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Coronavirus: Tax tweaks help the vulnerable

From LISAs to VAT zero rating, tax credits and statutory payments, the government is using every tool it can to help taxpayers hit by the coronavirus crisis. But is there anything more it could do?

14th May 2020
Tax Writer Taxwriter Ltd
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Personal protective equipment (PPE) zero-rated for VAT until July 2020
iStock_Protective equipment_filadendron

Life time ISA

The life-time ISA (LISA) was introduced in April 2017 to encourage UK residents to save for long term goals such a buying a home or retirement. Individuals have to be aged between 18 and 40 to open a LISA, and the government pays in a 25% bonus of up to £1,000 per year on amounts contributed in the year until the saver reaches the age of 50.

The catch is there is a penalty of 25% of the amount withdrawn if the funds are taken out in circumstances other than:

  • to buy the saver’s first home worth up to £450,000
  • when the saver is aged 60 or more
  • when the saver is terminally ill with less than 12 months to live.

The withdrawal penalty has been set at 25% and at that rate it takes some of the saver’s initial capital if no interest has been added by the bank (see example).

Example of 25% withdrawal penalty

Saver’s deposit:            £1000
Government bonus:     250
Total funds                      1250
Withdrawn:   1250
25% penalty          (312.50)
Net cash to saver:            937.50

From 6 March 2020 to 5 April 2021 the LISA withdrawal penalty is reduced to 20%. In the above example using a 20% penalty the saver would sacrifice £250 for an early withdrawal, exactly the amount of the government’s bonus.

As this rule change was only announced on 1 May 2020, savers may have already made withdrawals which now qualify for the lower 20% penalty, in which case they can ask their LISA provider to refund the difference.

VAT on protective equipment

Alongside the permanent reduction in VAT to zero on digital publications, the government has also introduced a temporary zero rate of VAT for personal protective equipment (PPE).

This VAT zero rate is effective from 1 May 2020 to 31 July 2020 and applies to items recommended by Public Health England to reduce coronavirus infection rates. The goods covered gloves, aprons, surgical masks, respirators and face visors.

The lower VAT rate should help carehomes that need to buy PPE for staff, businesses that can’t reclaim VAT as they make exempt supplies or are not VAT registered, and individuals.

Statutory payments

When the CJRS details were finalised, little thought was given to the knock-on effects of reducing an employee’s pay to 80% of their normal rate.

Although the national minimum wage rates do not have to be paid while an employee is furloughed, as the individual is not working, the statutory payment rules do apply. Thus, employees are entitled to the family-related statutory pay (for maternity, paternity, adoption, or parental bereavement) while on furlough.

However, all of these types of statutory pay rely on a calculation of average weekly earnings (AWE), which is particularly important for statutory maternity pay (SMP). While on furlough the employee’s pay may have been reduced to 80% of its normal level, which would in turn reduce the amount of SMP payable.

New regulations for each type of statutory pay require the employer to use the normal pay level to calculate AWE, not the furloughed pay. This applies where the family-related statutory pay period begins on or after 25 April 2020. Thus, individuals who have had their pay reduced while furloughed should not be disadvantaged by receiving a lower rate of SMP (or SPP, SAP, SPBP) as a result.

Tax credits

To be eligible for working tax credit the individual needs to work above certain thresholds of hours per week (16, 24 or 30 depending on circumstances). However, while furloughed or on unpaid leave, HMRC will treat the claimant as working their normal hours, so they are still eligible for tax credits. LITRG has provided further details for tax credit claimants.   

What more could be done?

All of the above changes are welcome but I would like to see the following tweaks made:

  • Pay universal credit awards within one week of the claim, not five weeks as currently
  • Require the NHS to pay all staff through the payroll with full employment rights, so they don’t have to be engaged through an agency and risk being drawn into tax avoidance schemes.

In addition, the government could consider the following easements specifically for NHS and care workers:

  • Free parking while at work
  • Relaxation of the taxi home rules so that any number of journeys paid for by the employer are tax free
  • Require employers to pay travel time for home care workers at their normal rate, and pay them 45p/mile to cover the costs of traveling between their clients.  

Where do you think the government could tweak the tax system to support struggling businesses, individuals and healthcare workers? Or do such measures risk adding yet more unnecessary complication to an already creaking system? Share your ideas by commenting below.

Replies (5)

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By johnjenkins
15th May 2020 10:58

Apart from replacing lost income, when you start tweeking and plastering gaps there will be gainers and losers. I think the Government have done a brilliant job under the circumstances. Hindsight will tell us, we should have done this earlier or stockpiled that. You could go on and on (which I usually do). Getting the balance right is difficult and there will always be "collateral damage". This is not a UK problem, it is a world problem and needs to be sorted before we get a virus that does wipe out the human race. Time for Governments to take stock and realise what is important for the future of humanity. This time we were able to tackle it, next time we might not have so much warning. So tinkering with pennies here and pennies there won't help.

Thanks (1)
By Robin Wishart
15th May 2020 11:38

Has anything been done about the Holiday Letting rules?
Clearly, operators of Holiday lets are unlikely to have their properties let for the required number of days in the current circumstances.

Thanks (1)
Replying to Robin Wishart:
By stellaboy
15th May 2020 12:04

Boo hoo

Thanks (2)
Replying to Robin Wishart:
By Rebecca Cave
26th May 2020 14:40

No, there has been no announcement for easing the FHL rules. Although the grace period already allows for one or two fallow years if conditions were met previously.

Thanks (0)
By sammerchant
16th May 2020 09:59

I believe that there will be very many self-employed taxpayers, who having had a reasonable 2019/2020 will be faced not only with the balance of the tax for that year, but also a payment on account for 2020/2021 which, pending claims to reduce, will be unsustainable. It is also unlikely that these taxpayers will have set aside the monies needed to pay the 2019/2020 tax bill on 31 January 2021.

One solution, and simply as a one-off, would be for the Chancellor to permit all taxpayers to spread the payments for 2019/2020 a while longer. And, more drastically, to allow the self-employed a form of 'averaging' over the two years. I would hope that those who survive will be on an even keel by 2021/2022.

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