Monday, 30 March 2020

SELF-EMPLOYED CORONAVIRUS SCHEME


THIS BLOG WILL BE UPDATED AS I GET NEW INFORMATION.

UPDATED 0500 on 23 May 2020 - version 2.61. It includes the formal Treasury Rules, the application process for the Scottish scheme, and new figures on excluded people. It also includes guidance on what 'adversely affected' means - and why you do not need to show hardship.

Applying
By now if HMRC thinks you are entitled you should have received a letter inviting you to claim and explaining how. 

If you have not heard and think you are entitled try the online checker . If it says 'no' then
  1. read this guide carefully to see why that might be (the checker does not give the reason why you failed, just a list of possibles).
  2. Try again making sure you enter your 10 digit Unique Tax Reference and your National Insurance number carefully - it is very fussy.
  3. If still 'no' ask for a review. 
  4. If that comes back 'no' it will give a reason. The one most people fail on is the 50% rule - explained below.
  5. If you still think you are entitled, return to this blog for more advice as we do not know yet what the next step might be. But the indication is there will be no simple right to appeal further.

Reluctant to claim?
Some people who would be entitled are saying they are reluctant to pursue their claim. They are put off by a question in the application process which asks them to confirm that their self-employment business has been 'adversely affected' by the coronavirus crisis. They are unclear what that phrase means and are afraid HMRC may challenge their view of what is 'adversely affected'.

HMRC gave me these examples of what would constitute being 'adversely affected'

You’re unable to work because you’re:  
·         shielding 
·         self-isolating 
·         on sick leave because of coronavirus 
·         have caring responsibilities because of coronavirus
You’ve had to scale down or temporarily stop trading because:  
·         your supply chain has been interrupted 
·         you have fewer or no customers or clients 
·         your staff are unable to come in to work 


It also said that people claiming the SEISS grant should keep records of how the business has been adversely affected. That could include 
  • business accounts showing a reduction in turnover 
  • dates your business had to close due to lockdown restrictions
  • dates you or your staff were unable to work due to coronavirus symptoms, shielding or caring responsibilities due to school closures. 
HMRC would give no guidance on how much 'reduction in turnover' would be enough to claim. It seems to be up to you to say how much would amount to 'adversely affected'. In my opinion that would be any reduction in your business turnover or profit. Or even no change if you had to work harder to achieve it.

One other point. As far as the law is concerned it does not matter if you need the money or not - though clearly most people who claim will need it badly. The law set out in this Treasury Direction makes no mention of needing the money. Apart from the two tests built into the scheme, there is no means-test of your income and none at all of your capital. The income or capital of your spouse or partner is not assessed. So if you have money in the bank or your spouse is still working full time that is neither here nor there as far as the law for claiming the SEISS is concerned.

My advice is to claim if you are entitled. Clearly if business is booming under coronavirus then don't claim. But if you turnover or profits have been reduced in any way by any amount or you're having to work harder to stand still because of coronavirus there is no reason I can see for you not to claim. The money is there to help your business over that difficult patch. If you can argue your business has been adversely affected you have a right to this money. 

The Scheme
The Government scheme to help self-employed people will leave out millions of those who have income from self-employment. Even Her Majesty's Revenue & Customs admits only 66% will be helped. It will not be 95% of self-employed people as Ministers and others have said. The Government admits two million will be left out - we now know it could be double that.

If you live in Scotland you may get a £2000 grant if you are excluded from the UK scheme because you began your self-employment in 2019/20. The grant is accessed through your local authority. However, you will not get it if you have already claimed Universal Credit. See EXCLUDED Scotland below.

Tweet or DM me @paullewismoney with corrections and questions. I may not be able to answer them all personally.

Numbers
The Office for National Statistics says at the end of 2019 there were a shade over five million self-employed people. But the Government says 5.75 million are registered with HMRC as self-employed. It has said its  Self-employment Income Support Scheme announced on 26 March 2020 will help 3.8 million of them.

HMRC has told me that two groups are excluded because
  • Less than half their income came from self-employment. It says that is 30% of the 5.75 million or about 1.75 million people OR
  • Their profits from self-employment were £50,000 or more. It says that is 4% of the total or around 230,000 people. 
Those two groups reduce the 5.75 million registered to about 3.8 million - the number it says will be helped (though by 4 May it was saying 'around 3.5 million'.)

