Britain’s Conservative party has long prided itself on being the champion of business and protector of entrepreneurs. In last year’s manifesto, Boris Johnson reaffirmed this commitment when he described small businesses, family firms and the self-employed as among those that “create the wealth of the nation”. Those words now ring hollow for an estimated 3m small business people who have been largely left to fend for themselves through the coronavirus crisis.
The government has committed significant amounts of money to businesses to help them survive the crisis. Emergency loans, business rate relief and the self-employment income support scheme (SEISS), under which sole traders can claim up to £2,500 per month, have all been offered. Yet chancellor Rishi Sunak has consistently ignored the pleas for support from those who have been excluded — specifically, the recently self-employed, freelancers paid through the payroll system and those who are directors of limited companies. He again turned a blind eye at last week’s spending review.
Campaign groups claim the government has deliberately chosen not to engage with them. Instead, they fear that ministers have unfairly portrayed them as undeserving of state support and, by default, implied that many are tax dodgers. Officials have countered that the government has been unable to support certain self-employed people when it designed SEISS because of the difficulty in getting the data needed to target them with funds. Concerns about the potential for fraud have also been raised. Differentiating between those directors who receive dividend income from passive investments rather than in lieu of salary has been another challenge.
Mr Sunak should, at the very least, offer these businesses a fair hearing. Deliberate or not, it is wrong to insinuate that everyone who incorporates their business as a limited company is a tax dodger. It is true that the rate of tax on dividends is lower than that on wages and salaries — but this is a longstanding government policy designed to encourage investment, and within the gift of government to change. Entrepreneurs choose to incorporate limited liability companies for the obvious reason — to limit their liabilities and protect their personal assets if their business goes under.
There is also more at stake than the 2m small limited companies. These businesses support as many as 7.5m jobs. There are other consequences to consider, including the longer-term costs of the economy scarring. Small businesses will be a vital factor driving economic growth.
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A proposal now on the table from a group of professional bodies including the Federation of Small Businesses promises if not to eliminate potential fraud, then at least to limit it. Under the scheme, which mirrors SEISS, directors would be able to claim 80 per cent of average trading profits before dividends were taken — figures that could be evidenced via tax records, and verified by an accountant. Capped at £2,500 per month, the taxable grants would be paid into the company, not to individuals — helping to minimise any fraud risk. Property and investment companies would not be eligible.
Estimates suggest this scheme would cost £2bn-£6bn a quarter, putting it on a par with the SEISS scheme. These are not insignificant numbers for a government facing wartime-sized debt to pay for the Covid crisis. Nevertheless, Mr Sunak should weigh the cost of doing something now against the much greater longer-term cost, financial and political, of doing nothing.