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Directors income support scheme proposed

This proposal demonstrates how a viable method of support could be provided for limited company directors. These individuals have received very little support during the coronavirus pandemic.

27th Nov 2020
Employment Status & IR35 expert Re Legal Consulting Ltd
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Rishi Sunak leaving 11 Downing Street
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Rebecca Seeley Harris and Glenn Collins of the ACCA have drafted the Directors’ Income Support Scheme (DISS), which is supported by ForgottenLtd, the FSB and the ACCA. The policy document has been set out to provide the government with a variety of options on how to help.

Similar to SEISS

The assumption is that DISS will be run on the same parameters as the self-employed income support scheme (SEISS). The goals have been to design a scheme that:

  • Creates parity with the SEISS
  • Is not open to fraud or abuse by non-trading companies
  • Can use existing information and tools that HMRC already have and therefore will be simple to administer and setup.

One company, one directorship

The DISS award would be based on the trading profits of the company, which are contained in the CT600 corporation tax return. The director's remuneration would be added back into the reported trading profits on the CT600, for it to be in parity with SEISS.

Any verification of the company’s profits can be self-certified because unlike the self-employed, the director of a limited company has certain duties in law. If a director makes a false or misleading statement, then this can have very serious consequences.

The director would only be able to claim for one directorship in the entity which they have the greatest income and that income must make up over 50% of any income from other sources. The director must declare that they intend to continue to trade and are either:

  • Impacted by reduced demand due to coronavirus, but are currently actively trading
  • Temporarily unable to trade due to coronavirus, but were previously trading

Example 1

Sam works through limited company providing sales and marketing consultancy. They are the sole worker in the company and his profits are less than £50,000 a year.

In this scenario there is one company director with a majority shareholding in the company that is owned and managed by them - they are a working director in an actively trading company. This company would be one of the 946,000 with no employees. This company can either be registered or not for VAT or PAYE. The DISS grant would be paid into the company and could be distributed either as taxable income or it could be kept in the company for cashflow purposes. 

It is estimated that there would be 946,000 working directors eligible for the DISS grant. According to take-up levels for eligible companies that are based on SEISS levels, 75% would claim the average £2,900 - this would cost an estimated £2 billion.

Example 2

Hilary and Jas are working directors running a small manufacturing company and employ eight staff. Last year the company made a profit of £45,000.

Here, there are one or more working company directors in the actively trading company where they are each a person with significant control (PSC). A PSC in this context is someone who has more than 25% shares in the company and more than 25% voting rights and the right to appoint or remove the majority of the Board.

This means that DISS would be limited to companies with not more than four directors. This company may be one of the 1.157 million micro-entities whose turnover is no more than £632,000 or with up to £316,000 on the balance sheet, and ten or fewer employees.

With the entity trading profits capped at the level of SEISS, it is estimated that with eligible profits, directorship and PSC, eligibility would be at 70%. With an estimate of four million directors at 70% eligibility (2.8 million) and 75% take-up levels (2.1 million), and an average claim of £2,900, the cost would be around £6 billion.

Recommendation

If these companies are not supported then their businesses face collapse and along with it future tax revenue. In addition, the company may become insolvent owing the deferred VAT to HMRC, the Bounce Back Loan to the banks, and have outstanding debts to other small companies. All this is even more reason why the government should help before it costs even more.

The designers of the DISS believe it is not open to fraud, any more than SEISS is and would not be too labour intensive for HMRC to set up.  If the lack of a coherent system of support is why the government is not providing it, then DISS is the solution.

Influence

DISS has already received significant attention and was the subject of a live Q&A session with Claer Barrett of the Financial Times on 24 November 2020.  The policy document was also sent to all MPs ahead of the Spending Review on 25 November 2020, and submitted to the Chancellor, Rishi Sunak and the Financial Secretary to the Treasury, Jesse Norman on 19 November 2020.

Replies (28)

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By Paul Crowley
28th Nov 2020 12:51

Support is for people who pay NIC
Shame on all parties looking to just on the free money bandwagon
Glad to see ICAEW have not tarnished their reputation

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Replying to Paul Crowley:
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By Echo761
30th Nov 2020 10:23

"Support is for people who pay NIC" Is it though? ... can you explain how to "just" on the bandwagon?

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blue sheep
By NH
30th Nov 2020 09:53

erm, isnt this just a little bit too late - its taken these experts how many months to come up with this? And meantime how many of those supposed 946k have already claimed furlough, UC or simply gone out of business

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blue sheep
By NH
30th Nov 2020 09:53

erm, isnt this just a little bit too late - its taken these experts how many months to come up with this? And meantime how many of those supposed 946k have already claimed furlough, UC or simply gone out of business

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By rbw
30th Nov 2020 09:58

Unclear to me what "working director" means in this scheme. A "full-time working director" (c.f. s.67 ITEPA)? Or any director who gets all or most of their income in the form of earnings and dividends from the company and does a bit of work (e.g. a spouse or partner at home who answers the phone)?

