Those who have opted in the past or recently by choice or not, will have appreciated or now be discovering the pain and pleasure of self-employment. It can provide a life of freedom and creativity but also bring unforeseen problems by the bucketful – such as a pandemic that closes down your industry.
Whilst some businesses will have experienced boom times others will have suffered loss of orders with continuing low turnover and unavoidable expenses and have had to adjust family and personal living to cope with the situation. Currently the medium term is not yet clearer which makes planning more uncertain and riskier.
The furlough relief introduced by government has been mirrored for the self-employed, with a similar scheme, but the form of self-employment must fall within the strictly defined qualifying conditions.
Many self-employed have a business or share in one with profits of more than £50,000 a year, but nonetheless have found themselves without income and in financial difficulties as a result of the slowdown of the economy. Other innovators and entrepreneurs have young businesses or just left employment to start up in business and do not have the necessary track record to apply for government income replacement.
This situation causes many headaches as government schemes are not designed to cater to individual situations in part because they need to be administered efficiently and without opening themselves to obvious abuse.
In these circumstances what is there that the self-employed can do aside from applying for welfare benefit? Clearly expenditure can be examined, and supply payments cut or deferred to reduce expenditure and it may be possible to obtain some relief from other sources of loan capital such as local authority grants, government loan or bounce back loans schemes. Given time the sale of surplus assets following reorganisation of the business model may be feasible.
Claims against certain types of insurance policy may be possible but are proving problematic and do not seem to be meeting the current need. Assuming sufficient reserves of capital to survive the in the short term then it may be possible to look for a cash injection through claiming tax refunds.
Where your business spends more than it receives during an accounting period, it has made a trading loss. As an individual owner or partner you can set off trading losses against profit or capital gains in a variety of ways.
Where you make a trading loss within any of the first 4 tax years of trading, you can carry it back and set it against your income from any source (but not capital gains) in the previous 3 tax years starting with the earliest year. This relief must be claimed within one year of the 31 January following the tax year of the loss.
Also carry-across and carry-back relief enable you to set the loss against other income and capital gains in the year of the loss. This would reduce the income tax otherwise payable on other income and/or the capital gains tax. Alternatively, the loss may be deducted from total income and capital gains of the preceding tax year giving a tax refund for the previous tax year.
Losses can be carried forward and be deducted from profits that the business produces in future accounting periods, but this means you have to wait for future profits of the business before you can benefit from loss relief.
These examples show that planning the way forward with your solicitor or accountant can be a bridge to survival and a brighter future.
Michael Garson is the senior partner of Kagan Moss and Co Solicitors of 22 The Causeway Teddington Middlesex TW11 0HF