Economic responses to Covid-19: A UK-Israel comparison

Demonstration near prime minister's residence July 25 / Photo: Elor Levy

Facing similar pressures, the UK and Israeli governments have come up with various measures to mitigate the economic devastation.

On Wednesday July 8, the UK Chancellor of the Exchequer announced an impressive set of measures to protect, support and create jobs in light of the Covid-19 pandemic. The UK previously focused on phase one to stop the spread of the virus (the renowned "stay at home" campaign) and as the UK was inching its way out of lockdown, the UK announced supportive measures to generate jobs to help the UK to "get back to work". The third phase of the government’s plan will be set out in the Autumn Budget with measures to support longer-term recovery through a budget and a spending review.

Similarly, July 9, the Israeli government presented an economic plan called the "Economic Safety Net 2020-2021" following widespread public criticism of previous Covid-19 aid programs for being inadequate and not reaching those who needed it. The initial aid plans launched in March included the application of unemployment benefits to those on unpaid leave, corporate support (which included a loan facility guaranteed by the state and innovation grants of NIS 50 million), and delayed deadlines for VAT payments. Following this, grants (of up to NIS 6,000) were made available to the self-employed, and larger grants of up to NIS 10,500 and NIS 400,000 for businesses with an annual turnover of up to NIS 1 million and NIS 20 million respectively (provided they had suffered a decrease of at least 25% in turnover during March and April). The new plan’s guiding principles are maintaining certainty for the next year, speeding up the process of transferring funds, and providing immediate grants for the self-employed.

Furlough schemes

The UK Coronavirus Job Retention scheme involved putting employees on "furlough" (unpaid leave) whereby the employees stop work temporarily but stay employed. Since March 2020, the UK has generously paid 80% of the wages of employees on furlough. This scheme helped to pay the salaries of 9 million employees in the UK, which represents more than 25% of the UK workforce. Sadly, this system was abused by many employers, which led to a recent criminal arrest of an individual as part of an HM Revenue & Customs investigation into a suspected £495,000 Coronavirus Job Retention Scheme fraud. There have been numerous other reports of suspected defrauding of the job retention scheme.

The Coronavirus Job Retention Scheme will end on 31 October 2020. To prevent these employees facing layoffs, the UK introduced a new Job Retention Bonus to incentivise employers who retain furloughed employees. The government will contribute £1,000 for each employee retained until at least January 2021. The Job Retention Bonus is available for all companies, and this has been criticised by some as not effectively targeting those who need the monies the most. Certain large UK companies (for example, Primark) have publicly declared that they will not take advantage of the Job Retention Bonus as they do not deem it necessary in light of their (albeit reduced) profits.

Among other measures to support people trying to find jobs in the UK are extra funding for the National Careers Service; incentives for employers to hire new apprentices; a £2 billion fund creating work placements aimed at ages 16 to 24 on Universal Credit and the Kickstart Scheme. The Kickstart Scheme seeks to create high quality jobs for young people at the highest risk of long-term unemployment. These measures are most welcome, given the concern that unemployment rate could peak at up to 10%.

In March 2020 the Israeli government decided to extend the right to receive unemployment benefits to employees placed on unpaid leave. This was crucial in enabling employers to manage their expenses during the initial phase of the pandemic without having to fire their employees. The initial decision ended in May but was later extended to June and subsequently to August. As part of the Economic Safety Net 2020-2021, the Israeli government decided that both the unemployed and employees who are on unpaid leave (for a minimum period of 14 days) will receive enhanced unemployment benefits from the Israeli government until June 2021 (or until the unemployment rate in Israel falls below 10%). Such unemployment benefits are transferred directly to people's bank accounts, without them having to take any additional action. Furthermore, the qualifying period for receiving unemployment benefits (i.e. the period of time during which the employee was required to work before being eligible) is being reduced from 12 out of the previous 18 months to a period of 6 months. This should mean that the benefit will reach more people.

In June, the Israeli government agreed to grant employers who met certain qualifying criteria NIS 7,500 for each employee they recruited back to work from unpaid leave. There remain questions over how successful this initiative was, as some argued that most employers who benefited from the grants were planning to re-hire their employees in any event, and that the size of the grant was not significant enough to encourage those who were not planning to re-hire their employees. This same argument has been made in relation to the UK Job Retention Bonus. However, statistics released at the beginning of July suggest that the Israeli unemployment rate fell by 50% in June.

