Back in April, when you announced that the Coronavirus Job Retention Scheme (CJRS) was being extended to include the salaries – but not dividends – of sole director companies, many of us were relieved to hear that we’d at least be getting some help. But then you suggested that dividends were being excluded as you were suspicious of small business directors paying themselves in this way, and that this was “something the government needed to look at”, immediately giving us something new to worry about.
You seem like a genuinely nice man and have shown more empathy during this crisis than most of your Cabinet colleagues. You’ve certainly had a busy few months, so I wanted to write this open letter to you in the hope of saving you some time. As one of millions of sole director traders, I’d like to share my story to illustrate the full extent of the ever increasing tax burden placed upon us.
The Conservatives have consistently positioned themselves as the ‘pro business’ party and often wax lyrical about how small business is the ‘backbone of the economy’. Yet the taxes and bureaucracy placed on us have been steadily – and stealthily – increasing since your party came to office in 2010, making our profits smaller and our lives harder. And that’s before we even contemplate the looming financial disaster of Brexit.
Small businesses (SMEs) are indeed the backbone of the UK economy. As I’m sure you know, they represent almost 6 million businesses, account for three fifths of all employment (over 16 million people) and around half of private sector turnover (£2.2 trillion).
We have not started our businesses as some sort of elaborate tax dodge. Unlike big corporations, we couldn’t even if we wanted to. In the 13 years I have been running my business, I have complied with every bit of legislative change thrown at me and the amount of tax I pay (as a proportion of my very variable income) has almost doubled. Or to put it another way, the amount of profit I have been able to access to has decreased by thousands of pounds every year. So much for the party of small business.
And after 13 years of doing my bit for the economy and the Exchequer, I’m really done with being treated like some kind of villain and/or an endless source of new tax revenue, while big business continues to flout the rules and avoid its fair share. In addition to my Self-Assessment personal tax, I pay four other business taxes;
Dividends
Let’s start with this as this appears to be your main concern. Perhaps you’re thinking about Phillip Green and his pals when you worry about dividend abuse? Or maybe Tesco, who recently paid out a £635m dividend despite taking £585m from your emergency support fund?
I don’t doubt it would be simpler to pay myself via the regular salary route, but with such a variable annual income (which has ranged from £30k to three figures over my years of trading), this is just not practical. Furthermore, the basic tax rate salary allowance is only around £8000, and this has barely moved in 10 years. So whilst I am currently allowed to claim 80% under CJRS, that equates to just £575, around 20% of my usual monthly income.
In addition, the Conservative government scrapped the 10% Dividend Tax credit in 2016, further adding to the tax burden shouldered by small limited company directors.
Corporation Tax
Firstly, I am not a corporation. I don’t employ anyone. I’m a freelancer who was instructed to set up a limited company due to IR35 and the nature of the work I do. And yet I find myself paying more Corporation Tax than businesses like Amazon, The Ritz, EE, Caffe Nero and Vodafone.
How can it be right for a company like Anglian Water, a huge business which is well and ethically run, to use ‘infrastructure investment’ as an excuse to indefinitely defer their Corp Tax, justifying this due to ‘the wide range of taxes paid‘? Perhaps I could try this excuse on my next tax return? Like Tesco, they were able to manipulate the system whilst simultaneously paying out a shareholder dividend of £68m. It’s clear that small business owners, with no such loopholes and tax lawyers at their disposal, are not the problem here.
In 2015/16, the government announced the Corp Tax rate would gradually reduce from 20% to 17% by April 2020. At the time, it was thought this would ‘balance out’ the hit on dividends. But just before the start of this tax year, it was announced it was being left at 19%. Another tax rise by stealth.
And sitting on your own front bench, is Jacob Rees Mogg, who reportedly paid zero Corp Tax on £103m profit as his company is registered in the Cayman Islands.
This is an area in urgent need of reform at the top end. There should be a tiered system so small businesses are not expected to pay the same rates as major corporations, and the loopholes and exemptions should be closed so NO company is exempt from this.
VAT
When I first registered for VAT, I signed up to the flat rate scheme. For the first year or so, I was entitled to a discount, which helped greatly as I established my business. In 2017, this was significantly reduced when the government decided to crack down on what it called “aggressive abuse” of the Flat Rate Scheme. This unsubstantiated term still appears as a headline on HMRC’s website – another example of the unhelpful language that paints the majority of law abiding small business owners as the bad guys. The introduction of the higher flat rate of 16.5% for ‘limited cost’ traders was yet another blow to small business owners and consultants with little overhead and no need for plant or premises.
So without the benefit of the flat rate scheme, and very little ability to claim back any VAT, we’ve all effectively become unpaid tax collectors for HMRC. And as the bulk of our economy has long since shifted from manufacturing to service industries, those businesses are the ones hit hardest.
Two years ago, your predecessor Philip Hammond planned to drop the threshold for VAT registration from £85k to £43k (and at the time, it was rumoured the next step was to take it to £25k). He was rightly forced to abandon this plan – which even the Tory supporting Sun called a ‘tax raid on small businesses’. I very much hope you will leave those plans in the bin where they belong.
NIC
Also in 2017, the employer’s allowance on NIC for director-only companies was withdrawn. This effectively means all employee/directors now pay NI twice – for themselves and their business. A double tax burden which further penalises sole director traders.
IR35
But it’s not just taxation. This government continues to meddle in how we run our businesses, from Making Tax Digital reform to how we manage our contracts with our clients.
Over the last year, many self-employed consultants and interims – and our clients and the recruitment sector – have been grappling with the proposed changes to IR35 (‘Off Payroll Working’), which were confused, illogical and totally unnecessary.
There appeared to be no proper consultation on any of this, and it was widely known that this apparent ‘tax dodge’ was largely being taken advantage of by only two sectors (IT and Medical – specifically, consultant doctors). Once again, blanket legislation was being introduced to crack a peanut with a sledgehammer. The only ones set to benefit were the recruitment companies and consultancies big enough to set up ‘umbrella schemes’ to protect the individual contractors – for a hefty fee, of course. Millions of us breathed a sigh of relief when it was postponed in March and are hoping it won’t be resuscitated any time soon. Shame it was too late for the hundreds of people who pre-emptively had their contracts terminated by big firms like KPMG at the start of the year.
Let’s work together
I hope this has helped to illustrate the frustrations many of us feel.
Alongside running our businesses through times of incredible uncertainty (the 2008 crash, Covid-19, Brexit), we are constantly asked to understand and adapt to regulatory change. We do this, and carry on paying our taxes and contributing to society as best we can. But in the last 10 years, the ‘pro business’ Conservative party has continued to stealthily increase our tax burden whilst big business – and those wealthy individuals with expensive lawyers and accountants – continue to avoid and evade.
So I will leave you with two heartfelt pleas.
Firstly, talk to us. I, and many of the other consultants and small business owners I know, would be more than happy to tell you what life is really like at the sharp end. Please speak to us before you do any more damage. Enough businesses have ceased trading during this pandemic – we need legislative help, not hindrance. As small businesses contribute half the revenue to this economy, it’s high time you started treating us equally.
Secondly, please get on with the long overdue reforms that will ensure big business pays its way. In 2019, the Tax Justice Network found that the UK is by far the world’s biggest enabler of corporate tax dodging, stating that “the UK has single-handedly” done the most to break down the global corporate tax system, losing almost £400bn to avoidance.
Clearly it’s that half of the economy that can make the biggest difference to the Treasury’s coffers.
Thank you.
