Economic impact of coronavirus: gaps in support and economic analysis Contents

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2Gaps in support

27.In our first report of the inquiry, Economic impact of coronavirus: Gaps in support28 we identified the following groups as having missed out on support:

• Those newly in employment or newly self-employed;
• Those self-employed with annual trading profits in excess of £50,000 who are ineligible for support;
• Directors of limited companies who take a large part of their income in dividends, who do not qualify for SEISS and who are only entitled to claim support under CJRS on the typically small PAYE component of their income;
• Freelancers or those on short-term contracts who are unlikely to be eligible for either scheme.

28.Our report stated:

as the period of support is extended for those who are already eligible to claim, we question whether it remains “not possible or desirable”29 to help those who have fallen through the gaps. Over a million people have been locked out of support. The Government must assist these people if it is to completely fulfil its promise to do whatever it takes to protect people from the economic impact of coronavirus.30

29.In our second report of the inquiry, Economic impact of coronavirus: the challenges of recovery, we said that:

We are concerned that whilst there have been impressive examples of the Treasury moving at scale, at pace and with imagination to support the economy there are also disappointing signs of intransigence. We are disappointed in the Treasury’s refusal to implement recommendations from our first Report, focused on the gaps in support.31

30.In July 2020, the Chancellor confirmed to us that he had “drawn a line” under any possibility of changing the schemes.32 However, we urged the Treasury to exercise flexibility in its approach going forward.33 We have continued to take evidence on those excluded from support in the third stage of the inquiry.

Extension of schemes

31.On 24 September 2020 the Government announced an extension to the Self-Employment Income Support Scheme (SEISS) to be introduced in November 2020, to cover the six months up to the end of April 2021. The SEISS Grant Extension would be made in two taxable grants – the first to cover November to January, the second to cover February to April.34

32.Initially it was proposed that the first of these grants would cover 20% of average monthly trading profits, capped at £1,875, but that figure was revised subsequently.35 On 5 November the Chancellor announced that the first grant would be calculated on the basis of 80 per cent of three months’ average trading profits, capped at £7,500.36

33.In December 2020, he announced an extension of the Coronavirus Job Retention Scheme (CJRS), to run until the end of April 2021, with employees receiving 80% of their current salary for hours not worked.37

34.Given the economic outlook, we believe that the Government was right to extend both the Coronavirus Job Retention Scheme and the Self-employment Income Support Scheme to the end of April 2021. However, given the extended duration of restrictions, we believe the Government was wrong not to address gaps in support.

Newly self-employed and 2019–20 tax returns

35.Many witnesses told us that the 31 January deadline for 2019–20 tax returns offered an opportunity to help the newly self-employed who had been missed out in previous rounds of the SEISS. Martin Lewis, the founder of Money Saving Expert, told us:

Now, we have the fourth income support grant that is due to come out in February. Crucially, that is after the deadline for the 2019–20 tax returns to be filed, which means it is absolutely practicable that they could be incorporated for the fourth self-employment income support scheme, and I would desperately urge for that to happen.38

36.Caroline Miskin, Manager, Tax Practitioner Support, Institute of Chartered Accountants of England and Wales (ICAEW) also agreed that “in principle […] there is no reason why the 2019–20 tax returns should not be taken into account when determining the conditions and eligibility for the fourth grant”, though she observed that there would be some work on “data cleansing” needed on the part of HMRC.39

37.Richard Wild, Head of Tax Technical Team, Chartered Institute of Taxation (CIOT) pointed out that HMRC could also use the 2019–20 data to refine the amounts to be paid to existing claimants:

The scheme pays 80% of average profits over the previous three years on a quarterly basis, as it is worked out, and you may want to bring in 2019–20 to that and drop off the earlier year in order to have a more up-to-date reflection of what their business has been generating.40

38.Caroline Miskin noted there would be some “winners and losers” from doing that:

By bringing in 2019–20 and dropping off 2016–17, some people might fail the 50% test and the £50,000 test. There would be some winners and losers, depending on exactly how the conditions are determined.41

39.The 2019–20 self-assessment income tax returns will provide the Government with additional information that could allow it to provide support to those who need it but have so far not received it. We therefore strongly urge the Treasury to use the data from 2019–20 tax returns to help the newly self-employed who missed out on previous support. In order to ensure that this group is helped as quickly as possible, we recommend that HMRC prioritises work on analysing the 2019–20 tax returns.

