MPs challenge minister over treatment of dividend income in business support

MPs on the Treasury Committee questioned a minister and two of the Treasury’s most senior civil servants in the latest session of its inquiry into the economic impact of coronavirus, held on Wednesday 29 April.

The committee launched the first stage of this inquiry on 18 March 2020 when it issued a call for evidence on the speed, effectiveness and reach of the Government’s and Bank of England’s immediate financial responses to coronavirus. It will continue to highlight gaps in support to the Treasury. The Committee is also examining the impact on the economy and different sectors, the implications for public finances, and how the Government can work towards a sustained recovery.

Witnesses

Stephen Barclay MP, Chief Secretary to the Treasury, HM Treasury
Katharine Braddick, Director General Financial Services, HM Treasury
Beth Russell, Director General Tax and Welfare, HM Treasury

Dividends as pay

Jim Harra, head of HMRC, told the Committee in a previous session that the reason it was not possible to take dividend income into account in the many COVID-19 financial support packages for individuals, is because it was very difficult for the Treasury/HMRC to differentiate between the dividend income relating strictly to self-employment and the dividend income relating, for example, to a passive holding in a portfolio of shares elsewhere. Committee Chair Mel Stride asked today’s panel if there was a practical impediment to providing support for the self-employed working through companies based on dividend as well as PAYE income - would the Treasury provide that support, or is there a policy objection to providing that support?

Stephen Barclay replied that it is very difficult to roll a scheme out at the speed the Government have sought to do while trying to address how you determine what is investment income and what is linked to earnings. There is a different rationale to furloughing to the rationale behind the self-employment scheme, he explained. The policy objective has been to see what can be delivered at pace. When pushed by Stride, he said dividends are not treated in the same way as PAYE income by the tax system, but the primary concern has been an operational one. Part of the reason the package for the self-employed came after the package for PAYE was because of the complexity of addressing the self-employed, he said.

Stride suggested that those who claim for furlough could make a claim based on their self-employed dividend income and that HMRC could then look at some clawback mechanism if an erroneous claim had been made, maybe backed up by ‘significant penalties’.

Barclay replied that the significant fraud risk puts him off. Beth Russell added that because we do not have information on these people who pay themselves by dividends, we do not have an assessment of the scale of the risk. She explained: “HMRC then has to go back and retrospectively check every single claim, which it do[es] not need to do in the same way for the schemes we have set up so far.” Stride asked Russell to write to him with an update of proposals that the Treasury are looking at to help people paid mostly in dividends.

Exclusions from the CJRS

Rushanara Ali, Labour, was concerned about hearing in a previous Committee hearing that 350,000 to 500,000 people have been left out of the Coronavirus Job Retention Scheme (CJRS). Ali mentioned that some 250,000 hospitality workers who started before 28 February 2020 but have not had an RTI event submitted by their employers in time for 19 March 2020 have been inadvertently ‘un-furloughed’.

Barclay said there have been some ‘trade-offs’, in designing something that is simple enough to deliver to those timescales with the hard edges that Ali alludes to. These are the trade-offs in terms of the risk of fraud. There is no scheme that can be designed in the timescales we are dealing with that covers every single scenario, he said. Ali is angry at what she sees as people treated as ‘collateral damage’ in the Treasury’s trade-off analysis.

Reporting fraud

Alison Thewliss, SNP, wondered what the incentive is for people to use a hotline for employees who have been furloughed but have been asked to work, even though they are on furlough, by their employer, because they are ‘going to lose out on their wages at the end of the day’. Barclay said he would expect HMRC to deal with any whistle-blower call with discretion.

Universal credit claims

Thewliss was also concerned that in March, it was reported that there were queues of around 145,000 individuals trying to get into the DWP website for universal credit.

The chief secretary said the Treasury has worked with DWP on the reprioritisation of work, in particular the redeployment of staff, both internally within DWP and across the wider Whitehall civil service, for example staff from the Home Office passports agency. On the £16,000 threshold, the Government has looked at the guidance, for example, where those who were self-employed had put money aside for tax. One change we have made is to enable people to defer that tax payment but to also ensure that, in the guidance for universal credit, those are not classed as savings in the way that has an impact on their ability to claim universal credit, he said.

Why have you not increased legacy benefits, asked Thewliss, to which Barclay replied that the key thing is to stop people going into benefits in the first place. Russell added that alongside universal credit, the Government had also increased the working tax credit.

Thewliss asked for a relaxation of the two-child limit within benefits. Barclay declined, saying it is about equity between those on benefits and those who are not, and the wider affordability of the system.

Tronc

Steve Baker, Conservative, wanted the Treasury to look at the possibility of compensating people for their loss of tronc. (Tronc refers to a common fund into which tips and service charges are paid for distribution to workers, usually in a restaurant or hotel.) The Government have stopped businesses in these sectors operating and it is a matter of equity when people in that position are not getting 40 per cent of their regular income. They should be getting the 80 per cent that the Government intended, said Baker.

