Were You Forgotten?

Open Magazine

This Article Appeared In The August 2020 Issue of Mo2Vate Magazine.

“We will not leave you behind.  We all stand together.”

These were the words spoken by the Chancellor, Rishi Sunak, in March.  But 5.8 million small business owners were forgotten – the directors of limited companies. They could be furloughed but then they weren’t allowed to work, so they would have had to abandon their business. As an accountant, I kept expecting some funding to appear for them but it didn’t.

One of my clients, Myia Khela of Maze Tuition Limited, describes how this made her feel: “I was out of work for almost a month and extremely worried that I wouldn’t be able to pay my bills and how I would live.”

Of course, these 5.8 million business owners couldn’t possibly have known what was around the corner, but why had they decided to go limited in the first place? Why do people go limited instead of being a sole trader?  The main reasons are because they are not personally liable for any business debts.  Also, they may appear bigger and more professional – as if they mean business!  To be able to tender to councils and many organisations, they often need to be limited, possibly because of the limited liability and more professional image. The structure of being a sole trader would suit lots of smaller businesses better and be less expensive, but many don’t have a choice.

For many, the turnover varies massively from month to month.  If there’s a workforce, then they have to be paid regularly, but the directors themselves may take a lower monthly salary that they can afford and then dividends when they have available funds. As you know, a salary is taxed at 20% and national insurance is also charged. However, a dividend is taxed at 7.5% up to the basic rate with a nil band of £2,000.  I suspect this may have impacted on the Chancellor’s decision.

What funding has been available for limited companies?  Their workforce could be furloughed and the Government would cover 80% of their wages. Business interruption loans and Bounce Back Loans were attractive to some to keep their business afloat but, as Myia says: “A loan is a loan and taking one in uncertain times seems a silly move to me, not knowing how my business was going to fare during and after lockdown. I wasn’t sure if I could pay this money back.” Business rates relief grants are also available – but if your business doesn’t have any premises, then this isn’t going to help you!

What does the future hold for limited companies? Will the tax system be changed so that directors are no longer able to take dividends when they have enough cash?  If this is the case, how will they survive?  Whatever the next steps are in getting us back to a “new normal”, I for one intend to embrace it.