The Chancellor has taken unprecedented steps to protect incomes and prevent coronavirus-related business failures. We welcome the policies announced on Friday. In fact, we advocated for similar measures, including the move to allow employees to be furloughed with pay and for tax payments to be deferred automatically.
The measures are necessary because they allow us to preserve the valuable products, processes, knowledge and relationships that entrepreneurs have built over a number of years. That’s necessary if we want the economy to rebound next year. However, the measures are, not yet, comprehensive. There are three key groups in need of further support.
The self-employed
We welcome the Chancellor’s decision to allow the self-employed to defer income tax payments and to suspend the minimum income floor allowing the self-employed to claim the equivalent of Statutory Sick Pay. However, the measures will be insufficient for many of the self-employed, who will experience significant drops in income over the coming period.
First, the £16,000 savings limit should be disregarded for the next six months. In some cases, the savings will be set aside for future tax payments that have now been deferred. As Mike Brewer of the Resolution Foundation notes: “The goal should be a more comprehensive version of the Coronavirus Jobs Retention Scheme that encompasses the self-employed.” Removing the savings limit temporarily will help align the treatment of the self-employed and the employed.
Second, the self-employed may experience significantly larger falls in income than an equivalent employee on the same income previously. For instance, a self-employed worker earning £2,500 per month will normally take home £470 after tax. However, if they are moved on to universal credit, their earnings will fall to £94.25 per week (plus local housing allowance). This is a much steeper drop than the 20% drop that an employee would experience. To protect the income of the self-employed, we agree with the recommendation of the Bright Blue think tank that the ‘furloughed’ self-employed receive should at least be equivalent to the Maternity Allowance, £148.68 per week.
Under this system many of the out-of-work self-employed would still receive less than an equivalent furloughed employee. While we understand the administrative challenge of accurately calculating earnings of the self-employed, we believe the government should consider temporary hardship payments based on a percentage of the past tax payments for the self-employed, subject to a cap to prevent large payments to high earners. A version of this idea has been proposed by Neil O’Brien MP and a similar system is being used in Norway.
An additional way to support the self-employed and as well as high earners who have experienced a large temporary fall in income would be to create income contingent loans, modelled on student loans. Under the current student loan repayment terms, earnings above a certain income threshold (currently £25,716/year) are taxed at 9% to repay the loan, with any amount unpaid written off thirty years after the loan was first taken out. The loan incurs an interest rate equal to a measure of inflation (RPI) plus 3%. We could offer different plan terms to people availing of this scheme, cap the amount at a realistic level to reflect average earnings, and the repayment term to a short period of, say, five years.
Low earners would probably never pay back the entirety of the ‘loan’ – since this is a one-off cost, that simply transfers lost income to them from other taxpayers, and it is arguably a feature of this scheme, not a bug. Most other people, depending on their earnings and terms decided on by the government, would pay back as and when they were able to.
The advantage of an approach like this is that it allows people to self-select into the scheme, eliminating any need for the state to try to decide who is and is not deserving of cash now.
Equity-backed startups
Equity-backed startups that are not yet bringing in revenue will need targeted support as they approach the end of their funding runways. They are ill-suited to taking on debt as they can lack predictable revenues or security. As a result, many will be unable to benefit from the Coronavirus Business Interruption Loan scheme.
Equity-backed startups will be responsible for a large proportion of job and productivity growth once this is over, they should not be overlooked.
To help equity-backed startups, we support Coadec’s calls for the British Business Bank to create convertible notes of up to £500k. This funding would convert to equity at a startup's next funding round.
SMEs in co-working spaces, incubators and accelerators
Many startups will not benefit from the small business grant funding available for small businesses that already pay little or no business rates because of small business rate relief (SBRR), rural rate relief (RRR) and tapered relief, as they work out of co-working spaces or incubators, and accelerators.
There are 205 incubators and 163 accelerators in the UK. Over the past decade, more than 5,000 startups have participated in accelerator programmes in the UK with numbers increasing significantly year-on-year. The companies coming through accelerators are vital to the UK’s future economic growth. Research from Nesta, commissioned by BEIS, finds businesses that attend accelerator programmes have higher survival rates, employ more people, and raise more money. Accelerated companies raise 44% more money and have 75% higher valuations than companies that haven’t attended accelerators.
Grants aimed at small businesses that don’t pay rates should be extended to startups in these circumstances, if they don’t they risk stifling a vital source of future job growth. In lieu of accurate valuations, the government could use employment and tax data as a proxy.
Rishi Sunak’s bold measures will have saved jobs and businesses. The challenge now is to fill in the gaps with better support for the self-employed and equity-backed startups.