Chancellor Rishi Sunak said on Thursday that his eagerly awaited support scheme for self-employed people during the coronavirus crisis will cost the taxpayer “tens of billions” of pounds.
After previously unveiling support packages for companies and employees, Mr Sunak said the self-employed had not been forgotten. “We will not leave you behind and we are all in this together,” he added.
The Treasury has blown hot and cold over the appropriate support for people running their own businesses, and in the end it has designed a scheme for the self-employed that will be very generous to some and tough on others.
What are the details of the support scheme for the self-employed?
Mr Sunak said his scheme would help musicians, sound engineers, plumbers, electricians, taxi drivers, hairdressers and child minders who felt their livelihoods were on the line.
The scheme will cover 80 per cent of self-employed people’s average monthly profits over the past three years, up to a cap of £2,500 per month. It will be open to most of the self-employed, and will not depend on proving that their businesses were hit by the coronavirus crisis.
The money will come in the form of a taxable cash grant, paid by the end of June after a self-employed person has applied to HM Revenue & Customs. People will need to give evidence of their taxable profits from recent tax returns.
The Treasury estimated Mr Sunak’s scheme would cost £9bn for the first three months, but officials had little more than a rough idea of the total expense.
Torsten Bell, director of the Resolution Foundation, a think-tank, said Mr Sunak had devised a generous scheme that “filled a big hole in his crisis response”.
To limit the cost of the scheme, Mr Sunak excluded people with profits of more than £50,000 a year. It is also only available to those who make the majority of their income from self-employment.
How many people will benefit from the scheme?
The Treasury estimated that 3.8m people will benefit from among the roughly 6m who are self-employed. The chancellor said it covered 95 per cent of those who earn most of their income from self-employment.
The richest group of self-employed people, with profits of more than £50,000 a year, represent about 5 per cent of the total. In 2017-18, official figures show that 149,000 of the self-employed had profits of between £50,000 and £100,000 a year. A total of 127,000 had profits of more than £100,000.
Stuart Adam, economist at the Institute for Fiscal Studies, a think-tank, said Mr Sunak’s scheme would rectify much of the drop of incomes that many self-employed had faced before his announcement.
What are the notable gaps in the scheme?
There are some big gaps, although some in the Treasury have little sympathy for the people affected by these.
One glaring gap is that Mr Sunak’s scheme does not cover people who were owner-managers of their companies, paying themselves mostly through dividends.
They will not be eligible for the scheme, said Treasury officials, because it was impossible to know whether the dividends came from the fruits of their work or from passive investments and the government did not want to subsidise people with large pots of money.
Some officials felt these people had been engaging in tax avoidance by setting up personal service companies as contractors and did not deserve support.
There are at least 1.8m people who are owner managers and Tim Stovold, head of tax at Moore Kingston, an accounting firm, said 400,000 paid themselves mostly dividends through personal service companies. “They are left out in the cold for no logical reason,” he added.
Treasury officials said that if these people employed themselves through their companies they could, as bosses, furlough and apply for the government’s job retention scheme for employees.
Other gaps involve self-employed people’s companies which have had to shut but are not eligible for business rates relief and those with recent start-ups who do not have any tax returns to demonstrate proof of income.
Will the arrangements promote fraud?
The Treasury has been desperately worried about fraud, but plumped in the end for a generous scheme for self-employed people that was deliverable rather than one that would protect taxpayers.
Mr Sunak acknowledged this, saying: “I don’t think we should let the perfect be the enemy of the good.”
The main losses to the Treasury will come from self-employed people whose businesses are doing fine and will be able to claim under the scheme and keep on working. This is allowed under the arrangements, said one Treasury official.
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The thinly veiled warning made repeatedly by Mr Sunak was that self-employed people will have to pay more national insurance contributions after the coronavirus crisis is over than they presently do.
Speaking of the lower national insurance rates paid by the self-employed and their exemption from the 13.8 per cent contributions made by employers, the chancellor said this would have to change in the future, now that the state had been so generous.
“It is much harder to justify the inconsistent contributions of people with different employment statuses,” he said. “If we all want to benefit equally from state support, we must all pay in equally.”
The IFS estimated the more generous tax treatment for the self-employed costs the Treasury about £5bn a year.