Government announces financial support for self-employed during coronavirus outbreak

This latest announcement of support for the self-employed follows last week’s unveiling of the Coronavirus Job Retention Scheme for employed workers. That scheme will provide support for UK employers severely affected by the coronavirus crisis, with HM Revenue & Customs (HMRC) reimbursing 80% of “furloughed” workers’ wage costs, up to a cap of £2,500 per worker per month.

How does the self-employed scheme work?

The UK-wide Coronavirus Self-Employment Income Support Scheme aims to create parity with the scheme for employed workers. It provides:

• Self-employed individuals or members of a partnership will be able to apply online to the HMRC for a direct cash grant worth 80% of their average monthly trading profits over the last three years, up to £2,500 a month.
• To qualify, individuals will need to:
  • have submitted a self-assessment income tax return for the tax year 2018-19 (anyone who missed the filing deadline will now have until 23 April 2020 to submit it and still qualify)
  • 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)
  • intend to continue to trade in the tax year 2020-21
  • have lost trading/partnership profits due to coronavirus

• Only those with a trading profit of less than £50,000 in 2018-19 (or an average trading profit of less than £50,000 in the three years 2016-17, 2017-18 and 2018-19) can apply. These profits must constitute more than half of the total taxable income (or average taxable income in the three-year period).
• The grant will be backdated to 1 March 2020 and will cover the three months to May 2020 (this period may be extended). It will be paid in June in a single lump-sum instalment covering all three months and will be paid by HMRC directly into people’s bank accounts. HMRC will identify eligible taxpayers and contact them directly with guidance on how to apply once the scheme is operational (expected to be by the end of April).
• The grants will be taxable and will need to be declared on tax returns by January 2022.
• Unlike the Coronavirus Job Retention Scheme for employed workers, individuals can continue to work while they receive support.
• Individuals who pay themselves a salary and dividends through their own company are not covered by the self-employed scheme (but their salaried job would be within the scope of the Coronavirus Job Retention Scheme, if they are operating PAYE).
• To minimise fraud, only those who are already in self-employment will be eligible to apply.

What next?

Given the indication that the grants will not be paid until the beginning of June, self-employed individuals will need to rely until then on other recently implemented mechanisms for support. These include more generous universal credit, income tax and VAT deferrals, access to three-month mortgage holidays and business continuity loans.

Further details of the scheme are expected shortly. In the meantime, HMRC has made it clear that individuals should not contact them but wait to be invited to apply online once the scheme is operational.

Practical implications of the scheme

The self-employed make up 15% of the UK workforce and represent a sector worth an estimated £305bn. The Self-Employed Income Support Scheme will cover 95% of people who receive the majority of their income from self-employment. Taken together with the Job Retention Scheme, these schemes are an unprecedented response package by the government to lessen the financial impact of the coronavirus crisis on both business and individuals.

There are obvious upsides in the scheme - for example, the ability for a self-employed worker to continue to provide services whilst still claiming the grant. There are also some significant limitations, including the fact that self-employed workers who are employed and operate through a personal services company (PSC) will not be eligible to claim this grant. Such individuals are commonly paid a small salary from the PSC but take most their income from dividends (which currently enjoy more favourable tax treatment). 

The scheme has already been criticised for producing inequities and failing to provide adequate protection for some self-employed people:

• As the grant is based on past profit rather than current income, individuals who have only seen a small fall in profits will be entitled to the same as those who have lost all of their income.
• Individuals on the peripheries of the eligibility criteria – for example, someone whose trading profit is marginally in excess of £50,000 – will miss out entirely on the benefit of the scheme, despite being as badly affected by the current crisis.
• Individuals who only started trading last year and so have not yet filed a tax return for their self-employed income are excluded (along with anyone who fails to file their 2018-2019 return within the extended time limit).

There have been further criticisms that the government has disadvantaged self-employed workers compared to employees, although the new self-employed scheme is arguably more generous in terms of permitting individuals to continuing working while also claiming the grant. 

It is inevitable that the cost to the Exchequer of all the current measures will need to be recouped eventually, and the more favourable tax and National Insurance arrangements historically enjoyed by the self-employed are likely to be ripe for review. The Chancellor said it would now be “much harder to justify the inconsistent contributions between people of different employment statuses”, which suggests the government will most likely seek to implement a more onerous tax and/or National Insurance regime for the self-employed in due course.