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By booksy
30th Nov 2020 10:01

Thank you. Contrary to some small minded beliefs not only NICs but quite a few other taxes are paid either by the company or the directors/shareholders. And the legal burden born by them is high. Tarnishing the reputation of small company directors in this way and the denial of help to them is small minded and smacks of entrenched beliefs and an inability to change and keep up.

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Replying to booksy:
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By Echo761
30th Nov 2020 10:24

Hear hear Booksy.

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Replying to booksy:
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By CeriWilliams
30th Nov 2020 10:29

I don't think these are small-minded beliefs at all. Owner/directors who've deliberately structured their tax affairs to pay de-minimis salary and take the rest as investment income can't then expect taxpayer support when their investment income dries up. They could have paid themselves entirely on payroll and had the same financial support via furlough as any other employee.

I do sympathise with the (many) who probably didn't pre-covid understand the difference, and even more sympathy with those who were acting on their accountants advice without having the difference explained to them. But a large proportion would have taken the tax savings even if they had been explained.

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Replying to CeriWilliams:
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By johnjenkins
30th Nov 2020 10:36

I don't agree. However you legally structure your finances has nothing to do with covid. There should have been no difference and certainly no cap on who can claim (a cap on what they receive, yes).

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Replying to CeriWilliams:
blue sheep
By NH
30th Nov 2020 10:51

CeriWilliams wrote:

I don't think these are small-minded beliefs at all.

Yes they are, anyone who thinks otherwise clearly doesn't have a clue what they are talking about

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Replying to CeriWilliams:
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By Echo761
30th Nov 2020 10:52

"I do sympathise with the (many) who probably didn't pre-covid understand the difference,..."

Why did they not understand? As their accountant did not do their job correctly and fully explain it (oh my gawd! shocking). Or they had the situation explained clearly that they are free to structure their tax affairs within the current law and any savings that provides.

Let me guess which most sane people would go with. This is similar to the current HMRC mentality that all sole directors are using tax avoidance to get one over on them - so now HMRC can exact their revenge and not support these businesses which pay corporation tax, PAYE, and VAT. All of which will be lost post-Covid and instead HMT will have to foot the bill for benefits and job seekers allowance. Sounds like "cutting off your nose to spite your face" but this seems to be government policy at the moment. Like a petulant child!

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Replying to CeriWilliams:
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By Paul Morton
30th Nov 2020 12:25

What a ridiculous comment. So somebody who is acting in accordance with the law, structuring their affairs to minimise tax, is not afforded the same help as others when they need it?

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Replying to CeriWilliams:
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By Echo761
30th Nov 2020 12:53

Ceri, can I ask. As the sole director of a limited company are you telling us that you do not receive your own income as dividends? Do you prefer to take no dividends and only pay yourself a salary?

What advice would you give to your clients?

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Replying to CeriWilliams:
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By Echo761
30th Nov 2020 12:53

Ceri, can I ask. As the sole director of a limited company are you telling us that you do not receive your own income as dividends? Do you prefer to take no dividends and only pay yourself a salary?

What advice would you give to your clients?

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Replying to CeriWilliams:
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By Ian McTernan CTA
30th Nov 2020 14:06

The reason many don't do as you suggest is that cash flow isn't that even and profits aren't that predictable out in the real world.
In fact, any advisor who suggests that a salary for all the profits should be paid out on a monthly basis...well, they shouldn't be advising clients on how to run their company...
Many directors have not taken anything out of their companies this year, making sure their employees have been seen to and the business has survived- should they have no upside to all this risk?
You may as well say that all directors should pay themselves at least the minimum wage for every hour they work and be taxed as heavily as everyone else despite taking all the risks and often working 100+ hours a week- even though in practice many work for very little whilst growing the business and reinvesting THEIR profit back into the business to enable growth.
Also, dividends attract tax too: firstly 19% Ct and then from the net amount you then take your dividend from available profits and pay a further 7.5% as a basic rate taxpayer or 32.5% as a higher rate taxpayer (for a total rate of 51.5%).
The difference in tax between dividends and salary aren't actually that great any more...
Also, many businesses need or are required to have the protection that being a ltd company affords.
Many owners also leave considerable amounts of their money in the business rather than take it all as salary or dividends as the company needs the money to grow/for stock/etc...

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Replying to Ian McTernan CTA:
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By rbw
30th Nov 2020 15:08

"The difference in tax between dividends and salary aren't actually that great any more.."

...but the difference in NICs between dividends and salary...

