The government has announced its intention to provide further support for the self-employed (including members of partnerships) in the form of a Taxable cash grant but does not need to be repaid.
The scheme allows individuals to claim a taxable grant worth 80% of their trading profits up to a maximum of £2,500 per month for the 3 months from March to May 2020. This may be extended by the government if needed.
The taxable cash grant will be in the form of a single lump sum to cover the three months from March to May 2020. HMRC is aiming to contact eligible individuals in mid-May 2020 with a view to making payment in June 2020 to those that are eligible directly into their UK bank account. In our first example below, HMRC would make a single payment of £5,667 into the UK bank account, being three lots of £1,889.
Those that receive a grant can continue to work.
The scheme will be open to those that have submitted an income tax self-assessment tax return for the year to 5 April 2019 (the 18/19 tax year). Worth noting that HMRC’s guidance does state that the 18/19 tax return must be filed by 23 April 2020 in order to eligible for this scheme! For those that have yet to file their 18/19 tax return, it represents something of an opportunity in the few days remaining to meet this deadline.
You will be eligible for the scheme if all of the following criteria apply:
- The individual must be currently self-employed (including partners in partnerships and LLPs);
- The individual must have lost trading profits due to Covid-19/Coronavirus and they must have traded in 2019/2020,
- The trader intends to trade in the current 2020/2021 tax year and are trading at the point of application or would have been except for Covid-19.
- The individual must have submitted a 2018/2019 self-assessment tax return (or will do by 23 April 2020) in order to qualify for this scheme. Individuals can, of course, submit a late return for 2018/2019 after 23 April 2020, however, this would mean that they would be precluded from qualifying for this scheme.
- Any changes relating to tax returns that were amended after 26 March 2020 will not be taken into account.
In addition to this, there are two alternative rules relating to earnings and sources of those earnings (a trader only needs to meet one of the following two requirements):
- The self-employed trading profits for 18/19 must be less than £50,000 and more than 50% of their income stems from self-employment
- Average trading profits for the tax years 16/17, 17/18 and 18/19 were less than £50,000 and more than 50% of their income stems from self-employment.
To work out the average trading profit, HMRC will add together your total trading profits or losses for the 3 tax years then divide by 3 using the information set out on the tax returns that they have received.
Example – Where the individual made losses in one or more of the tax years
A sole trader has the following profits and losses for the 3 years and more than 50% of their income stems from self-employment.
- £45,000 profit in tax year 2016/2017
- £60,000 profit in tax year 2017/2018
- £20,000 loss in tax year 2018/2019
First, add £45,000 and £60,000 then deduct £20,000 loss. This gives us a total of £85,000 and dividing this by 3 this gives us an average of £28,333. 80% of this would be £22,666. We do not treat loss-making years as zero, however, we do not take into account brought forward or earlier year losses either.
The grant will be the LOWER of 80% of the average trading profit (here £1,889 which is £22,666/12) or £2,500 per month. Here the grant would be £1,889 per month as it is lower than £2,500 per month.
For the purposes of working out the average trading profit, HMRC will not deduct losses brought forward from previous years. HMRC will not deduct the personal allowance either in arriving at the reference figure.
For those that started trading between 2016-19 HMRC will only use those years for which a Self-Assessment tax return has actually been filed.
The above example assumes that trade was continuously carried out over the 12 months of each year. Looking at HMRC’s methodology it is clear that whether or not trade was carried out over the full tax year or say, 4 months of it does not matter. The averaging calculation will always use 24 for 2 years or 36 months for 3 years.
More than one trade
HMRC has confirmed that it will sum the profits and losses of all trades to arrive at the average annual income.
Example – Where the individual did not trade in all 3 tax years
If tax returns were only submitted for 2017/2018 and 2018/2019 then HMRC would take the average of those 2 years. This would be the case where no self-employment was carried out in 2016/2017.
To reiterate, HMRC are taking a 12-month average per tax year even if the self-employment only lasted 4 months of a tax year. So the denominator for 2 years would be 24 months even if the self-employment did not start until partway through the two years.
Disguised Remuneration Scheme
The loan charge affects individuals if they used disguised remuneration tax avoidance schemes and they did not repay their loans, or provide HMRC with all the necessary settlement information by 5 April 2019. HMRC released updated Guidance on 7 April 2020 in respect of the Loan Charge.
HMRC offer the following advice to those individuals who have reported their Loan Charge, are aiming to settle their disguised remuneration scheme use by 30 September 2020 and wish to claim a grant under this scheme will have different criteria to adhere to. HMRC state that their grant will be based on either (presumably HMRC mean the higher of):
- the average of the tax years 2016 to 2017 and 2017 to 2018
- the tax year 2017 to 2018 if you were not self-employed in the tax year 2016 to 2017
In this circumstance, note that the 2018/2019 figures are not used in order to arrive at an average.
Note also that those that are declaring a Loan Charge should file their 2018/2019 self-assessment tax return by the 30 September 2020 (they do not need to file their return by 23 April 2020, see above) in order to qualify for a grant under this scheme.
If the self-employment began after 5 April 2019, i.e it began in the 2019/2020 tax year onwards, then, unfortunately, the individual will not qualify for this scheme.
HMRC will use the amount of profit before the impact of an averaging claim to assess eligibility. HMRC makes no comment on how this might affect those whose profits are derived wholly or mainly from creative works.
Tax Credits and Universal Credit
Individuals that claim Tax Credits would need to include the grant as part of their income. The grant will be treated as earnings for Universal Credit too and should be reported in the claimant’s online journal.
HMRC state: ‘You can make a claim for Universal Credit while you wait for the grant, but any grant received will be treated as part of your self-employment income and may affect the amount of Universal Credit you get. Any Universal Credit claims for earlier periods will not be affected’.
Making a claim
It is crucial to observe that HMRC will contact and invite those that are eligible to apply. Applications will need to be made online when the invitations have been issued by HMRC.
As mentioned earlier, HMRC are aiming to contact eligible individuals by mid-May 2020. Individuals do not need to contact HMRC now.
This seems an opportune moment to remind readers that HMRC does not send texts or make calls asking for bank or credit card details. If this happens then it is likely to be a scam. Please be wary.
We will update this guidance as and when HMRC issue further guidance of their own.
The online service is not available yet. HMRC is aiming to contact taxpayers in May 2020.