Stop the War on SMEs
Over the last week there has, in the UK, been a furore over the Government’s plans to renege on a manifesto pledge not to raise tax in the form of national insurance. The furore is justified: the Government’s pledge was unequivocal and the proposal to renege on it amounts to bare-faced countenance of deception.
But the furore has had an unfortunate effect: it has deflected attention from another measure, namely a reduction (w.e.f. April 2018) in the dividend tax allowance.
The previous Chancellor, George Osbourne, introduced a measure (w.e.f. 2016) by which people receiving dividend income of over £5k p.a. would be taxed. The current Chancellor, Philip Hammond, proposes to reduce that allowance to £2k.
There has been some misunderstanding of the effects of this measure, by commentators who should know better. They argue that this will impact only people who own far more in equities than the average person in the street. Their reasoning goes as follows: take 3% as a typical yield; then to exceed the dividend threshold of £2k, you would need to a portfolio of £67k — not exactly a fortune, but more than most people have. Moreover, an investor who makes use of ISAs can reduce tax liability further so that, very rapidly, one gets into the area of requiring a portfolio well into six figures before suffering from this tax change. Ergo, the cut in the allowance affects only the wealthy.
But this argument is inaccurate and the conclusion unwarranted. It ignores two points. First, many SME owners divide their income between salary and dividends. This is entirely sensible. Where trading is uncertain (which is always), you can reduce the strain on profitability and cash flow by paying your self only a modest salary. If trading turns out to have been healthy, you can then top up your income through dividends.
In this case, the calculations based on a typical yield of, say, 3% goes out of the window. Across the country, there will be numerous people who wish, and even need, to pay themselves more than £2k in dividends.
They include, it should be noted, countless ordinary folk: hairdressers, gardeners, decorators, plumbers, electricians, shopkeepers, and so on. The ‘hard-working families’ and JAMs (just-about-managings) who the Government claims to want to help.
Looking at reaction of SME owners, especially micro-business owners, on social media. I’ve seen several react along the lines of ‘Right, that’s it: that’s me and my business f—ed’.
My heart goes out to them. What have they done to deserve this? They’re not criminals – they’re not muggers or drug dealers or computer hackers: they’re just trying to earn an honest crust. Yet though they’re not muggers, they’re certainly being mugged.
Moreover, the above argument that I have been critiquing is inaccurate in a second way. You can hold shares in an ISA only if they are quoted (on the FTSE, AIM, or ISDX). Have a guess how many hairdressers fall into that category. Why is there not an SME owners’ ISA to enable owners to shelter shares in their own business?
Who knows the reason? One might speculate that (as a perusal of Who’s Who or Debrett’s People of Today will confirm) politicians of all parties and senior civil servants typically have little or no experience of the SME sector. They are rooted in the corporate state.
The restriction of ISAs to quoted companies works tilts the playing field away from fair competition towards crony capitalism. SMEs lose out, not through honest competition, but through the intervention of the state to reward large corporations.
I hereby invite the Chancellor of the Exchequer to introduce an SME owner’s ISA.
But I won’t hold my breath.
So let us consider the overall plight of the two kinds of small traders. First, those who are self-employed. They might quite reasonably have conducted their business and financial planning on the basis that National Insurance wouldn’t rise before the next election, because such a rise would turn the unambiguous manifesto pledge into an outright lie. Well, they’re screwed.
Second, those who own a limited company (as my wife and I do) and pay themselves dividends: they’re screwed too.
Either way, we’re screwed.
Unfortunately, some of the individuals and organisations who claim to support SMEs have gone rather quiet, at just the time we need them — presumably for party political or a careerist reasons. Our local MP Lucy Frazer, for example, who claims to campaign for SMEs seems just to have gone to ground. To those whose voices have gone AWOL I ask three questions:
- The dividends that are taxed are paid from profits; profits are already taxed; so dividend taxation is a form of double taxation. Would you be will prepared to be taxed twice. May HMRC send you two tax demands this year, rather than just one?
- Will the SMEs affected be likely to employ more people in the future or fewer? (And how has this effect been accounted for in Treasury predictions?)
- Will traders be less tempted to trade in the black economy, or more? (And how has this effect been accounted for in Treasury predictions?)
In the meantime, Her Majesty’s Government has declared war on small businesses. We need a resistance movement.