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Replying to CeriWilliams:
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By Arcadia
30th Nov 2020 16:23

Presumably you would also bar these evil people from the NHS, and food banks?

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Replying to booksy:
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By Paul Crowley
30th Nov 2020 13:47

Why are landlords excluded then? Only Directors looking to minimise contributions to the state entited to free money
They all had Interest free loans, No employee got one of those

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Replying to Paul Crowley:
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By Echo761
30th Nov 2020 13:55

Paul, they are loans... to be repaid. Unlike SEISS giveaway to people who could keep working and still be paid them. There are many flaws in all of these things.

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Replying to Paul Crowley:
blue sheep
By NH
30th Nov 2020 14:11

Paul Crowley wrote:

Why are landlords excluded then? Only Directors looking to minimise contributions to the state entited to free money
They all had Interest free loans, No employee got one of those

Oh dear thats embarrassing! - loans are to be repaid whether they are interest free or not, employees got paid salary (which is not going to be repaid). They are not the same thing.
In fact to make things even worse the employees on furlough were able to do DIY, play with the kids, do what the heck they liked all day even go out and work a second job while their employers got diddly squat
Baffling why you would get confused over that.
I do agree with you on one thing though, yes - landlords have been shafted as well

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Replying to NH:
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By Paul Crowley
30th Nov 2020 15:07

So you do not think employees should have the support then?
Only businesses?

No I do not think landlords or investors were shafted.
Investors accept the market. Covid is just one of many risks

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By North East Accountant
30th Nov 2020 12:59

Never gonna happen.... waste of time trying.

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By AndrewM627
30th Nov 2020 13:05

A lot of heat and little light has been generated on the question of the application of CJRS to small company directors. Overall I agree with Ceri but with one important exception. The way that the CJRS scheme (aka furlough payments) has applied to annually paid employees (mainly small company directors) is shamefully unfair and arbitrary . Depending upon when in the year the annual payment and related RTI submission is made, some companies will get 7 or 8 months' worth of CJRS support (eg payment date in December), some only 5 months (eg payment date in late March) and others up to 12 or 13 months (eg payment date in October). The only mitigation for this glaring anomaly is that in most cases the salary payments were relatively small, ie below the NIC threshold.
As far as concerns DISS I think this comes far too late. If through lack of support small companies have gone to the wall that is regrettable, but the fact remains that there seems to be no political impetus for DISS or anything resembling it.
As far as concerns the argument surrounding dividends, they are investment income and no one got any support for dividend income lost due to COVID. Dividends are not treated as earnings for pension contribution purposes nor for most other purposes (although some mortgage companies did allow their inclusion). It is unrealistic to expect HMT to make an exception now.
So are small company directors now being "punished" for avoiding tax by receiving dividends rather than a larger salary? That depends on your point of view. I am a professional adviser with clients in both camps, ie self-employed and working through companies. The tax saved over the years by the latter group generally far exceeds the value of any support lost now. So as long as they can continue to trade they are better off.

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By Ian McTernan CTA
30th Nov 2020 14:21

Excellent idea although the chances of it being implemented are fairly remote.

The people who take the most risk in setting up and running their companies have been the ones who have missed out most. The most prudent who paid a small salary to ensure cashflow have been hit the hardest.

Self employed people got money just for being affected.

Employees got paid to stay at home and do nothing.

Meanwhile, small business Ltd company owners who take all the risks got practically nothing and also get accused on these forums of getting their just deserts for the sin of being prudent in their profit retention and payout plans.

I know many a director of a company who is scratching their head or tearing their hair out as they had to watch their bills mount up, take out loans they will have to repay, pay their employees tax and NIC and holiday pay and wages whilst their employees had several months off and the directors get sod all support.

Business owners will be paying all this back for years and suffering on their income because of it.

But still some people here think the marginal tax difference between (well managed when available cash flow funded) dividends and paying a salary to the owner should be the be all and end all of whether someone should get support...

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By Paul Crowley
30th Nov 2020 17:18

What about the international coffee chains
They lost loads on money
Surely UK owes them lots for Covid related lost UK income

And every Footsie company, my pension depends upon it

And Apple

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Replying to Paul Crowley:
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By johnjenkins
01st Dec 2020 09:22

You forgot our Phil. Looking at Lionheart made me Green with envy.

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By Chris Pittock
01st Dec 2020 17:08

I note that it says that the Directors salary should be added back when calculating the relative profit. I am not entirely sure about that one because the Director may have claimed furlough so has already received one lot of 80% back on that!

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Replying to Chris Pittock:
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By Paul Crowley
01st Dec 2020 22:33

And do all shareholders take all profit every month?
How much of that profit gets shared with non workers to save tax?
Its rubbish.

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