Seize the day on SEISS reform, urge committee of MPs

MPs who make up the House of Commons Treasury Committee have published their latest report on the Economic Impact of Coronavirus, claiming there is scant justification for the Government not to have addressed the ‘hard edges’ of the Self-Employment Income Support Scheme (SEISS) by now and calling for government support to be extended to those missing out, including limited company directors, the newly self-employed and self-employed people with higher earnings.

The report, titled ‘Gaps in Support and Economic Analysis’, is the committee’s third report on this inquiry. Both the Chartered Institute of Taxation (CIOT) and its Low Incomes Tax Reform Group (LITRG) provided written evidence to the inquiry. CIOT’s Head of Technical, Richard Wild, appeared before the committee as an expert witness (liveblog here).

The Treasury Committee is appointed by the House of Commons to examine the expenditure, administration and policy of the Treasury, HMRC and associated public bodies. It is chaired by Conservative MP Mel Stride, a former Tax Minister.

Key recommendations of the report (Government should…)

  • Use 2019-20 tax returns to help the newly self-employed
  • Develop measures to support limited company directors and set these out in the Budget
  • Reconsider the 50 per cent limit in the eligibility criteria for the fourth tranche of the SEISS grant
  • Remove the £50,000 cap and allow those with profits just over this cap access to some financial support
  • Look at other models of support, including those developed by the devolved administrations
  • Set out criteria for how and when it will lift lockdown restrictions with economic and epidemiological modelling to support it
  • Be more transparent about the economic analysis that informs government decisions


The newly self-employed

Key recommendation: The committee urge the Treasury to use the data from 2019–20 tax returns to help the newly self-employed who missed out on previous support

The report notes that many witnesses told the committee 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. The report cites the evidence of Richard Wild, for CIOT, who had pointed out that HMRC could use the 2019–20 tax returns data to refine the amounts to be paid to existing claimants. Wild told the committee that the scheme pays 80 per cent 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 to have a more up-to-date reflection of what their business has been generating. But Caroline Miskin, Manager, Tax Practitioner Support, at ICAEW, noted there would be some ‘winners and losers’ from doing that. Miskin said that by bringing in 2019–20 and dropping off 2016–17, some people might fail the 50 per cent test and the £50,000 test. There would be some winners and losers, depending on exactly how the conditions are determined.

The committee concluded that 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. The MPs 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. To ensure that this group is helped as quickly as possible, they recommend that HMRC prioritises work on analysing the 2019–20 tax returns.

Support for limited company directors

Key recommendation: The committee urges the Treasury to develop measures to support limited company directors and set these out in the Budget

Another area which interested the committee in its report was support for limited company directors. 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).

The committee was interested in Richard Wild’s view that CJRS ‘isn’t really much help’ to directors. Wild told MPs this is because if it is your company, your business, you want to keep working, keep it running and make it viable, so you would not be eligible to claim under CJRS anyway. A lot of directors pay themselves a nominal salary, but they would not get even that under the existing rules. Wild explained that there are risks of them going bust, losing employees and therefore they are ‘definitely in need of support’.

The report notes that the MPs heard evidence from Money Saving Expert founder Martin Lewis and Martin McTague, Policy and Advocacy Chair, Federation of Small Businesses (FSB), about a new proposal to help limited company directors called the Directors Income Support Scheme (DISS). The DISS is supported by ACCA, Forgotten Ltd and FSB. 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. The advantages of the scheme are that the information needed to implement it is already with Government.

But the committee heard that the ICAEW thinks DISS would be more complicated to operate than SEISS. One of the reasons is that ICAEW does 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. It says 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 – but ICAEW’s witness said that none of these problems are ‘insurmountable’. On fraud, a different witness said directors have specific duties, laid down by company law and this would provide improved security for the DISS scheme.

The committee concluded in the report that, by conspicuously leaving out a large proportion of limited company directors from support altogether, it is 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. But the MPs recognise that there are administrative difficulties to overcome and fraud risks with the implementation of any scheme. They ask the Treasury to provide an assessment of the level of fraud which it believes would arise from the implementation of the DISS scheme. The committee questions 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. It urges the Treasury to develop measures to support limited company directors and set these out in the Budget.

The ‘50 per cent test’ and freelancers

Key recommendation: The Government should reconsider the 50 per cent limit in the eligibility criteria for the fourth tranche of the SEISS grant

Currently individuals are only eligible for SEISS if more than 50 per cent of their income is derived from self-employment.

ICAEW’s Caroline Miskin opined that there is no practical reason why there needs to be a 50 per cent test. CIOT’s 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 per cent test is concerned. He argued that it seemed particularly unfair that they were excluded from the SEISS. 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 per cent 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. 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).

The committee acknowledges 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 CJRS. The MPs 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

Key recommendation: The Government must remove the £50,000 cap and allow those with profits just over this cap access to some financial support

Whereas those who earn more than £50,000 a year in 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. In an earlier report as part of this inquiry, the committee complained that 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.

This week’s report cited the view of ICAEW’s Miskin that though the cap was intended to exclude very high-earning groups from support, it has caught people who are not particularly high earning. CIOT’s Wild is quoted in the report as saying that the taper would not necessarily add complexity to the claimant. Wild told the committee that ‘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’. The IFS recently estimated that extending SEISS fully to this whole group would cost £1.3 billion per quarter with a payment of £7,500 [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.

