The Treasury Select Committee held an evidence session on Tuesday 21 April on the economic impact of Coronavirus. Two evidence sessions were conducted over a two-hour period:
• Kate Nicholls – CEO of UK Hospitality
• Andy Chamberlain – Director of Policy at the Association of Independent Professionals and the Self-employed (IPSE)
Mel Stride (chair; Conservative) asked Andy Chamberlain to provide his observations on the impact of the lockdown on the self-employed. In particular, he asked about those who receive income through a Limited Liability or Personal Service company, are unable to use dividend income when working out their entitlement to support under the Coronavirus Job Retention Scheme (CJRS) and can only use PAYE income, which is often the lower of the two forms of income.
Stride noted that HMRC have deemed that it is impossible/difficult to differentiate between dividend income related to self-employment activity as opposed to passive investment. He asked Chamberlain for his views on this.
Andy Chamberlain said that directors of limited companies were more likely to draw down income from dividends, as it was more economically advantageous from a business perspective. He said accountants generally advised the practice. He added that it was a ‘myth’ to say that drawing income from dividends was motivated primarily by tax planning purposes, as tax on dividends had increased in recent years.
He said that IPSE have asked Treasury officials to consider a ‘pay now, claw back later’ approach to enable LLC directors (he said there were 710,000 of them) who have had very little support from government during the crisis to enable them to access support via the Job Retention Scheme.
Stride asked Chamberlain if his views on dividends as tax planning meant that IPSE would be open to removing the tax advantages of dividend income. Chamberlain said the tax system for the self-employed was ‘far less than optimal at the moment’. He called for a fundamental review of the tax system for all self-employed workers and suggested that reforms to IR35 – moved to April 2021 – should be delayed further in light of Covid-19.
On further questions relating to the application of a ‘clawback’ scheme and concerns over fraud or abuse of the system, Chamberlain said that directors could be compelled to disclose the source of their dividend income when making an application for support, with penalties for non-compliance.
Angela Eagle (Labour) asked about the levels of support provided by the Self-Employment Income Support Scheme (SEISS). Chamberlain said IPSE believed the Institute for Fiscal Studies assessment that it would support 62 per cent of people who get the majority of their income from self-employment was more accurate than government claims that it would cover 95 per cent.
He added that the 95 per cent figure had been ‘slightly twisted’ because it didn’t include around one million people who have been self-employed for less than a year (and therefore unable to claim support) nor limited liability sole-company directors. Chamberlain said this added up to ‘a very large number (of people) not impacted by the (SEISS) scheme.
Eagle asked Kate Nicholls if sufficient interim support was available to the self-employed before SEISS payments begin in June. Nicholls said that only a very small proportion of workers in the tourism and hospitality sector would be affected, but that it was clear that delays in processing and making payments, together with the strain placed on the Universal Credit system, highlighted the growing demands for support.
Eagle then asked whether the government had provided enough support for freelancers. Chamberlain and Nicholls agreed that the government has put in place a very generous level of support for businesses and workers but that support now needed to be focused on those – including freelancers – who have fallen through the cracks.
Rushanara Ali (Labour) asked how many people could still be left out of the job retention scheme, despite the government extending the cut-off date for eligibility to 19 March.
Andy Chamberlain said there could be some limited company directors who may pay themselves a salary annually after 19 March. In these circumstances, they would not be classed as having been on the payroll and would therefore be excluded under a technicality. IPSE are seeking clarification on this from HMRC.
Kate Nicholls said the extension was ‘incredibly welcome’ and had extended support to many seasonal hospitality staff. However, she also pointed towards new criteria added to the scheme by the Treasury and HMRC that require furloughed workers to have received a payslip from their employer prior to 19 March. She said that this could exclude between 350,000 and 500,000 hospitality workers. Nicholls agreed with Ali that there should be a focus on supporting those who may be missing out.
Ali also asked about hospitality workers who may only see 50 per cent of their wages instead of 80 per cent because service charges have been excluded from consideration by HMRC.