Those Government figures fail to count four excluded groups.
  • People who began their self-employment in the tax year 2019/20 that is since 6 April last year. New figures from the Office for National Statistics show there were 150,000 in the first nine months of 2019/20 which would gross up to around 200,000 in the whole year. However, ONS has told me that is 'a lower bound' and that "Over the past five years, the proportion who have been continually self-employed for less than 12 months is around 10%. Over the last five years it is between 450,000 and 500,000."
  • People who began their self-employment in 2018/19 but did not register because the business was too small or they forgot. A new self-employment should be registered by 5 October in the tax year after it begins. We do not know how many register each year because HMRC does not produce the statistics. 
  • People who consider themselves self-employed but trade through a limited company of which they are a director. The Institute for Directors estimates there are 800,000 limited companies with between 0 and 9 staff. Another estimate is that half a million people trade through a personal service company. These new ONS figures show that of those saying they are self-employed 715,000 are a sole director of a limited business and 935,000 say they are running a business. The two groups overlap so should not be added together. 
  • Those who earn very little and did not register - though they should have done if their turnover exceeded the level of the trading allowance which is £1000.
The Scheme
The Self-employment Income Support Scheme gives self-employed people who qualify 80% of their average annual profits divided by twelve to give a monthly amount and the multiplied by three to give a three monthly amount. That will be paid in one lump sum in early 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 £50,000. Others can work out their payment by dividing their annual profits by five. The lump sum will form part of their income 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

And the formal Treasury rules were published on 30 April and the official guidance was updated on 13 May. The rules have changed the conditions slightly. 'Less than £50,000' has become '£50,000 or less' and 'more than half' has become 'at least 50%'.

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 by the extended date of 23 April 2020. 

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.

3. You must have traded in 2019/20 and still be trading when you apply or would be but for COVID-19 and you must intend to continue to trade in 2020/21. Neither of those years will count towards the amount of grant you get. 

4. Your business must have been adversely affected by the Coronavirus outbreak. That includes restrictions on yourself due to health or other reasons. 

5. Your annual profits must be £50,000 or less. 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 £50,000 or less
OR
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. It cannot be taken over 2016/17 and 2018/19. 

6. At least 50% of your income in a tax year must come from self-employment.
You can fulfil this condition in two ways –
a) At least 50% of your income in 2018/19 was from self-employment
OR
b) Your average income from self-employment formed at least 50% 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. It cannot be taken over 2016/17 and 2018/19. 

Income is all taxable income other than that from self-employment. It includes wages, income from property, private and state pensions, any taxable social security benefits, interest on savings, returns on investments, any other taxable income. If you consider yourself self-employed but do short stints on contracts paid through PAYE the gorss amount counts as employed income not self-employed profits and will work against you passing the 50% rule. Guidance on how HMRC works out profits and other income was updated on 7 May. All the amounts used for the calculation are taken from the Self Assessment form. The calculation uses different years for those subject to the Loan Charge.

7. You apply for the scheme and are accepted.

HMRC holds most of the data it needs and from 13 May has been writing, emailing, or texting people it thinks qualify to invite them to apply. They then have to check their entitlement on the HMRC checker and if the answer is 'entitled' they will be told when and how to apply. Never click on links in response to an email or text even if it appears genuine. It is safer to go to the HMRC checker direct.

If successful the money will be paid direct into the nominated bank account by 25 May. If the checker says you are not entitled it will not say why. There is a procedure to challenge the checker but the response which will come later in the month is more likely to be an explanation of why you have failed rather than a change in the decision. 

It is very important to put the correct and up to date information into the form. It needs your 10 digit Unique Tax Reference (UTR) and your National Insurance Number both of which are on HMRC letters to you about self-assessment. . If you make a mistake it will say 'no'. However you can try again - without limit - to get it right. Before 13 May it did not have all the data uploaded so it gave some false 'no's. If that happened to you then try again now.

If you are accepted you are not restricted from 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 separate job as long as you fulfil rule 3 above.

If you qualify for this scheme and also have a separate job as an employee you can claim from the self-employment scheme and be furloughed by your employer in the job. See my updated blogpost on the Coronavirus Job Retention Scheme.

There is no upper age limit.

Beware thieves contacting you by text, phone, or email offering you money from HMRC. Do not click on any link or speak to anyone. Hang up or delete


Universal Credit
The Government says if you cannot wait three months for the money then you should claim Universal Credit - if you are under state pension age - 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 on the Government website. Before you do that you can check your entitlement to means-tested benefits including Universal Credit at Turn2Us. Savings over £6000 will reduce UC and savings over £16,000 exclude you. A couple has their income and savings counted jointly. People over state pension age - almost 66 at the moment - should claim pension credit which is almost double the rates for Universal Credit.

