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Politicians, it would appear, have saved Christmas. New measures for exiting lockdown this week have given hope to families looking to form a festive “bubble” — but Wednesday’s UK government spending review contained no such cheer for owners of small businesses.

For a party that has historically championed entrepreneurship, it is jarring that a Conservative government should repeatedly refuse to help an estimated 3m self-employed freelancers and limited company directors who have been largely excluded from coronavirus support schemes.

Some 2m directors of small companies failed to qualify because of their accounting structure — typically a small PAYE salary, and a variable dividend depending on their annual profits. This is a perfectly legitimate, widely used structure.

Accountants don’t advise you to incorporate your business as a limited company as a means of dodging tax, but as the most prudent way of managing unpredictable cash flows — which are stock in trade for those running their own businesses. Tax experts say that paying dividend tax, corporation tax, VAT and other taxes offer very little savings over paying income tax and national insurance.

However, the government’s lack of support for directors has effectively demonised a class of businesses that support 7.5m UK jobs, which will be lost if these companies fail.

The impact of the coronavirus and national lockdowns has ravaged small firms, but combined with the lack of grant assistance, many have been forced to borrow to the hilt and are now staring down the barrel of insolvency.

In a survey of its members, campaign group Forgotten Limited found that 70 per cent had not received any government support since the onset of the pandemic in March. Even if they make it to Christmas, 93 per cent doubted their small limited companies would still be trading by Easter.

Although directors of limited companies might sound wealthy, they are not — the average income of Forgotten Limited’s members is £38,000. Many small and micro companies are home-based, run from kitchen tables, sheds and vans. Yet the lack of physical premises means owners have also been excluded from grants delivered via the business rates system.

As the spending review laid bare, the UK’s own balance sheet is in a precarious state, with tens of billions spent so far on coronavirus support measures. Yet, as large companies are handing back furlough cash, there are still millions of small businesses owners and self-employed freelancers who have not been helped.

Last week, I watched on Zoom as 39-year-old Zoe, an experienced West End theatre manager, dissolved into tears as she spoke of putting her family home up for sale. She is moving in with her parents in a last-ditch attempt to stay afloat financially. A sole trader, she was excluded by the £50,000 turnover cap under the self-employment income support scheme (SEISS).

Even though being on maternity leave meant she had hardly any income in the most recent tax year, she was still denied assistance as eligibility is based on what she earned in the three tax years before that. Zoe’s partner is also excluded as a limited company director of a live music business. With a 21 month-old son, the couple have qualified for just £612 worth of universal credit since the crisis hit.

The webinar, organised by campaign group Excluded UK, was just one of a string of attempts to raise awareness of the plight of self-employed and owners of small businesses in the run-up to chancellor Rishi Sunak’s big outing this week.

There are now 261 cross-party MPs calling for more to be done for the excluded, including Mel Stride, chairman of the Treasury select committee, who (like me) has been urging the government to plug gaps in support since April.

Mr Stride, Conservative MP for central Devon, wrote to the chancellor again this week, pointing out how Scotland and Northern Ireland are targeting grants at those excluded from support. Since his letter, Wales and Liverpool have also launched their own schemes.

These one-off grants of up to £2,500 are relatively small sums when you consider how furlough and SEISS have provided up to £2,500 per month. Yet they are highly symbolic, recognising that significant gaps in support remain and can make all the difference for those in dire need.

“The whole small business community is urgently looking for a signal from the chancellor and Treasury ministers,” says Craig Beaumont, chief of external affairs at the Federation of Small Businesses. This week, the FSB offered a ready-made policy solution to the Treasury — the Directors Income Support Scheme, or DISS (modelled on the existing SEISS for sole traders).

The scheme is backed by ACCA, the professional accountancy body, and designed by Rebecca Seeley Harris, a former tax adviser to the government. She says: “If the government’s excuse was we don’t know how to help directors, they now have no excuse. We’re now going to find out if they are motivated to help this population at all.”

This isn’t the only solution being put forward to save the excluded from insolvency. The Treasury has already snubbed a “pay now, clawback later” system to provide grants to directors and the recently self-employed excluded from SEISS. Others are calling for tax offsetting ahead of January’s crunch point, and recognising 2019-20 tax returns in future SEISS assessments.

With a vaccine now in sight, this dogged refusal to throw a lifeline to small companies and the self-employed makes no sense. The cost of any grants given now will be dwarfed by the costs and repercussions of so many going bust — the loss of livelihoods and jobs, not to mention the loss of future tax revenues and economic output.

It is also devoid of political logic. In the Conservative party’s 2019 manifesto, small and family businesses were lauded as “the backbone of the economy”, making Britain “immeasurably stronger for their contribution”.

Vote for us, it promised, and we will “better support the self-employed” and ensure small businesses can “unleash their enormous potential” rather than being “crushed by [Labour’s] inexorable hostility towards aspiration and entrepreneurship”. What of these promises now?

Ironically, it is the Labour mayors of Manchester, Liverpool and London who have been speaking up for the excluded and questioning how this fits with the “levelling up” agenda.

At an event last week, Andy Burnham said the government’s failure to act “sent a dangerous message”.

“If you do go it alone, follow your dream and set up your own business, the message from the government coming back to you is you are on your own,” the Manchester mayor said. “What message is that to send to the next generation of entrepreneurs?” 

The chancellor failed to send them a different message at the spending review this week. Millions are counting on him to deliver some hope before Christmas.

Claer Barrett is the FT’s consumer editor, and a financial commentator on Eddie Mair’s LBC drive-time show, on weekdays between 4-7pm: claer.barrett@ft.com; Twitter @Claerb; Instagram @Claerb

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