The UK’s bailout of the self employed comes with a hidden catch

The chancellor’s £6.5bn bailout of the self employed is welcome. But it has hidden benefits for the taxman, says Merryn Somerset Webb.

Another whopper of a package. Yesterday the chancellor introduced a range of new measures for the self employed to the tune of around £6.5bn (or 0.3% of GDP on numbers from Capital Economics) – to help them through the tricky months ahead.

The idea is to offer taxable grants of 80% of previous income up to £2,500 a month to those already in the self-assessment system and with an income below £50,000 (anyone over that is considered able to fend for themselves).

The income used for the calculation will be based on an average of the income declared in the last three tax years. If you haven’t got three years of tax returns it will be based on whatever you have.

This looks like good news for some of the self employed – particularly as you can claim the grant even if you continue to work. It isn’t, of course going to make everyone happy – being based on income not turnover, it will mean that those with high expenses might not be able to cover all their fixed expenses and have excess income from the grant.

Also worrying for some will be that the scheme won’t be in place until June – although the well organised can live off their tax savings until then (July’s payments are to be delayed six months). Finally it’s not great news for the newly self employed – if they can’t show a tax return with an income on it, they aren’t going to get paid.

However there is a lifeline in here for those who have perhaps avoided filing tax returns in the past (the UK shadow economy makes up about 10% of GDP – useful piece on it here in the Telegraph). You will now get four weeks to set things straight – to file a tax return on the back of which the HMRC can work out what kind of grant you might be entitled to. If you aren’t in the system you can’t get paid.

There is a hint of never letting a good crisis go to waste in this – once the tax returns required to access the grants have been filed, HMRC may keep a beady eye on whether those same self-employed workers file again in 2021 and 2022.

We have long expected a major crackdown on the tax avoiding part of the cash economy – but we expected it to come about more via the slow death of cash rather than by a grant for tax return trade off. It will be fascinating to see how many new self-assessment tax returns turn up in the next four weeks.

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