Support for limited company directors

40.Currently, limited company directors can only receive financial support under coronavirus support schemes if they had previously paid themselves a salary, and were therefore in a position to furlough themselves to receive payment through the Coronavirus Job Retention Scheme (CJRS).42 But Richard Wild, Head of the Tax Technical Team, Chartered Institute of Taxation (CIOT), told us CJRS “isn’t really much help” to directors:

because if it is your company, your business, you want to keep working, keep it running and make it viable, so you wouldn’t be eligible to claim under CJRS anyway. A lot of directors pay themselves a nominal salary, but they wouldn’t get even that under the existing rules. […] there are risks of them going bust, losing employees and so on, so they are definitely in need of support.43

41.We also heard evidence from Martin Lewis and Martin McTague, Policy and Advocacy Chair, Federation of Small Businesses, about a new proposal to help limited company directors: the Directors Income Support Scheme (DISS). The DISS is supported by The Association of Chartered Certified Accountants (ACCA), Forgotten Ltd, Federation of Small Businesses (FSB) and Rebecca Seeley Harris (who authored the Scheme).44 The details of the scheme are outlined below:

The DISS award would be based on the trading profits of the company, which are contained in the CT600 corporation tax return. The director’s remuneration would be added back into the reported trading profits on the CT600, for it to be in parity with SEISS.

Any verification of the company’s profits can be self-certified because unlike the self-employed, the director of a limited company has certain duties in law. If a director makes a false or misleading statement, then this can have very serious consequences.45

42.Glenn Collins noted that one of the advantages of the scheme was that the information needed to implement the Scheme “is already with Government”.46 He told us that he had taken the proposal to the Treasury and HMRC and that they have been “have been positive in their review of those areas”.47

43.Caroline Miskin thought that the scheme would be more complicated to operate than SEISS. In a letter to the Chair on 22 January 2021, she stated that “we [ICAEW] do not think that it would be possible for HMRC to identify those taxpayers who are potentially eligible for support, and to calculate the value of an associated grant, based solely on data held on HMRC’s systems”. She also noted that the scheme would need “additional declarations, such as that the directors who are being claimed for are working directors, and that only one claim is being made in respect of those who are a director of more than one company”. She observed, however, that none of these problems were “insurmountable”.48

44.We heard some suggestion in oral evidence that not supporting limited company directors could be detrimental to entrepreneurship in the country and future economic growth.49

45.The Rt Hon. Jesse Norman MP, Financial Secretary to the Treasury, told us on 18 January that “DISS has been a very constructive contribution” and “it is a clear set of proposals” but “there are some concerns about how it would work”.50 But, on 25 January, he said in the Chamber “I and my officials do not believe that as framed it [the DISS scheme] overcomes the fundamental issues of protecting taxpayers’ money and safeguarding it against fraud and abuse.”51 In a letter to the Chair on 26 January, Sir Tom Scholar, Permanent Secretary at the Treasury, was also doubtful about the prospects of the DISS:

The Government’s assessment of the DISS is that the scheme as proposed is unworkable, because it is intrinsically reliant on self-certification by owner-managers of companies. The effect of this reliance on self-certification is potentially to open the scheme up to an unacceptable level of fraud and abuse, and perhaps even criminal activity. Ministers believe that the Government cannot expose the tax system to these risks.52

