The Chancellor’s rescue package for the self-employed comes with holes that need to be plugged

Many self-employed persons have been left in the lurch by Rishi Sunak’s new measures designed to help them through the next few months of the virus crisis. At first glance, the pledge to guarantee up to 80% of monthly profits based on a three-year average, capped at £2,500 a month, is a good and generous one.

However, as always the devil is in the detail and many small business owners are complaining the conditions which come attached to the package ignore the realities of self-employment. One Amersham physiotherapist complained that she would not benefit “at all” under the current scheme, and only one of her eight self-employed staff would.

The most glaring issue is that the payments will not arrive until June. That’s going to be a huge issue for many, who have no savings and will have built up three months of debt since they have been earning. Here is a striking example of how devastating it will be for many in the self-employed bracket.

A freelance project manager, John, who works in construction, told Reaction that “most people would be ok” and that thankfully he had some resources to help him through this period. However, he worries about many of the self-employed contractors he regularly works with. Many of them live “week to week” and do not know how they will be able to support themselves until June without government support or work.

If the self-employed are allowed to work while also claiming this stipend, that may help bridge the gap. However, a great deal of confusion exists around whether this will be allowed with different sources giving conflicting reports. Furthermore, while construction workers are still allowed to go to work – even as the status of this work remains confused – John expects construction to be closed down soon along with the rest of the country’s workforce.

Furthermore, he pointed out that construction work cannot be practically combined with self-isolation measures that require people to be two metres distance at all time, and working on one’s own contravenes health and safety advice.

Similar problems about the impossibility of doing certain jobs while maintaining social distancing will of course affect a wide range of other small, usually self-employed, professionals such as hairdressers, physiotherapists, and domestic plumbers. Even those who can work remotely have found business quickly drying up and contracts cancelled as companies and individuals seek to quickly reduce their costs.

Of course, the delay of payments until June seems to be tied to further details that come attached to the Chancellor’s package. Namely, some businesses will receive less than the £2,500 maximum, and others with an average trading profit per year of over £50,000 will not be eligible.

This seems sensible enough- on the face of it. It would be a little absurd for Elton John or a partner in a top law firm, to qualify for government aid. However, they account for only the top 10% of those who are defined as self-employed.

The problem is that many of the six million of self-employed, which includes small companies as well as sole-traders, may not qualify as official government guidelines say that those who “pay themselves a salary and dividends through their company are not covered by the scheme”.

However, as Sacha Bright, CEO of Nextfin, pointed out 96% of all businesses in the UK are micro-businesses. That is to say they have a maximum annual turnover of £632,000 and no more than ten employees. Unsurprisingly most of these businesses are managed by their owners, who are often in fact the company’s sole member of staff. The current system stands to leave millions of these businesses with almost no relief.

The one way in which they could claim some of the relief on offer is if they also paid themselves a salary via a PAYE scheme. However, as the tax paid on dividends is slightly lower than income tax business owners almost universally structure their companies so the vast majority of their earnings come from dividends.

Almost all small business owners interviewed expressed great concern that under the current scheme they stood to lose the majority of their income. As the physiotherapist pointed out, self-employed people whose household income is over £50,000 are not eligible for any relief. In an era where most families survive on double incomes, many households will find this sudden cut to their income extremely tough to weather.

There is a further blow. Other moves to offer loans and delay or reduce taxes may well not be enough to relieve the strain. The Coronavirus Business Interruption Loans scheme offers loans of £25,000 to £5 million, with the government covering the interest and fees in the first year. But there is mounting criticism that many banks are demanding personal guarantees in order for people to qualify for the loans. This leaves them at risk of having their personal property seized if they default, a worryingly possible prospect at this time of crisis.

There are some protections. Personal guarantees will not be asked for loans under £250,000, and primary residential properties cannot be taken as guarantees. However, taking on a large loan at times of uncertain income is still a nerve-racking prospect.

One potential solution for some, suggested by Terry, a self-employed management consultant, is to copy Australia and allow people to tap their pension pots tax free for savings to help them through this period. However, this would likely mainly help self-employed persons on the older and richer end of the spectrum – leaving many still vulnerable.

The tax relief on offer may also prove insufficient for many. Large numbers of self-employed persons will benefit from the cut to business rates. However, the many small businesses which operate from home or hot-desk will not be able to claim this grant.

Furthermore, while the delay in the six-month delay of payment of VAT and income tax will help with current cash flow problems, it stores up big new ones down the line. The usual payment on account system that helps businesses spread out their costs over the course of the year has been suspended. This means that small businesses will need to have higher than usual liquidity come 31 January 2021 – a time when they might be facing an all time low or just starting to recover depending on how long this crisis lasts.

Potentially adding to this burden is the mooted proposal that tax breaks for the self-employed may come to an end. For the physiotherapist, it was this aspect that left her “the most upset”. As it has been widely pointed out self-employment means that the benefits usually taken for granted such as sick pay, holiday pay, and paid parental leave are non-existent. For businesses struggling to recover in the aftermath of the coronavirus crisis this could be a bitter pill to swallow.