Covid-19 update 8. More details to hand.
More details have come to hand as accounting bodies and journalists ring the Treasury to clarify details.
The Self-employment Income Support Scheme gives self-employed people who qualify 80% of average profits over three months in one lump sum sometime in June 2020. There is an upper limit of £2500 a month or £7500 over the three months. That upper limit will apply to people with average annual self-employed profits of £37,500 to £49,999. Others can work out their payment by dividing their annual profits by five. The lump sum will form part of their profits in 2020/21 and be subject to income tax and National Insurance. It will count as income when working out entitlement to tax credits. Ferret Information Systems have produced this helpful calculator.
To be eligible you must pass seven tests.
1. You must have filled in a self-assessment tax return in the year 2018/19 and submitted it. Normally that is due on 31 January 2020 but a million people who should have done so did not. If you were late but file by 23 April you fulfil this condition.
2. In that tax return you must have filled in the self-employment or partnership pages. Property pages filled in by landlords and others are not part of the scheme.
- You must still be trading when you apply or would be but for COVID-19 and you must intend to continue to trade in 2020/21.
- You must have suffered some loss of profits due to the Coronavirus outbreak.
- Your annual profits must be less than £50,000. That is defined as taxable profits after expenses and capital allowances but before pension contributions or charitable donations.
You can fulfil the profits condition in two ways –
- a) Your profits in 2018/19 were less than £50,000
b) Your average annual profits over the three tax years 2016/17, 2017/18, and 2018/19 were less than £50,000. If you were not self-employed in 2016/17 then the average is taken over two years.
- Most of your income in a tax year must come from self-employment.
You can fulfil this condition in two ways –
- a) Most of your income in 2018/19 was from self-employment
b) Your average income from self-employment formed most of your income over the last three tax years 2016/17, 2017/18, and 2018/19. If you were not self-employed in 2016/17 then the average is taken over two years.
- You apply for the scheme and are accepted.
HMRC holds most of the data it needs and will invite applications from those it thinks qualify. It is not clear yet how or if others can apply. A declaration about fulfilling condition 4 above may be required as part of the application. If successful the money will be paid direct into the nominated bank account in June.
If you are accepted you are not restricted in pursuing your business. Unlike the similar scheme for furloughing employees you can get the money and work at your self-employment or indeed in a job as long as you fulfil rule 3 above.
The Government says if you cannot wait three months for the money you should claim Universal Credit to fill the gap. Not everyone can do that and it will take a lot of persistence as hundreds of thousands of people are trying to get it. Find out how to claim here. Before you do that you can check your entitlement to means-tested benefits including Universal Credit at Turn2Us.
If you do successfully claim Universal Credit it will give you an income until the payment is made. However, UC does not start for five weeks after you are awarded it. So you will have to claim an advance payment. Despite its name that is just a loan which will be repaid by deductions from your future Universal Credit.
When you get your self-employment payment that will affect your Universal Credit. The Government has not yet said exactly how it will be treated.
- If the Government counts the payment as earned income then it will wipe out your entitlement to Universal Credit in the month you get it and probably for some time in future. You will not have to repay the Universal Credit you have had.
- If it counts it as unearned income then the DWP could apportion the payment back over three months so you will have been overpaid and will have to repay probably all of the money you have already had.
No decision has been made yet (31 March) how it will be treated. When it is I will change this blog.
People whose profits are £50,000 or a shade above will be excluded even though they may be as much in need as those on £49,999. The Treasury said it has to have a limit to make it affordable. If people on £50,000 or over were included they would be caught by the upper limit and limited to a payment of £7500. HMRC estimates there are 230,000 of them so the extra cost would be £1.72 billion on top of the £9 billion the Chancellor says the scheme will cost. However between 40% and 47% of the cost would be recouped through tax and National Insurance.
Given the ‘whatever it takes’ approach to the crisis the net cost of no more than £1 billion is not prohibitive. The Government is more likely concerned about how it would look to give a £7500 handout to the already very profitable self-employed such as some TV presenters and some barristers. Hence the Chancellor’s statement that the average pay of these people is £250,000. True but misleading. Many will be caught by this rule who are not much above the average pay in London.
The similar scheme for employees placed on furlough has the same maximum payment of £2500 a month for three months but there is income ceiling. Someone on annual pay of £250,000 could be furloughed and get £2500 a month to do nothing.
People who have used the profits of their business to invest in the future and have high expenses and capital allowances will have what they may see as artificially low profits and get little from the scheme. On the other hand some with very high profits who have also investment heavily in their business will be in scope of it because of those investments.
Those who began self-employment in 2019/20 are contacting me in large numbers. They feel the hardest done by as they get nothing despite perhaps being 11 months into self-employment but with dreams shattered by the epidemic. At least one petition has been launched to challenge this rule.
HMRC have made it completely clear again to me that there are no exceptions to the rule that to qualify for the scheme an individual must have completed the 2018/19 tax return in time (which is no later than 23 April 2020). So those who began self-employment from 6 April 2019 are excluded.
The number affected is not definitively known. Newly obtained figures from the Office for National Statistics show that in 2019 the net flow into self-employment was 306,000. That net figure is made up of 1,422,000 people who moved into self-employment minus 1,116,000 people who moved out of self-employment. Some people will be included in both numbers. It follows that the true number of newly self-employed in 2019 calendar year is somewhere between 306,000 and 1,422,000 people who are denied help under this scheme. I will try to get more clarity on this figure tomorrow.
Not a hobby
The massive group of 1.75 million ‘part-time’ self employed are also being excluded unless more than half their income comes from self-employment. There are many who consider themselves self-employed but have to take paid employment to make ends meets and pay their rent and feed themselves and their family while their business grows. These are not pursuing a hobby on the side but developing their business which may later become successful. They are being excluded if they fail this ‘over 50%’ test now.
The rule also treats very badly people who moved from employment to self employment in 2018/2019 and did fill in a tax return. They can fail the 50% test if their time as an employee earned them more than their later time as self-employed. In some cases they could have been working as self employed for well over a year. But they are excluded. In 2018/19 a total of 750,000 people moved from employment to self-employment. If they earned less from their new self-employment than their previous employment in that tax year they are excluded.
Many people who consider themselves self-employed trade as a limited company. Many of them pay themselves a small salary out of the profits and take the rest as dividends. That has – or had – major tax advantages. They could pay a lot less tax than if they paid themselves all the profits as salary. Many do not choose to work in this way. It is forced onto them by the firms that engage them. This group is specifically excluded from the Self Employed Income Support Scheme. Instead the Government has suggested they claim under the furlough scheme for employees.
The Government has now confirmed – late on Monday 30 March – that it is possible for sole directors to furlough themselves and fulfil their statutory duties as directors.
So, limited company directors can furlough themselves in their capacity of as employees for their company, and claim a grant under the Coronavirus Job Retention Scheme to cover 80% of the regular salary that they have paid themselves via PAYE, up to a cap of £2,500 a month.
For companies with a sole director, their statutory and administrative responsibilities under company law should not impinge on their ability to furlough themselves as employees for the purposes of this scheme, as long as they do no work beyond this.
However, those sole directors who have paid themselves mainly in dividends will get very little – just 80% of their regular pay. Dividends do not count as pay.