Work in crisis: Furlough benefits not for everyone

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  • Support for self-employed workers has worked less well than furlough for employees. The two looked similar, but were designed very differently
  • Many have fallen through the cracks in support, but for some, it’s a £13,250 windfall they didn’t need
  • The crisis and big changes to the way we work coincide with reforms already under way, that are likely to change self-employment significantly – contributing more while potentially gaining rights

The money is arriving in the bank accounts of the self-employed – up to £7,500 to compensate for lost earnings up to this weekend.

For 2.3 million people receiving the grants, those who saw their earnings plummet with the start of lockdown have had to burn through savings.

Some 80% of profits, based on average profits for the past three full financial years of tax returns, will come in handy to shore up those financial reserves.

  • Furlough scheme to finish at end of October
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And on Friday, it was with only two days before the end of this Self-Employment Income Support Scheme that the Chancellor Rishi Sunak came up with more, designed to help these same people through the next three months, to cover June, July and August.

With that, it seems that the apparent similarity between the employee furlough scheme and the one for self-employed people is parting company. Furloughed staff get support for a further two months.

Spectator sport

Why? Well, it seems that the Treasury never saw the two schemes as running in parallel. The purpose of furlough was to maintain the link between employer and employee. It was to make sure that, when the time comes, staff can go back to work and the business tap can be turned on again. No need to recruit.

And for those companies that can see a return of demand in autumn, it has served that purpose well.

For others, in hospitality, tourism and spectator sport for instance, who can’t do much while two metres of social distancing looks likely to remains in place, the furlough tapering may be welcome, but Hallowe’en still brings the horror of no further support.

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Image caption

Chancellor Rishi Sunak said the next phase was about getting people back to work

Retaining the link between self-employed worker and client or contractor was not a priority. The point of self-employment is its flexibility, often – though certainly not always – benefiting both sides.

And the income support scheme has operated very differently, in that it has allowed people to continue working and earning if they can.

If you didn’t lose any contracts due to lockdown, you stood to be £7,500 better off than you’d otherwise be (before tax). And with a further £6,750 lump sum for the next three months, that’s quite a wodge of government cash that you didn’t need.

Crofters to QCs

The total cost for 2.3 million people benefiting has been £6.8bn so far. Yet that’s less than half the total number of self-employed people. This has handed large sums to those who don’t need it, yet failed to wrap support around many of those most in need of support.

That includes people who don’t have a record of tax returns because they became self-employed recently. It includes those who paid themselves a salary from their company, as well as dividends if they made profit: they don’t qualify. Nor does anyone who was earning more than £50,000.

The difficulty of designing the scheme was well-signalled from the start. The Treasury initially said all self-employed people would have to turn to Universal Credit if their income had dried up, but political pressure forced them to find a scheme.

They had to use existing data (tax returns) as the only reliable source of income information, for the very wide range of people within this category: from gig workers – cleaners, farm-workers and part-time security guards – to crofters, artists, company directors, offshore engineers, agency nurses, mercenary soldiers, rock stars and outrageously well-paid Queen’s Counsel.

Many of them will be affected by the likely downside to the self-employed income support scheme, which was coming even without the pandemic crisis and income support emergency – a reckoning in terms of national insurance contributions, bringing the self-employed closer to those on Pay As You Earn.

Where once self-employed people were deemed to have less of a benefits safety net, so shouldn’t be expected to pay so much NICs, the crisis income support scheme demonstrates that is not the case now. So they will be expected to contribute more.

Tax incentives

This feeds into a shake-up in employment rights that is likely to emerge out of this crisis.

This may address the insecurity of people on precarious, insecure contracts, and particularly those who have proved their social value through the crisis. That is obviously true of care home and homecare workers, but it is also true of delivery cyclists and shop workers.

It could go further, to draw more self-employed people into employment. The benefits to both sides of paying less tax and NICs are being eroded. Self-employed people whose work is entirely for a public sector organisation have to pay tax through PAYE.

That’s a feature of employment for, among other organisations, the BBC. That has led to one of the significant gaps in the income support schemes – contract workers who have counted as self-employed, but who don’t qualify for the self-employed income support scheme, and nor are they being furloughed.

In the private sector, it’s for the self-employed person to define their tax status.

That was due to end with the start of the 2020-21 tax year, two months ago, in a reform with the shorthand IR35. But because of the pandemic and economic crisis, it was postponed by a year.

It means private sector employers will next year bring self-employed contractors within the reach of the PAYE tax system, equalising the tax burden between workers. It brings benefits to the workers in terms of their employment rights.

That, in itself, removes an incentive to be self-employed, and is another reason why the recent boom in self-employment may be coming to an end.

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