Russell replied that the difficulty with tronc particularly is that, in some cases, it is notified to HMRC and in some cases it is not, so if we included it there would be unfairness in that approach. We are generally taking an approach that discretionary payments are not included and obligatory payments are, she said.

£50,000 cut off to self-employed scheme

Baker asked the Government to dispense with the ‘50k cut-off’ and instead use a £2,500 a month cap on what people are paid. At the moment, Baker said, it looks like an ‘ideological aversion to self-employment’. Why not just rely on the £2,500 a month limit and treat people in self-employment more similarly to those who are PAYE on furlough?

Barclay replied that the way this is designed is off the self-assessment tax forms. That is the operational design. That is where the £50,000 threshold has been linked and that enables Treasury to cover 95 per cent of people in self-employment where it is the majority of their income.

Support for the hospitality industry

Anthony Browne, Conservative, asked about the cut-off in rateable value of £51,000 for businesses in the hospitality industry, ‘where they get a £25,000 grant up to that but then, if they are just over £51,000, they get nothing.’ He would like to see some form of tapering scheme, for example for every £1 increase in rateable value you reduce the grant by £1.

The minister replied that changes have already been made, in part to address concerns where there were certain businesses saying that they were outside of scope for what was within the Budget, which is why the Government made the changes subsequent to that.

Separately, Browne spoke about a ‘gap’ in COVID-19 financial help around businesses where the operations are based primarily at home, or the administration is based at home but they operate out in the field, so they do not pay business rates. Barclays said part of the reason for linking it to property is that property is a significant fixed cost of business. That was part of the rationale for the scheme, he added.

Furlough and redundancy

Browne said he was worried that furloughed people will end up being made redundant as soon as they come off the scheme. Millions of employees coming off it at the same time, and companies suddenly facing wage bills but without having income to pay for those wages, worries him.

Barclay replied that that is part of a much wider question on the wider exit package. He said: “The interaction with getting people back to work is extremely important, but there are many dimensions to that: the interaction with schools, which are a key enabler of people’s ability to work; how it interplays with schemes such as the furlough scheme; and how it addresses the challenges for the NHS.”

Distributional impacts

Alison McGovern, Labour, asked if Barclay or the Treasury has commissioned analysis across different groups in society to work out where disproportionate impacts are, for example on race, gender, disability and socioeconomic inequality.

Barclay said the distributional impacts are usually measured by household and there is often quite a time lag in compiling that data. The expectation is that this is impacting much more among the young, women and the low paid, he said. Again, it is quite difficult to model that, given that we do not know how long these measures will be in place for.

Recovery?

Angela Eagle, Labour, was told by the chief secretary that it is too early to start talking about V-shaped, U-shaped or ‘what shape’ a recovery will be. It is clear from what the OBR and others have said that the UK has responded quickly and on an unprecedented scale, said Barclay. He went on to say the whole purpose of the measures the Government have taken has been to seek to limit that economic scarring and to enable the economy to recover quickly, but it will, in large measure, be shaped by how long the measures are required for. “You will know that, for example, the British Chambers of Commerce has talked about the fact that many businesses do not have cash reserves of more than three months and that there will be significant pressure on businesses the longer this goes on.” We have taken measures to enable the economy to bounce back quickly, he told MPs.

The spending review will be in the autumn, later this year, the minister added.

The Budget

Harriett Baldwin, Conservative, asked Barclay to give an indication of how much more the Treasury has spent since the Budget on 11 March.

Barclay said: “We have tended to touch more on the business and the individual elements of spending, but on the public services side, which is the key part, that is now in excess of £16 billion. It is the £14.5 billion that the Chancellor updated on, and then there has been the local authority spending in addition to that. There is also additional spending coming through in key areas, not least on the health side, and there is also £2 billion or so of spending that has gone to the devolved administrations through Barnett consequentials.”

When pressed if the OBR forecast that by the end of the year if we have a recovery from the coronavirus crisis and a relatively temporary shock, the deficit will rise to about 95 per cent of GDP, Barclay said: “It is clear from the OBR numbers that the impact will be significant. We see similar within the Treasury. The key is that the underlying principles of the economy are strong.”

Stalled work

Baldwin asked about some of the schemes and projects that other government departments are currently not able to deliver because of the coronavirus outbreak. Barclay said: “Departments are compiling returns to the Treasury on that and I have written to Secretaries of State about that. It is work that is ongoing. You will be able to guess where those projects largely relate. They relate to areas where, because of the health impacts, it is not possible to pursue the projects.”

Banking and insurance sector

Katharine Braddick said on the question of insurance and the impact on insurers of claims arising from a number of types of cover affected by coronavirus, the Treasury is working very closely with the  Financial Conduct Authority (FCA) and, where necessary, the Prudential Regulation Authority (PRA) to understand the impact on solvency should that become an issue. The Financial Policy Committee at the Bank of England leads for the UK on analysing the stability of the financial system, and in its Financial Stability Report it will be discussing how it sees the impact of the coronavirus event on our financial system and its ability to withstand and support. Currently, the Governor has made clear that the core of the system is sound and it is not constraining provision of credit into the economy, she said.

The full session is available to read in PDF or HTML.

 

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