46.There are concerns of scope for fraud. Glenn Collins, who contributed to the details of the DISS, acknowledged: “It is incredibly important that we consider some of the fraud aspects”.53 However, he said that “directors have specific duties, laid down by company law” and believed that this would provide an element of “improved security” for the DISS scheme.54 He also pointed out that “actually the entire tax system is built around self-assessment and the fact that taxpayers make a declaration.”55 Fraud and administrative errors do not only apply to schemes targeted at the self-employed though. The Permanent Secretary of HMRC, Jim Harra, told the Public Accounts Committee in September 2020 that their planning assumption for the error and fraud rate within the CJRS is 5–10 per cent (up to £3.5 billion).56

47.By conspicuously leaving out a large proportion of limited company directors from support altogether, we are concerned that the Government is sending out the wrong message—that it is not adequately supporting entrepreneurs and employers, who have suffered significantly from a lack of support. However, we recognise that there are administrative difficulties to overcome and fraud risks with the implementation of any scheme.

48.When responding to this report, the Treasury should provide an assessment of the level of fraud which it believes would arise from the implementation of the DISS scheme.

49.We question whether the Treasury could do more to investigate how to mitigate the fraud risks inherent in the DISS scheme and similar schemes, and whether the levels of fraud risk merit the Treasury’s position of not providing any support at all. We urge the Treasury to develop measures to support limited company directors and set these out in the Budget.

The ‘50 per cent test’ and freelancers

50.Currently individuals are only eligible for SEISS if more than 50 per cent of their income is derived from self-employment (‘the 50 per cent test’).57 As we noted in our first report on the economic impact of coronavirus, this criterion has meant that many freelancers have missed out on support.58

51.Caroline Miskin told us: “There is no practical reason why there needs to be a 50% test”.59 Richard Wild pointed out that there were claimants who had a small self-employment income but who also had pension income “that tips the balance in the wrong direction as far as the 50% test is concerned”. He argued that it seemed particularly unfair that they were excluded from the SEISS.60

52.A Briefing Note by the Institute for Fiscal Studies (IFS) also emphasised that those who missed out from the SEISS because of the 50 per cent test were often low-income, and a higher proportion of them were women compared to those who were supported by SEISS:

More than half of self-employed people with less than 50% of their income from self-employment have total personal incomes of under £25,000, meaning that targeting support at this group would affect many people with low or moderate personal incomes. They also have relatively low levels of self-employment profits (more than half have profits under £5,000 per year). 45% of people in this situation are women compared with just 35% of those supported by SEISS.61

The IFS also estimated that extending SEISS to this group would be “relatively cheap” in comparison with other spending on government support schemes (between £500 million and £800 million per quarter, with average quarterly payments of between £600 and £1,000 per person).62

53.In a letter to the Chair on 14 December 2020, the Chancellor justified his decision to target the scheme at those who receive the majority of their income from self-employment:

On SEISS, the Government believes it is right to target the support at those who are majority self-employed. 1.4 million of the 5 million people who file self-employed tax returns are not majority self-employed. In fact, the average income these people receive from self-employment is between £1,800 and £3,500 a year. Therefore, the majority of their income comes from other sources. This could include income from employment, which means that individuals may be able to access support via the CJRS. The principle of our decision to target the scheme in this way was supported by the organisations with which the Government engaged when designing the scheme. It’s right that we continue to target the scheme at those who are most dependent on self-employed income.63

54.Although we acknowledge the Chancellor’s intention to target the SEISS at those who are most dependent on self-employed income, not all of them would have access to the Coronavirus Job Retention Scheme, as we pointed out in our first report of this inquiry.

55.We believe that the Government should reconsider the 50 per cent limit in the eligibility criteria for the fourth tranche of the SEISS grant so that those who derive less than half of their income through self-employment can receive some level of support.

Self-employed who earn more than the £50,000 threshold

56.Currently there is a stark difference between the Government support available to those self-employed with trading profits of more than £50,000 a year and whose business has been affected by coronavirus, and those who receive PAYE income above £50,000 a year. Whereas those who earn more than £50,000 a year PAYE income can be furloughed and receive payment through the CJRS of up to a maximum wage amount of £2,500 a month or £576.92 a week, self-employed people with trading profits more than £50,000 a year are not eligible for any of the SEISS grant.

