Tom Walker ACA assesses the range of new measures from the government to help the self-employed.
The Chancellor's £6.5bn bailout for the self-employed was welcomed by many. However, it's likely to come with longer term tax consequences for this particular group of workers!
According to the Financial Times, there are approximately 5m self-employed people in the UK. This accounts for around 15% of the workforce. For a while it looked like this group had been left to fend for themselves during the coronavirus crisis. Then on Thursday 27 March 2020 came the announcement of a significant financial package to help them.
What is the Self-employment Income Support Scheme?
Taxable grants of 80% of historical income, up to £2,500 a month, will be offered to the self-employed where they're already in the self-assessment tax system. This will apply where income is below £50,000 and will last for 3 months.
If your income is above that level then you're deemed by the government to have earned enough to see yourself through the economic downturn resulting from the COVID-19 outbreak.
Interestingly, it appears you'll be able to claim the grant even if you continue to work during the pandemic. However, the calculation is based on income, not turnover. Therefore, if you have significant expenses you may not have much income left over from the grant once you've covered them.
Who the scheme applies to
If you're a self-employed individual or a member of a partnership, you can apply for the support if you fit the following criteria:
You've submitted your self-assessment tax return for the year 2018/19
You're trading in the 2019/20 tax year
You're trading when you apply or would have been but for the coronavirus outbreak
You'll likely continue to trade in the 2020/21 tax year
You're suffering with lost trading profits as a result of UK coronavirus
The income used to calculate your grant is based on the average income you have declared in the last 3 tax years. If you don't have 3 years of tax returns then it's based on what you do have. If your average income over that timeframe is higher than £50,000, you won't be eligible.
Finally, a key qualifying criteria is half your income must come from self-employment activities.
When will the scheme be implemented and how it will work
Originally the scheme was scheduled to go live in June 2020, however, many self-employed people are reportedly under severe financial pressure. In response to this, the government are now accelerating delivery of this support and it will be active from 13 May 2020.
Further good news is that the government have promised that cash will be in bank accounts by 25 May 2020 and that these sums will cover the 3 month period. HMRC are set to get in touch with those eligible from Monday 4 May to explain the application process. An online eligibility checking tool has also been launched.
Where you qualify, you'll be informed of the date you'll be able to make a claim and you'll be asked to add your contact details. Those exact details will then be used when the online service goes live.
After you've submitted your claim, you'll be notified immediately if the grant has been approved. Where successful, the money will be transferred to your bank account within 6 working days.
Who is likely to miss out?
At present the grant leaves out the newly self-employed. Data from the current 2019/20 tax year doesn't count. This means if you haven't got a historical tax return declaring your income then you won't get paid. You'd then have apply for Universal Credit as your only alternative option.
Of note, the scheme is not designed to owner-managers who, while self-employed, pay themselves via dividends through a limited company. Instead they'd have to go down the route of:
This means it also won't help contractors who use limited companies to work off payroll. The reason being the Treasury have deemed it impossible to decipher if dividends, where they're less than £50,000, have been generated from productive activities through work, or simply from the proceeds of shares in a listed business. The argument is that makes it impossible for HMRC to implement.
Alternatively, if as an owner manager, you pay yourself all or part of your salary through PAYE, you could furlough yourself in the job retention scheme. You'd then receive 80% pay support up to £2,500 per month. This might help to tide things over a bit as you strive to keep your business going.
A future of more tax for the self-employed?
Having announced the scheme, the Chancellor then talked of the need for taxation of the self-employed to be, "levelled up". Whilst he wouldn't be drawn on any details in regards to this, for quite some time there has been plenty of parliamentary debate about greater alignment of tax between those on PAYE and off payroll workers.
Given the government has had to bail out this part of the economy, despite the self-employed not receiving the same benefits as those on PAYE, expect potential tax rises for this group once the outbreak has finally passed.
The content of this post was created on 31/03/2020 and updated on 29/05/2020.
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