The committee concluded that it believes the Government ought not to disadvantage the self-employed in this way. The committee reiterated its recommendation from its 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).

Alternative schemes of support

Key recommendation: The committee recommends that the Government look at other models of support, including those developed by the devolved administrations

The devolved administrations have put in place systems to try to fill gaps in support for the self-employed. Last month, the Northern Ireland Executive introduced the Newly Self-Employed Support Scheme (NSESS) 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 must 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. The report notes that Wild told the MPs that Northern Ireland offers the UK a blueprint for how to be more flexible over the 50 per cent test.

Paul Johnson, the Director of the IFS, 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. CIOT’s Wild is also quoted in the report accepting 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, Wild said. ICAEW’s Miskin pointed out that there was some tightening of eligibility criteria, saying that the Treasury and HMRC have sought to target those grants, and the conditions were quite significantly tightened for the third scheme.

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, the committee accepted, but they said ‘there is scant justification for not having addressed them eleven months later’. The committee is disappointed that the Government has so far shown no inclination to expand or provide alternatives to the SEISS, which it said is providing a vital life-line to many but is not available to all those whom it believes should qualify. The MPs recommend that the Government looks 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.

Economic analysis

Key recommendations: The committee calls on the Government to set out criteria for how and when it will lift lockdown restrictions with economic and epidemiological modelling to support it; and be more transparent about the economic analysis that informs government decisions

This week’s committee report also looked at the Government’s analysis of the economic impacts of social restrictions along with the transparency of the Treasury in publishing its existing analysis. It explored the potential of cost-benefit analysis and epi-macro modelling to inform government decisions on social restrictions, as well as the need for the Treasury to produce a counterfactual on what would happen to the economy if the virus were allowed to spread without restriction. MPs also looked at the role economic modelling can play in future government decisions as the vaccine is rolled out and at the Treasury’s capacity for modelling and joint working with other departments in this area.

The committee said it is disappointed at the lack of analysis provided by the Treasury, despite such analysis being referenced in the SAGE minutes. Without it, the impression is that the Government is making important decisions ‘without proper regard’ to all their impacts, both on health and the economy, they say. The lack of such analysis also prevents the public from understanding in full the basis for, and impact of, the restrictions imposed upon them, the report argues.

The committee calls on the Treasury to be more transparent about the economic analysis which it undertakes to inform government decisions in the fight against coronavirus and to publish any such analysis in a timely manner. MPs should not be asked to take a view on proposals which have far-reaching consequences for the general population without economic analysis, they say.

The MPs said they agree with the Treasury that epi-macro modelling relies on assumptions which may not be supported by extensive data sets. Nevertheless, the committee believes it would be a useful exercise for the Treasury to undertake epi-macro modelling to better understand the implications of government-imposed social restrictions and to evaluate the costs and benefits of such social restrictions.

The Treasury’s analysis has been criticised for not providing modelling of the alternative to lockdowns. There is evidence to suggest that in the absence of lockdown, people would have socially distanced to a large extent through fear of viral transmission and infection. As such, while a lockdown is a significant and costly imposition by government, that cost when compared to the alternative with voluntary social distancing, may be less than many assume, said the report.

The MPs strongly urge the Treasury to provide rigorous analysis of future policy choices which quantifies the harms and benefits of each of the plausible range of alternative policies. It has always been considered good practice to publish an impact assessment for every measure that the Government proposes.

While death rates from coronavirus are high, the rationale for government decisions on social restrictions is well understood by the public. As the vaccines roll-out proceeds and death rates fall, government decisions on whether or not to lift restrictions will become more finely balanced. The committee believes that economic analysis and modelling is essential to inform those decisions, alongside evidence of the other necessary infrastructure such as test, trace and isolate, and responses to new variants, being comprehensive and in place to mitigate against the need for a further lockdown.

“After almost a year of restrictions on social and economic activity, the general public and the business sector need confidence that the Government has as clear and as certain a route out of the crisis as possible,” said the report.

The committee recommends that in order to provide some certainty to businesses, as well as to the general public, the forthcoming Government plan for taking the country out of lockdown should set out criteria of how and when it will lift restrictions—this could be in terms of the prevalence and R rate of the virus. MPs recognise that this would be a contingent plan, based on the stages only being activated after milestones are met, with the Government providing the maximum possible certainty. Alongside this plan, the Treasury should also provide the combined economic and epidemiological modelling to support it, and show how it would best optimise health and economic outcomes, says the committee.

The MPs propose that the Government use a more multi-disciplinary approach to examine the health and economic costs of social restrictions without delay, and recommend that the Government should put more information in the public domain as to how economic and health factors have been taken into consideration regarding government decisions on social restrictions. How the Government made decisions on social restrictions is an area that might be expected to come under further review in any future public inquiry into the Government’s effectiveness in combating coronavirus.

In a final recommendation, the committee strongly believes that the Treasury needs to retain greater modelling capacity outside the OBR, so that it can model the implications of different policies. It should also ensure that it has sufficient capacity to modify or use new types of modelling techniques where necessary. MPs recommend that the Treasury produces a policy document that sets out what its modelling capacity should be and what modelling it should be expected to carry out and publish, independently of the OBR. This is especially important in times of crisis, when the Treasury may rapidly roll out programmes without the benefit of OBR analysis.

The 15 February 2021 report is here.

 

Posted in: SEISS, Employment Taxes
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