Directors dividends under attack

Chancellor Rishi Sunak has been challenged by the influential Treasury Select Committee to eliminate the problems hampering small businesses and directors of limited companies.

Specifically the issue of dividends being paid to owner-directors of small companies in lieu of salary and how they need further help as they risk slipping through the support net.

 

Directors paid through PAYE or the self-employed have access to support from both the Self Employed Income Support Scheme (SEISS) or the Coronavirus Job Retention Scheme (CJRS) whereas directors receiving a dividend have no such support.

 

In a written response to the committee the Chancellor said: “Unfortunately, we can’t guarantee to protect every business and every household. However, our planned economic response aims to be as comprehensive as possible whilst delivering support as quickly as we can to those who need it.”

 

The Treasury’s previous position was that it’s problematic to distinguish between the income that directors receive from their own companies as income and the dividends received from other investments such as shares.

 

Based on this, they said it’s difficult to draw up a policy specifically targeted at company directors.

 

Andy Chamberlain, director of policy at IPSE, the Association of Independent Professionals and the Self Employed, said that directors typically only took a small fixed salary topped up by dividends as they didn’t know how much profit their company might make in a given year.

 

As well as this being standard and prudent practice, company profits are taxed under Corporation tax and changes to the tax rules in recent years meant that dividends were being much more heavily taxed than previously.

 

IPSE urged the committee to pursue a strategy of providing emergency funds to company directors through a “pay now, claw back later” model.

 

This system would rely on directors self-reporting their average dividend income and obtaining a similar measure of support to the 80% of income that self-employed and PAYE workers can access.

 

One caveat being that HMRC could later reclaim and penalise anybody found to have inflated figures to claim more than they would otherwise have received.

 

He praised the Self-Employment Income Support Scheme but noted that it had “sharp edges”.

 

“If you fall inside it, it’s good but if you don’t, you get nothing. If you earn one penny over £50,000, you get nothing. If you only recently became self-employed, you get nothing.

 

“If you’re working through your own limited company you get nothing under this scheme – although you may be able to get something from the Job Retention Scheme.

 

“What we’re saying is that the support available under the SEISS scheme is brilliant, but can we now get support for the people who are clearly falling through the gaps of it.”

 

Jenny Graham of Redundancy Assist agrees.

 

“This will be feeling very unfair to many small business directors.

 

“The tax benefits of being paid via dividend are negligible at best for the reasons IPSE outlined to the Treasury committee, and the situation is especially difficult when annual income is dependent on uncertain future yearly profits.

 

“While we’ve helped many directors take advantage of directors’ redundancy pay, those solutions might not be the best for them or their companies.

 

“The more options that are available for them, the better.”

 

For many directors, taking the redundancy route and claiming from the National Insurance Fund will leave them financially better off than the furlough scheme. For that to be the case is a failing of the new furlough system, but regardless, directors should make sure they know what they could get in both scenarios before deciding how to proceed.

 

The consequences based decisions facing directors now could hardly be greater.

 

They not only have their own livelihoods to worry about but those of their staff as well and unlike the pre-pandemic business world, we have no way of knowing how precarious or vibrant the employment market will be in the coming weeks and months.

 

If the economy is going to be rebuilt then they will be amongst the leaders – making decisions, day in and day out, that will work for them and everyone who depends on them.

 

If their business can be rescued and restructured and ready to go again then that’s great but it’s not the scenario facing everybody.

 

For some directors it might be more beneficial to take advantage of a furlough right now. For others, claiming everything they’re entitled to through the director’s redundancy would be the best call.

 

Whether they primarily need time, money or the chance to make a clean break and prepare the ground to begin again – we can help them and you get it.