57.In our first report on the economic impact of the coronavirus inquiry, we said:

While the Committee recognises the importance of allocating financial support to those who earn the least, the design of the SEISS means that hundreds of thousands of people are potentially suffering financial hardship because of the arbitrary £50,000 cut-off that has no equivalent in the job retention support scheme.

[…]

The Government must tackle the cliff edge that exists in the design of the SEISS by removing the £50,000 cap and allowing those with profits just over this cap access to some financial support, up to the total monthly support cap of £2,500 (as for salaried employees).64

58.In its response to our report in July 2020, the Treasury said that

those who received more than £50,000 from self-employment profits in 2018–19 had an average total income of more than £200,000. In the 2017–18 year, around 4% of self-employed people received more than £50,000 in self-employment income.65

59.When we had previously queried with HMRC some of the data on the numbers of self-employed who had been missed, they told us:

HMRC does not presently hold information on the number of people who had self-employed income as their main source of income at the start of the lock down on 23 March 2020. The reason for this is that the Self-Assessment returns relating to the 2019 to 2020 tax year are not due until January 2021, and as a result no assessment of the number of people with self-employed income as their main source of income in 2019–20 is held at this time.66

60.Caroline Miskin told us on 20 January 2021 that though the cap was intended “to exclude very high-earning groups from support”, “it has caught people who are not particularly high earning”.67 She added:

there is no inherent reason why there had to be a cap of £50,000. It could have been designed with […] a cap in the amount of the grant rather than the amount of income. It could have been designed so that it tapered away above £50,000.68

61.Richard Wild also said that the taper would not necessarily add complexity to the claimant:

You would imagine they could have built the taper mechanism, or whatever it might have been, within the calculator, in order to cap it and still calculate the right amount. It wouldn’t have introduced extra complexity for the claimant, because HMRC would have still worked out the value of the claim for you.69

62.The IFS recently estimated: “Extending SEISS fully to this whole group would cost £1.3 billion per quarter with a payment of £7,50070 [per quarter] per person. Providing a tapered form of support to those with profits between £50,000 and £100,000 would cost much less: around £350 million per quarter”.71

63.There is a striking inconsistency between the way the Government is treating employees earning more than £50,000 a year and those who are self-employed and have trading profits above £50,000 a year. Whereas those who are employed can receive support from the Government up to a maximum wage amount of £2,500 a month through the Coronavirus Job Retention Scheme, those who are self-employed receive nothing at all under the Self-employment Income Support Scheme. This is unfair. We believe the Government ought not to disadvantage the self-employed in this way.

64.We reiterate our recommendation from our first report in this inquiry that the Government must tackle the cliff edge that exists in the design of the SEISS by removing the £50,000 cap and allowing those with profits just over this cap access to some financial support up to the total monthly support cap of £2,500 (as for salaried employees).

65.The Treasury should in its response to this report provide:

• the number of people with self-employed income as their main source of income in the 2019–20 financial year;
• the proportion of the self-employed who had more than £50,000 trading profits in the 2019–20 financial year;
• the median income of those above the £50,000 trading profits threshold in the 2019–20 financial year who earned the majority of their income from self-employment; and
• the range of costs of applying the recommendations we have made to the SEISS.

Alternative grant schemes

66.We are also aware that the devolved administrations have put in place systems to try to fill gaps in support for the self-employed.

