Why the Job Support Scheme falls short for limited company contractors

Both before and after chancellor Rishi Sunak’s Winter Economy Plan, hatched on Thursday just as new covid-19 restrictions hit much of England, we thought the very same thought -- that what everyone wants to see is contractors getting back to business as soon as possible, minimising the need for government support.

So the question is, writes Helen Christopher, operations director at Orange Genie, will the plan’s Job Support Scheme help or hinder with that collective goal? Or does it do neither? But first, what of Mr Sunak’s other key announcements?

What we all want

Well, we know that our PSC contractors and agency partners share this view of wanting work to resume as normally as possible, and are working hard to make this happen. Since coronavirus lockdown was eased across the UK, we have seen a number of PSC contractors end their time on the furlough scheme, either to start new contracts or to choose permanent employment. Yet right now, as the easing has been replaced by new measures, there are a significant number of contractors still out of work.

For this significant chunk not working, the chancellor’s Winter Economy Plan provided hope of further support in what are still very difficult and unusual times. That’s why many will welcome his announcement that deferred VAT no longer needs to be paid in March 2021, but can be repaid over 12 months. Further time to pay Self-Assessment liabilities is similarly welcome.

For those that have taken out Bounce Back Loans, the opportunity to repay the debt over a longer period of time is sensible. Yes -- their businesses will be carrying debt for longer, but it will not affect their credit rating and it will ease some pressure as they try and rebuild incomes. It is highly likely that we see peaks and troughs over the coming months and it is not unreasonable to expect the economic recovery may be slower than we would like. That said, the Winter Economy Plan’s opening up of potential payment holidays and interest-only periods will provide contractors with a little, welcome breathing space.

So we largely agree with Mr Sunak that deferral schemes and payment holidays all have their place, but what the contractor workforce really needs when its members are not working is ongoing support to enable them to look after their lives, homes, and families. They need an income.

Where the Job Support Scheme isn’t supportive of contractors

The newly announced Job Support Scheme is designed to protect “viable roles.” It seems fundamentally to be aimed at a traditional employment relationship where the worker has a set salary for a set number of hours.

PSC contractors don’t work like this. They often have irregular hours, with no set pattern and their salaries are set not in line with hours worked, but as part of a broader tax strategy. We need to see the finer details from HM Treasury to understand how, if at all, the scheme will work for PSC directors.

Assuming it is available for these sole-person businesses, what is clear is that the scheme (like the Coronavirus Job Retention Scheme -- ‘the furlough scheme’), will provide support only in relation to the director’s salary, not dividends. This time around however, the amount available is less than 80% of salary. Government support will not cover Employer NI costs or pension contributions, if there are any.

Crunching the numbers – how the average limited company contractor fares

As an example, let’s take a typical limited company contractor-director, paying themselves a salary of £792 per month. To qualify for the Job Support Scheme, they must be working 33% of their ‘usual week’ (let’s leave aside the complication of how we work out a ‘usual week’). If they work 33% of the week, their PSC will need to pay 33% of their usual salary -- £261. The remaining 67% of the week the contractor does not work, that’s in effect £531 of wages unearned.

Under the scheme, the limited company is expected to pay the contractor one third of that 67% -- so £177. The government will then also pay a third (up to a maximum of £697.92), so a further £177 in this case. The contractor therefore receives £615, or 77% of their salary. Interestingly, the draft rules of the November 1st scheme specifically state that the PSC is not expected to make up the salary to 100%, so the remaining unpaid salary of £177 is, in effect, covered by the contractor as lost wages.

Better than nothing, right?

While some support is better than none, this level of funding from the government is not going to be enough to sustain many small consultancy or contractor businesses in the long term. But is it enough to support them in the short to medium term to find new contracts? Well, as stated at the outset, we don’t believe that PSC contractors want to have to take advantage of the government support scheme, and we genuinely believe they want to be back out working as soon as possible. For those limited company contractors not lucky enough to have yet found work, however, this Job Support Scheme may well feel like it is falling short.

Similarly, the genuinely self-employed running their own sole trader, unincorporated business may feel that they have been forgotten. For those eligible for the first two grant payments under the Self-Employed Income Support Scheme, the unexpected move by the government to use the chancellor’s plan to extend to them a third and fourth payment may seem very welcome. But with the third payment to be capped at £1,875 for a three-month period, there are still going to be problems ahead where the worker currently has little or no work.

Also unhelpfully for many, the eligibility criteria for the SEISS grants remain what it was for the first two payments, which means anyone newly registered as self-employed since April 2019 is still ineligible. We believe that the government should have looked at how this hard-working, yet excluded group could have been helped some six months into the coronavirus crisis.

Final thought

Clearly this new round of covid-19 income support offered by the government is designed to encourage contractors to be back out working as soon as possible -- it’s what we all want. If that happens, then the tax deferral schemes offering extra time to pay will provide them with a fighting chance of getting their businesses back on track. But the reality is, with a Job Support Scheme that obviously wasn’t drawn up to support them in any tailored or financially-meaningful way, finding that next contract may not be that easy. And in that case, we foresee that many contractors are going to face real financial difficulties.