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HM Treasury Urged to Back Directors, Limit Job Losses

Posted on Nov. 24, 2020

The Association of Chartered Certified Accountants (ACCA) backed a call for the U.K. government to extend income support to company directors receiving dividends, as business groups warned that millions of jobs are under threat.

Gaps in coronavirus support schemes have left thousands of people without government support throughout months of economic disruption, the ACCA said November 23 in a joint release with the Federation of Small Businesses, the ForgottenLtd campaign, and tax specialist Rebecca Seeley Harris of Re Legal Consulting Ltd.

“Hundreds of thousands are suffering severe financial hardship and are at serious risk of closure. Up to 7.5 million of their employees are at risk of unemployment. We will see fewer businesses in existence, fewer jobs, less economic activity, and more unemployment — these roles cannot be furloughed, as neither they nor their employer will exist,” the groups said in a November 19 letter to Financial Secretary to the Treasury Jesse Norman.

The groups noted that ministers have indicated that owner-directors are excluded from the support schemes because “most take their earnings in the form of dividends.” HM Treasury cannot differentiate between dividends taken as earnings and dividends arising from passive investment, but has said it remains “open to any potential new solution,” they added.

A directors income support scheme based on the self-employment income support scheme could draw on details of trading profits and directors’ remuneration submitted by a business in its corporate tax return, the groups said. The remuneration would be added back to the trading profits to put the scheme “on an equal footing” with the self-employment scheme.

Separately, House of Commons Treasury Committee Chair Mel Stride wrote to Chancellor of the Exchequer Rishi Sunak November 23, urging him to explore initiatives similar to those recently introduced in Scotland and Northern Ireland to support taxpayers excluded from the U.K.-wide support schemes.

‘On the Brink of Collapse’

“After eight months without meaningful support, many businesses are on the brink of collapse or insolvency. Directors have found themselves having to take on debt or spend their life savings to stay afloat,” Georgina Broadhurst, co-founder of ForgottenLtd, said in the joint release.

Claire Bennison, head of ACCA UK, said she recognizes the challenges facing the government. “However, we have come together in partnership to find a workable solution to save jobs, and to level up the playing field. These local businesses are the ones who will play a significant part in our economic recovery and they deserve to be treated equally,” she said.

“For months now, company directors — who have dutifully paid corporation and dividend taxation for years — have been told by the Treasury and HM Revenue & Customs that helping them falls into their ‘too difficult’ box,” said Mike Cherry, national chair of the Federation of Small Businesses. “Our fresh proposal demonstrates that, in fact, putting together a support scheme for directors in line with what’s available to the self-employed is pretty straightforward — so much of the information needed is there in existing tax returns.”

Cherry had warned in May that “business owners who have contributed for years through corporation and dividend tax are now suffering purely because of the way they pay themselves.”

The directors income support grant would be available to executive directors with significant control over their companies, and eligibility would be self-certified or verified by an accountant, according to a policy outline accompanying the group’s letter. The grant would be paid to the company and form part of its taxable profits.

A combination of policy decisions and constraints in the tax system meant that as many as 2.9 million people were not eligible for the coronavirus schemes, the National Audit Office said in an October 23 report. “People were excluded from the schemes either because of ministerial decisions about how to target the schemes, or because HMRC did not have data needed to properly guard against the risk of fraud,” it said. The figure includes an estimated 700,000 limited company directors who could not claim support under the coronavirus job retention scheme “for company dividends paid instead of salaries.”

‘Genuine Issues’

Norman told the House of Lords finance bill subcommittee November 17 that there would be “serious issues involved in [HMRC] manually processing hundreds of thousands of claims” relating to dividends, adding that “we are in a world of automated responses.” HMRC does not hold information “by which to assess what percentage of dividends should be counted as pay,” and there is no recognized public standard for such a percentage, he said.

“There are genuine issues that we are trying to work through in recognizing both the problem that people have fallen through the cracks and some of the concerns that have been publicly expressed, but it is a very difficult and complex problem,” Norman told the subcommittee.

The Labour peer, Thomas Lyttelton, known as Viscount Chandos, told Norman that in cases in which dividends have been used to remunerate directors, he was “not as sympathetic . . . because that deprives [HMRC] of national insurance contributions, among other things.”

But Norman stressed that Treasury is “still struggling” with the issue. “It is important to be equally clear that this is not a policy decision. We would like as many people as possible to take up this benefit, and we would like it to extend as widely as possible,” he said.

Broadly, lower tax rates for business owners relative to employees provide a strong incentive to operate through a business structure, the Institute for Fiscal Studies said in a July 2019 report. “For higher-income individuals, there is a particularly strong tax incentive to incorporate, because doing so allows income to be taken in the form of dividends or capital gains, which are taxed at lower rates than employment or self-employment income. The corporate form, which requires greater reporting of activities, also facilitates income splitting between spouses and income shifting across time, both of which can be used to further reduce tax liability,” it said.

“Most owner-managers pay themselves a small salary and take the rest of their income in the form of dividends. Retaining income in a company and paying out dividends at a later date can reduce tax liability if the marginal tax rate on dividends is expected to be lower in the future (e.g., if incomes are lower in the future),” the report added.

However, HMRC accepts that many factors other than tax have to be considered in deciding whether to incorporate a business, and in its published guidance on the general antiabuse rule, last updated in September, HMRC recognized that “under the U.K.'s tax code, in many circumstances there are different courses of action that a taxpayer can quite properly choose between.”

A taxpayer deciding to carry on a trade “can do so either as a sole trader or through a limited company whose shares that taxpayer owns and where the taxpayer works as an employee,” HMRC said. “A decision to accumulate most of the profits to be paid out in the future by way of dividend, rather than immediately paying a larger salary, is again something that should, in any normal trading circumstances, be outside the target area of the GAAR.”

The campaign group ExcludedUK said it is seeking “an end to the exclusions in [the support measures] across all employment statuses, circumstances, professions, and industries.” Its campaign has been endorsed by the mayors of London, Greater Manchester, and the Liverpool City Region.

More than 260 members of Parliament have signed up to the Gaps in Support All-Party Parliamentary Group, which has issued a call for evidence to inform recommendations to the government.

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