67.The Scottish Government has put in place a Newly Self-Employed Hardship Fund (NSEHF), managed by local authorities and has provided grants worth £2,000 to the newly self-employed facing hardship but ineligible for support under UK-wide schemes (as they became self-employed since April 2019).72

68.On 21 January 2021, the Northern Ireland Executive also introduced the Newly Self-Employed Support Scheme (NSESS)73 which offers an initial one-off taxable grant of £3,500 to newly self-employed individuals (sole traders and those in partnerships). Although it states that over 50 per cent of income in 2019–20 has to come from self-employment in order to qualify, it adds that if potential claimants “moved from paid employment (PAYE) to self-employment during 2019/20” the income from the paid employment would not need to be taken into account when calculating this percentage. Richard Wild told us that Northern Ireland offers the UK a blueprint for how to be more flexible over the 50 per cent test.74

69.The Northern Ireland Executive had also put in place an Emergency Resilience Programme designed to help support individual musicians, DJs, artists, actors, craftspeople and freelancers and other creative practitioners.75

70.Richard Wild pointed out that the existence of the Scottish and Northern Irish newly-employed schemes makes it more difficult for the UK Government to give national support, given the potential for multiple sources of support for these firms:

Now that Scotland and Northern Ireland have moved with their newly self-employed schemes, it probably makes it more difficult to do something for the rest of the UK, because you then have to decide whether you’re willing to give people funding twice or introduce a further complexity, which would be to have to deduct any other support that businesses have received from elsewhere. When the Scottish newly self-employed grant scheme was launched in spring-summer last year, there was a long list of exclusions, which meant you couldn’t claim the grant if you were eligible for any other Covid support. As time goes on, it becomes more difficult to target the scheme effectively.76

71.In January 2021, the All Party Parliamentary Group on Gaps in Support put to the Treasury a proposal for a Targeted Income Grant Scheme (TIGS), which involves making grants to those who have been excluded from support: the newly self-employed, PAYE freelancers, limited company directors, and those excluded by the 50 per cent rule.77 We have not had an opportunity to take evidence on this proposal.

Lost opportunities

72.Paul Johnson, the Director of the Institute for Fiscal Studies, expressed disappointment that the Government had not taken the opportunity, when extending the schemes, to change the SEISS to make it fairer and more targeted:

To have a scheme where we know that we are very significantly overcompensating a large number of people and very significantly undercompensating and, indeed, ignoring another large group, that was something entirely understandable back at the beginning of April, but really to reintroduce or keep precisely that same scheme seven months later was really quite disappointing. That the combined efforts of HMRC and Treasury could not come up with anything that was one iota better than something that was clearly, to be kind to it, extremely rough justice back in the spring was, as I said, quite disappointing.78

73.Richard Wild also stated that in the “rush to get these schemes implemented extremely quickly”, some hard edges would “inevitably” arise. However, “for some people by the time we get to March and April they will have been a year without support: it is quite surprising that we have not done more to fill those gaps”.79

74.However, Caroline Miskin, pointed out that there was some tightening of eligibility criteria, saying that “HMT and HMRC have sought to target those grants, and the conditions were quite significantly tightened for the third scheme”.80 She added:

It was made a condition that you had to have reduced profits and not just have incurred some additional PPE costs or something. So I think there has been a serious effort on behalf of HMT to try to target it, but in a way that does not undermine the simplicity of the scheme and allows HMRC to calculate the basic entitlement, with the taxpayer just being required to go through a fairly minimal process to confirm that they have complied with the conditions. They are qualitative tests, not quantitative tests, so it is already quite difficult for taxpayers to understand whether they are eligible or not. To make it even more so would make everything much more complex.81

Overall conclusion on gaps in support

75.The first version of the SEISS scheme had to be rolled out at speed in March 2020. Partly because of that haste, there were ‘hard edges’ which meant that some people lost out. Though regrettable this is understandable. However, there is scant justification for not having addressed them eleven months later.

76.We recognise that it may not have been possible for the Government to help all those who have fallen through the cracks of the support schemes. However, we are disappointed that the Government has so far shown no inclination to expand or provide alternatives to the SEISS, which is providing a vital life-line to many but is not available to all those whom we believe should qualify. We recommend that the Government look at other models of support, including those developed by the devolved administrations with a view to extending support to people who require support and who do not currently qualify.