Limited company freelancers (LCFs), COVID support's neglected tribe
Freelancers working through limited companies as director-owners have been left out in the cold by the Chancellor’s recent employment support packages.
Many of these people are akin to those going through the self assessment system, who are getting support - freelancers and one-person bands. Not all these people are rolling in money or using this arrangement to reduce tax. People often need to be a ‘company’ to pitch for client work and to secure the required professional insurance. This group includes people from important UK sectors such as the creative industries and health sector.
From what I’ve read and heard the rationale for the lack of support seems to be three-fold -
(1) There are so many different examples of people working under limited company structures that it’s hard to come up with something blanket for them. And they don’t want to make it possible for people to abuse the system.
(2) The government wants to use existing systems rather than setting up new ones. So if you look at the first three options below you’ll see they map to three systems: PAYE, Universal Credit and the British Business Bank respectively.
(3) Rumours are that the Treasury is under-resourced, and also that, like everywhere, some of them are suffering from COVID themselves. It took them eight days to come up with the self employed package.
Before I get into options, a big disclaimer: this is my assessment on Friday 27th March 2020 and does not constitute financial advice.
Furthermore, I’m focussing on director-owners who are either freelancers or running small companies where they bring in contractors and pay themselves a small salary and dividends. Rather than more substantial limited companies. Hence calling them LCFs; limited company freelancers.
Also, a set of good resources to look at, in addition to the government’s official sites -
The excellent Federation of Small Businesses site (FSB) is the most useful one I’ve found. They host really useful webinars where you can ask questions and they put things very clearly.
FT.com is covering this really well. You can get a four-week trial subscription for next to nothing (but remember four weeks goes quickly). Also follow FT political editor George Parker.
Also check out the IPSE microsite (Association of Independent Professionals and the Self-Employed) and the Tech London Advocates Resource Hub.
So what is the current situation for LCFs?
LCFs have been left out in the cold. The FSB and IPSE represented LCFs interest to the Chancellor. This Twitter thread from Andy Chamberlain at the IPSE talks about their efforts, and why that part of the ‘sell’ failed.
But it’s hard to see who is fighting for LCFs now. So they need to fight for themselves. There is an online petition on Change.org.
It’s important to make your voice heard on this with institutions like the FSB and IPSE. Organisation that have the ear of the Chancellor.
The Treasury will be approaching this by thinking, “what systems do we currently have that we could use?”. One that comes to mind for me is giving a dividend tax rebate for previous years. Do any of you know if this has already been explored?
Over the last fortnight the Treasury has announced two big schemes -
The Job Retention Scheme - which pays 80% of PAYE salaries.
Coronavirus Business Interruption Loan Scheme (CBILS) - a six year loan with 0% rate for the first year.
And there are available that should also make a difference. I won’t go into detail on these because they are covered extensively on the FSB and government sites.
These measures include -
Mortgage holidays
12 month delay in IR35 rules coming in for the private sector
‘Time to Pay’ helpline launched by HMRC to help people struggling with tax
VAT returns due in March able to be delayed to June
Grants for small businesses of £10K and £25K
Business rates holiday for retail and hospitality sectors
These are all covered extensively on government sites.
What options do LCFs have?
In terms of what you can do, there are three options that have been made possible by the Chancellor’s announcements (1-3). And three (4-6) that are more general -
Declare yourself ‘furlough’ and claim through the Job Retention Scheme
Claim a slightly higher universal credit
Take out a loan through CBILS
Take out a normal commercial loan or go into overdraft
Sell equity in your business
Take your business online
To go through these in turn.
1. Declare yourself ‘furlough’ and claim through the Job Retention Scheme
Furlough means inactive. So you claim 80% of the salary component you pay yourself (not the dividend component). This is going to be a lot lower than you’re used to living on.
In an FSB webinar I attended, they mentioned two things about this - (1) you can keep working on your statutory duties as a Director, so they’ve carved that out of the broader scheme where you can’t work at all during the period, (2) there isn’t much of a hurdle to applying for this, you simply tick that COVID has affected you.
2. Claim Universal Credit
The self employed can claim £94 a week, which is the same as statutory sick pay. This is an increase of the limit they previously set. You need to have less than £16,000 in savings. Again, this is going to be a lot lower than you’re used to.
3. Take out a loan through CBILS
I think CBILS is the ‘safety net’ they have in mind for LCFs. But it introduces something into a lot of people’s lives - risk - who previously saw themselves as akin to freelancers completing self assessment returns.
For CBILS, you can take out loans of up to £5M. This will be interest free for 12 months. You need to pay it off over a maximum of six years.
But it does involve taking on risk. Because it relies on you coming out the other end in good shape.
It seems to be a huge figure to be lending - £330BN. But it could be all there is. So don’t necessarily write it off. Also, I can’t find anything about the rate after the first year so it can be adjusted depending on the health of the economy - they won’t want to see businesses going to the wall. It is still a loan though, and there’s no getting around it, it comes with risk.
4. Take out a normal commercial loan or go into overdraft
Yes, I know this is obvious. One other good thing from the FSB webinar was that it is relatively easy to get loans against invoices that are due.
5. Sell equity in your business
This is probably even more obvious, but this option is there to get funds into the business this way.
6. Take your business online
This one will split people. Some LCFs will be entrepreneurially minded. Others will be freelancers who are used to operating in one way. Some yoga teachers are now running online classes and I’ve just been invited to this online yoga retreat.
These new revenue streams are unlikely to replace LCFs income, particularly in the short term.
Summary
Through no fault of their own, people have seen their incomes disappear. Whilst others are getting help the LCFs are being encouraged to take on loans. What can you do?
Sign the petition and make your voice heard with the institutions like the FSB and IPSE. Ask them if they are going into bat on this, and if not, why not and who is. Also, speak to your local elected representatives - the Mayors and leaders of your local council and your MP - and let them know about your situation. Explain what you are personally going through and see if they can help fight your corner.
[UPDATE on 31st March Tim Farron is championing this issue.]
Also think about it from the Treasury’s perspective - what policies they implement that wouldn’t require a big set up?
My policy suggestion - provide a rebate on the dividend tax paid in previous years.
Use the hashtags #selfemployed and #ltdcompanies to be part of the online discussion. And National Treasure Martin Lewis has really stepped up to the plate on this.
Consider the loan. But, to repeat, none of this constitutes financial advice in any way. Do your own research and understand the risks.
Good luck. Kia kaha (‘stay strong’ in Maori). We will get through this.
Duncan Ray, Founder / CEO, Remarkable City
27th March 2020
@duncan__ray and @remarkablecity on Twitter
duncan@remarkable.city
