Financial support for self-employed extended in line with employee furlough scheme

The initial scheme to give financial support to the self-employed provided a grant to eligible claimants of up to 80% of average trading profit for three months (capped at a total of £7,500) to be paid out in a single lump sum from June.

Alongside the extension of the furlough scheme for employees, the self-employed scheme has been extended to enable self-employed individuals to claim a second lump sum grant. As with the furlough scheme, the value of the second self-employed grants has been reduced, to 70% of trading profit for three months. 

The extended self-employed scheme now provides:

• Claims for the first grant must be made on or before 13 July 2020.

• The second (and final) grant will be available to self-employed individuals whose business has been adversely affected on or after 14 July 2020.

• The second grant will be worth up to 70% of average monthly trading profits for three months, capped at £6,570 in total. Like the first grant, it will be paid in a single instalment.

• The grant will be available to be claimed from August 2020, when the online service will be updated for second-grant claims.

• Eligible claimants will be able to claim for the second grant even if they did not make a claim for the first grant. HM Revenue & Customs (HMRC) will work out eligibility in the same way as for the first grant.

• Additional anti-fraud checks are being made on late returns for the 2018-19 tax year, submitted between 26 March 2020 (when the scheme was announced) and the extended filing date of 23 April 2020.

The grant will be subject to income tax and self-employed National Insurance contributions (NICs), and claimants will need to include the grant in their tax return for the 2020/21 tax year. Recipients of the grant can continue to work, start a new trade or take on other employment or voluntary work.

Eligibility for the scheme

HMRC is using data from tax returns already submitted to identify those eligible to claim. Claimants can check online to see if they are eligible.

To be eligible, a claimant must

• have submitted a self-assessment income tax return for the tax year 2018/19 by the 23 April 2020 deadline

• have traded in the tax year 2019/20

• still be trading at the point of applying for the grant (or would be trading except for coronavirus) and intend to continue to trade in the tax year 2020/21

• have trading profits of no more than £50,000, which are at least equal to their non-trading income (see further below)

• confirm to HMRC that their business has been adversely affected by coronavirus.

The guidance gives examples of how a claimant’s business may have been adversely affected, including:

The individual is unable to work because they are shielding, self-isolating, on sick leave or have caring responsibilities because of coronavirus.

They have had to stop or reduce trading because of supply-chain interruption, reduction in custom or because staff are unable to come to work.

If a claimant has been trading for all three tax years 2016/17, 2017/18 and 2018/19, HMRC looks first at the 2018/19 self assessment tax return. If a claimant isn’t eligible based on their 2018/19 tax return, the previous tax years will be considered. So long as their average trading profit for the three tax years is less than £50,000, and the sum of their trading profits for the three years is at least equal to the sum of their non-trading income, they will be eligible.

Self-employed people who have taken family leave since 6 April 2019 will still be treated as trading and would be eligible to claim the grant (subject to meeting the other criteria).

Claimants need to make the claim themselves. A claim submitted by a tax agent or adviser will trigger a fraud alert, requiring the claimant to contact HMRC and causing significant delay to the payments.

Members of partnerships can claim based on their own circumstances and share of the partnership profits. If the partnership rules would require the partner’s grant to be paid into the partnership “pot”, the HMRC guidance states that the partnership needs to pay the full grant back to the partner.

How trading profits and the grant are calculated

Unlike the employee furlough scheme, which requires employers to calculate what they can claim in respect of each employee, the HMRC guidance contains very little detail regarding calculation of the self-employed grant. The HMRC online service will tell claimants how their grant has been worked out. If a grant is payable, it will be paid direct into the individual’s bank account in a lump sum (for each grant). 

The grant is based on a claimant’s average annual trading profit over the three tax years 2016/17, 2017/18 and 2018/19. If a claimant has traded for all three years, the total trading profit is added together and divided by three to give the average annual figure. 

If a claimant has only traded in 2017/18 and 2018/19, profit will be averaged over those two years. If a claimant traded in 2016/17 and 2018/19, but not in the middle year 2017/18, then only 2018/19 will be taken into account.

Average trading profit needs to be under £50,000 for a claimant to be eligible for a grant. HMRC will work out the claimant’s trading profit using the information shown in submitted tax returns:

• Income:

• annual gross trading income from self-employment

• share of partnership trading income, deducting anything that is non-trading income, such as investment income.

• Deduction of allowable business expenses, capital allowances and flat-rate expenses.

• Addition of any losses brought forward from previous years to the amount shown on the tax return as “total taxable profits from this business”, or “your share of the total taxable profits from the partnership’s business”.

If a claimant has had more than one trade in the same tax year, all profits will be added together - and any losses deducted - to work out trading profit for that year.

Once it has been established that an individual has average trading profits of less than £50,000, HMRC will check that the claimant’s non-trading profit is not greater than then trading profit. To assess this, HMRC will add together:

• income from earnings

• property income

• dividends

• savings income

• pension income

• overseas income

• miscellaneous income (including taxable social security income)

The amount of the grant is calculated according to average monthly profit, based on the average annual figures:

• The first grant will be 80% of average monthly trading profits, paid out in a single instalment covering three months’ worth of profits, and capped at £7,500 in total.

• The second grant will be calculated in the same way, subject to the 70%/£6,570 cap for the three-month grant.

What next?

The government has made it very clear that financial support cannot continue indefinitely, and this will be the final grant instalment under the self-employed scheme. Given the uncertainty surrounding the government’s plans for easing social distancing, many self-employed individuals will most likely continue to see a negative impact on trading well beyond the end of the scheme.

Those who missed out when the scheme was first announced, such as those who only began trading after the end of the 2018/19 tax year and so did not submit a tax return for the year, or those with trading profit only a little over the £50,000 cut off, will be disappointed that the government has not made any adjustments to the eligibility criteria for the second grant.

There seems to be little prospect that additional support will be offered after the scheme finishes, when the government appears to expect affected individuals to rely on state benefits for which they are eligible.

In light of the additional anti-fraud measures applying to tax returns filed close to the extended filing deadline, it seems likely that HMRC will be carefully scrutinising returns for the current tax year where grants have been claimed.