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, normally over the next twelve months.

WARNING: If you already get tax credits it is probably best not to claim Universal Credit as it may well be worth less and you cannot then go back to tax credits. That is true even if you do not qualify for Universal Credit. Seek advice - Citizens Advice is probably the best place to start.

When you get your self-employment payment that will affect your Universal Credit. The Government has now confirmed the payment in late May will be treated as earned income in that assessment period. That will be taken into account when your next Universal Credit payment is made and will probably wipe it out. It will not affect earlier payments so you will not have to repay any Universal Credit you have had, except of course the advance payment if there is still an amount outstanding. The next month you will have to reclaim UC, which is easy and does not normally involve a five week wait. If your late May payment is very big - well over £2500 - it may reduce the payments you get or even prevent a claim.

WARNING: In Scotland if you have claimed Universal Credit - even if you have not received a payment yet - you are excluded from the Scottish Newly Self-Employed Hardship Fund. 

EXCLUDED
Newly self-employed
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 being perhaps 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 to me again that there are no exceptions to this rule: 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.  

New figures given to me by Office for National Statistics show there were 150,000 people who are still self-employed at the end of 2019 who began self-employment in the first nine months of 2019/20. That implies over the whole tax year to day about 200,000 excluded people. However, ONS has told me that is 'a lower bound' and that "Over the past five years, the proportion who have been continually self-employed for less than 12 months is around 10%. Over the last five years it is between 450,000 and 500,000."

Scotland
If you live in Scotland you may get a £2000 grant if you are excluded from the UK scheme because you began your self-employment in 2019/20. The grant is accessed through your local authority. Payment is promised within ten days. You must fulfil the other conditions for UK help with more than 50% (not at least half) of your income in 2019/20 coming from self-employment and your trading profits in 2019/20 must be below £50,000 (not £50,000 or less). 

However, you will be excluded from this scheme too if you have claimed Universal Credit, even if you have not received a payment yet. You will also be excluded if you receive Statutory Sick Pay, Employment and Support Allowance, Job Seekers’ Allowance, or Income Support. See the Scottish rules.

The £35m budget indicates that just 17,500 people are expected to qualify.

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 50% rule is turning out to be the main reason people unexpectedly fail to get a grant. It is hitting pensioners particularly hard as both private and state pensions count as 'other income' and if the total is more than the self-employed profits no grant is paid.

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. We also know now that 431,000 people who are self-employed now began to be so in 2018/19. The later in the year they began the more likely they will be caught by the 50% rule.

HMRC has confirmed that there is no provision to gross up the profits earned over a few months to give a yearly amount. If someone worked part of the year as self-employed it is the actual profits over the period of self-employment that is counted for all the rules.

Women on maternity leave
Maternity allowance is not counted 'other income' but there is no provision to ignore the time when you are not earning from self-employment though you are treated as 'still trading'. So a self-employed woman can find that she gets far less because the same three year average of her profits is used even if she was not earning for a large chunk of that period due to maternity leave. By contrast an employee on maternity (or other statutory leave) has their pay counted as if they were not on maternity leave for the Coronavirus Job Retention Scheme. 

Profit ceiling
People whose profits are above £50,000 are excluded even though they may be as much in need as those who make £49,999. The Treasury said it has to have a limit to make it affordable. However, if people with profits above £50,000 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 no 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 invested heavily in their business will be in scope of it because those investments will reduce their taxable profits. 

Directors
At the end of 2019 a new ONS report says that 715,000 people who consider themselves self-employed traded as the sole director of 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 - significant 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. 

It is possible for sole directors to furlough themselves and fulfil their statutory duties as directors. That means directors of limited companies can furlough themselves in their capacity as employees or office holders of 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. 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. Many will not qualify for the CJRS because pay themselves wages once a year and if that is at the end of March they will be excluded from it by the cut off date of 19 March on payroll.

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.


THIS BLOG REFLECTS THE RULES AS I UNDERSTAND THEM AT THE DATE AND TIME INDICATED. IT DOES NOT CONSTITUTE ADVICE AND SHOULD NOT BE RELIED ON TO MAKE DECISIONS THAT WILL AFFECT YOU FINANCIALLY.

Paul Lewis

23 May 2020
version 2.61