Last night, the government announced some help for the self-employed over a three-month period. To be eligible, a self-employed person’s trading profits must, effectively, be less than £50,000 and constitute more than half of their overall income.
At this stage, as with most of the government’s support initiatives, some of the details are yet to be honed, but to apply, an individual (or partner in a partnership) must also meet several conditions. Most importantly, they must have submitted a 2018/19 tax return or do so by April 23. They must also have lost trading or partnership profits due to Covid-19. It is not clear yet how one proves that loss of profits, but it is probable that this will be by comparison to previous years.
There are two tests for seeing whether a trader meets the £50,000 maximum profits test: they must either have had trading profits of less than £50,000 for the 2018/19 tax year, or the average over the three years up to and including 2018/19 was less than £50,000. The maximum payable is £2,500 per month, over three months.
Individuals cannot apply for this scheme yet. HMRC will contact traders by the beginning of June if they are eligible and invite them to apply online. HMRC will use 2018/19 tax returns to identify eligible persons – surely this cannot include a person with over £50,000 in 2018/19, but who meets the averaging test?
HMRC are telling people not to apply yet, as it will burden the system, but it is reasonable to assume that anyone who qualifies and doesn’t get contacted by HMRC will have an opportunity to claim at some point.
Unlike the employee scheme, you can continue to work and claim the relief. The announcements seen at the time of writing do not specify whether someone who continued to earn, say, £2,000 per month would qualify, as it seems that they might do quite well with a simultaneous claim for £2,500. What if the earnings lost is far lower than £2,500? It seems a bit of a windfall if someone gets more than they lose.
It looks as though anyone with a newly started business may fail to qualify as they cannot meet the 2018/19 declared profits criterion. The other issue that is bound to cause concern is that people, effectively self-employed but who trade through a limited company and pay themselves dividends (as well as a small salary) are not covered by the announcement.
This may well be addressed in due course, but we need some clear definitions as to who can qualify. If they are on their company’s payroll, then they would, in theory, be eligible for the employee scheme, but many only take a small salary, the rest in dividends, and would receive very little. As things stand, persons operating through a company and taking dividends look a bit stranded. Universal Credit may be the only option unless further measures are being considered.
With productions closing, many people will wonder where they fit in to all of this. Some freelances flit between employee engagements and self-employed engagements, a situation made worse by HMRC’s aggressive IR35 campaign.
It would seem that as long as the self-employed element is more than 50% of earnings, then they would be eligible for the self-employed scheme, but if the employee status earnings are high, this could be a problem.
Indeed, as these employment contracts would be short term, it seems unlikely that many would be eligible for furloughs under the employee scheme. Where a person has two current PAYE positions, it is possible to continue to work at one while on furlough for the other.
The government will be focused on initiatives that cover the majority before turning its attention to less common scenarios
For people on zero-hours contracts, an average will be used over recent months to estimate any claim. Anyone in a short term engagement under PAYE may well find that they qualify for a furlough so long as they were hired before February 28. This will be their employer’s decision though, and some productions may never resume if things don’t improve, so redundancy may be a reality. It is possible to be on furlough and later made redundant.
As things stand, anyone who falls outside of these conditions should look towards the benefits system. This will not be sufficient in many cases and there will be injustice unless some means of working to help unfortunate cases can be found. This is unlikely to be addressed immediately as the government will be focused on initiatives that cover the majority before turning its attention to less common scenarios.
With regard to Universal Credit, the calculation will ignore the minimum income floor during the virus period and the amount payable has been increased from April 6, which is slightly helpful. Anyone with substantial savings and other income streams may find their claim is impacted, and it will seem very unjust in some cases when compared to the standard packages for others. Hopefully this might be reviewed once some order has been restored.
Outside of the grants to cover loss of earnings, there are other previous announcements that some self-employed people might explore. Also remember that July tax payments may be deferred until January 31, 2021, and VAT payments between March 20 and June 30 may also be deferred until April 5, 2021. People who pay their VAT by direct debit should remember to cancel it.
There is plenty more to be addressed, both in honing the announced schemes and dealing with less common scenarios where hard luck stories will be numerous.
Dave Morrison is a partner at Nyman Libson Paul accountants and tax advisors