Kate Nicholls said this only impacted a small proportion of the overall hospitality sector, with staff in hotels and fine dining establishments the most likely to be impacted and the lowest paid staff receiving between 40 and 60 per cent of their salary during the furlough period.
Responding to a follow-up from Steve Baker (Conservative), Nicholls said that the income level of those impacted would be in the region of £9-£10 per hour when service charge payments are excluded from consideration.
Felicity Buchan (Conservative) asked the witnesses to outline their members’ experiences of engaging with the business interruption loan scheme. Kate Nicholls said that a survey of UK Hospitality members had found that over half had applied for a business loan and 18 per cent had been approved. She said that 58 per cent of those businesses surveyed had still to receive a response to their application, adding that bank bureaucracy and EU state aid rules had prevented some businesses from being able to access support.
Andy Chamberlain said that the overwhelming majority of IPSE members did not want a loan because they saw ‘no light at the end of the tunnel’ for the economy and were reluctant to take on debt that they may struggle to pay back. Of those who have chosen to access the scheme, the feedback was highlighting a number of barriers to access.
On the business support grants, Nicholls said there were some hospitality business who may lose out because their premises are above the £51,000 rateable value for eligibility. She said this equated to around 10,000 pubs and two-thirds of the hospitality industry as a whole.
Nicholls added that there were wide discrepancies in how councils across the country were implementing the grant scheme and said that scrapping the rateable value threshold would help widen access to finance.
Alison Thewliss (SNP) asked about the impact of insurance claims on business operations. Kate Nicholls said that many hospitality businesses had taken on expensive ‘bolt-on’ coverage to cover pandemics, notifiable diseases and forced closure of premises. 62 per cent of UK Hospitality members have tried to make an insurance claim. Of these, Nicholls said one per cent had been approved and 71 per cent rejected.
On further support for the industry, Nicholls recommended that the government consider extending furlough support to hospitality businesses beyond June if they are required to remain closed for longer. She also appealed for a coordinated approach to rent support from government to prevent a ‘bloodbath’ in the sector after June, when a second quarter of rent payments will be required.
• Gerard Lyons – chief economic strategist at Netwealth and senior fellow at Policy Exchange
• Ian Mulheirn – executive director of the Tony Blair Institute and chief economist
Mel Stride (photographed below, with thanks to UK Parliament) began the second session by saying that the committee’s view is that the Government must take the advice of health experts on the lockdown. In spite of this, he said, it is also concerned about the lack of discussion on the economic consequences of the different scenarios for ending the UK lockdown.
Lyons said the epistemological models justify the lockdown but that the medical side of considerations must work with the economic side going forward.
He said that one in three people have been directly or indirectly impacted economically by the lockdown, and said that that the longer it goes on the economic impacts risk becoming non-linear.
Lyons has suggested his ‘traffic light’ approach to ending the lockdown, reflecting that one needs a gradual predictable process for exit, keeping the virus under control while revitalising the economy. He said there needed to be ‘complete openness and transparency’ from politicians, which means the Government should set out an exit strategy.
Ian Mulheirn said the long-term consequences of the lockdown needed to be considered. Uncertainty about the lockdown has been a major worry and more information is needed from Government to give confidence to people that we will ‘not be in lockdown forever’.
Julie Marson (Conservative) asked for opinions about the government’s five-point strategy for ending the lockdown.
Lyons said that his traffic light approach identified health as the trigger for lifting the lockdown. In the absence of a vaccine, testing and tracing are important, as is behaviour.
Marson asked Mulheirn about the costs of announcing a strategy now and changing it at a later date. He said you need a contingent plan that can ‘flex’. But the Government can explain the metrics it is using to measure the virus and lockdown, either way.
Anthony Browne (Conservative) asked Lyons why the economy should be the priority when considering ending the lockdown, as opposed to age and geography. Lyons said that ending the lockdown by age group would not address health or economic issues.
