay employee costs (notably employer NI). Some feel that they were forced into setting themselves up this way to get work.
Consequently, the limited company structure is now used by a huge number of SMEs. Government figures tell that at the start of 2020, 946,000 limited companies had no employees.
It is relatively easy to set up a limited company and it is not uncommon for somebody not to take any professional advice on the best structure for them at outset, so, until faced with a shock or crisis event, many have little understanding of the risks.
There is also a lack of understanding of the alternatives available - for example partnerships and in particular limited liability partnerships (LLPs).