He gave the example of allowing those in their 20s – who don’t live at home with their parents – to ‘resume life’. He said it would take them considerable time to acquire Covid-19 and subsequent immunity and require impeccable (unlikely) behaviour. He said that they were also not the group key to unlocking the economy. A geographical lifting of the lockdown would be difficult to enforce and the importance of London to the UK economy is huge.
He added that ‘unlocking’ by immunisation wasn’t possible because of the lack of testing in the UK at present and suggested that unlocking by sector and economic activity made more sense and would provide a gradual and predictable method. Mulheirn broadly agreed, but said it was inevitable that geographical measures would come into consideration.
Browne then asked about the economic risk of a second lockdown. Lyons said that with suitable behavioural responses, a second wave of Covid-19 was avoidable.
He also said that a second wave was a perceived risk rather than a high actual risk if lockdown lifting was undertaken with the virus spread under control. Mulheirn adopted a more cautious approach and said it would be helpful to give businesses a framework for how a second wave might be managed.
Mulheirn told Steve Baker (Conservative), that testing and tracing - both with apps and manual tracing activity - and mask wearing were needed to keep a lid on the virus. Lyons said that social science should be looked at alongside medical science to provide flexibility. Unlocking in the absence of a vaccine or widespread testing requires behavioural steps, such as better hygiene, social distancing and the wearing of masks. These are harder to quantify than medical science.
Angela Eagle (Labour) highlighted the uncertainty of how the virus will behave. Mulheirn said containment and shielding provided a ‘belt and braces’ approach to dealing with the virus. He said there are measures we take to reduce the risk, such a wearing masks, that should be tried and that leaving adoption of such measures risked further economic damage.
Felicity Buchan (Conservative) asked whether the scale of the government’s fiscal intervention had been appropriate. Mulheirn said the interventions had been appropriate but that the jury was still out on whether it will work, warning that once we ‘turn the power back on’, it will take many years to recover if there has been damage to supply chains and companies and job losses. This in turn could lead to a fall in living standards.
Lyons called for an economic policy that is pro-growth. A relaxed fiscal stance would be justified and government should not be too worried about the debt to GDP ratio. Lyons said that he would like to see a greater focus on monetary side policy, particularly in a low inflation environment, to ‘kick start’ the economy. High debt to GDP must be considered alongside low interest rates and inflation. He said that in difficult times, the country should respond in a proactive way; unorthodox, unconventional and urgent are the policy responses we need.
Alison Thewliss (SNP) asked whether it was possible to avoid a second successive wave of austerity. Lyons suggested it would be by financing the deficit with higher tax, increased borrowing or finance through the central bank.
He said that austerity in itself was not the way to address this issue because it was a temporary economic shock due to a health crisis and that economic forecasts showed a significant rebound next year.
Mulheirn said the debt is there to deal with a crisis like this and that the role of fiscal policy was to maximise GDP. He said the real risk was if fiscal measures were wound in too quickly or did not provide private actors in the economy with confidence that there will be demand in the future. This could stun the recovery. He said there was no point worrying about burdening the next generation with debt and that the focus should be on worrying whether future generations end up with a lower standard of living.
Alison McGovern (Labour) asked about the risks of inflation as the UK emerges from lockdown. Mulheirn said that he was not worried about inflation. Lyons said the risk associated with the monetisation of the debt was low but he also said that there are risks if the world embarks on a de-globalisation agenda.
Mulheirn told Rushanara Ali (Labour) that developing countries and their role in global supply chains are facing twin shocks as a result of the pandemic, losing their customer base while also dealing with their own health crises. Responding to a question from Ali on what the UK Government should do to ensure UK multinationals pay their bills in developing countries more quickly, Mulheirn said the UK Government should make sure multinationals continue trading.
Harriett Baldwin (Conservative) returned to the issue of de-globalisation, which she expressed concern over. Mulheirn said it was a worry because countries will be restricted in their abilities to create deep trading relationships for a long time after the current health crisis.
Lyons said he did not expect total de-globalisation, although he suggested that organisations such as G20 should have a permanent secretariat, perhaps based in London, to combat this.