Property

The UK property market was severely impacted by the pandemic and effectively came to a standstill between March 2020 and May 2020, at which point the restrictions in the UK were relaxed. There were no property transactions during this period, because of the lockdown in the UK, which prevented real estate agents and surveyors from working as normal, leaving the completion of contracts on hold. To boost the UK property market, the UK announced a cut to Stamp Duty Land Tax (SDLT - equivalent to purchase tax in Israel). The threshold for paying SDLT was raised to £500,000 until 31 March 2021 with immediate effect. This means that the first £500,000 of any UK property transaction will not be subject to SDLT.

There is a 3% SDLT surcharge on the acquisition of a second property (relevant for those who own a property anywhere else in the world). Interestingly, the previous UK budget delivered on March 11, 2020 announced an additional SDLT surcharge of 2% for non-UK residents buying UK residential property to take effect from 1 April 2021. Non-residents looking to purchase UK residential property therefore ought to act sooner rather than later to avoid this extra proposed surcharge and take advantage of the current cut to SDLT. HMRC recently published draft legislation in relation to the extra SDLT surcharge for non-residents. We also note recent rumours concerning potential changes to UK Capital Gains Tax following the publication of a Capital Gains Tax review scoping document by the UK Office of Tax Simplification.

The Israeli government is also introducing changes to the purchase tax for investors buying a house in Israel who already own a property, whereby the purchase tax will be reduced from a rate of 8% to 5%. This tax reduction is aimed at revitalising the Israeli real-estate market to combat the negative economic impact of the coronavirus pandemic. According to the Israeli Central Bureau of Statistics, the number of new homes sold between March and May 2020 dropped by 38.1% in comparison with sales in the previous 3-month period. Furthermore, the data show a 0.7% drop in average transaction price for transactions in the April-May 2020 period, in comparison with transactions made between March and April 2020.

VAT

Alongside a number of other jurisdictions, the UK also announced temporary VAT cuts to boost the economy. From July 15, 2020 to January 12, 2021, to support businesses and jobs in the hospitality sector, the reduced 5% rate of VAT will apply to supplies of food and non-alcoholic drinks from restaurants, pubs and bars in the UK. Similarly, the 5% VAT rate will apply to supplies of accommodation and admission to attractions across the UK.

Self-Employed

Since the start of the pandemic, Israel’s self-employed and businesses have felt overlooked by the majority of economic measures enacted by the government. This has led to numerous demonstrations and protests.

In response to the growing criticism aimed at the government by these groups, under the Economic Safety Net 2020-2021 plan, any self-employed person or business owner whose annual revenue does not exceed NIS 640,000 and whose turnover falls by 40% or more will be entitled to receive a total of 14 grants paid in 7 separate payments in an amount of no less than 70% of their monthly revenues and up to NIS 15,000 (paid every two months and until June 2021).

Additionally, Israel also announced that any self-employed person or business owner whose annual revenue does not exceed NIS 100,000,000 and whose turnover falls by 40% or more, shall be entitled to the following grants until June 2021:

  • Businesses with a turnover of NIS 18,000-300,000 will be entitled to receive a bi-monthly grant of NIS 3,000-6,000;
  • Businesses with turnover of NIS 300,000-100,000,000 will be entitled to receive a bi-monthly grant of up to NIS 500,000; and
  • Businesses that were formed between January 2020 and February 2020 will receive a one-time grant of NIS 3,000-4,000. The idea behind this grant is to help the many businesses that were formed at the beginning of 2020 and were therefore not entitled to any of the previous grants.

Furthermore, as an immediate grant, any self-employed person or business owner with an annual income of up to NIS 1,000,000 whose income falls by 25% or more will be entitled to an immediate grant in an amount of NIS 7,500. The first payment of this grant was due to be transferred to each self-employed person and business owner no later than 15 July 2020.

2.7 million UK taxpayers have been supported by the Self-Employment Income Support Scheme. Applications for the first taxable grant worth 80% of average monthly trading profits (up to £7,500) ended on 13 July. A second grant worth 70% of average monthly trading profits (up to £6,570) will open from August 17 until October 19 for eligible applicants.

Hospitality sector

The UK hospitality sector of course is among the hardest industries hit by the pandemic. The UK introduced the "Eat Out to Help Out" scheme to support approximately 130,000 businesses and the jobs of approximately 1.8 million employees. This will entitle every diner to a 50% discount of up to £10 per head on meals during August 2020 (subject to certain restrictions). Participating establishments will be fully reimbursed for the 50% discount. The objective of this is to encourage people in the UK to go out and spend money to support the UK hospitality sector.

To encourage Israeli citizens to spend money and boost the economy, Prime Minister Benjamin Netanyahu and Finance Minister Israel Katz recently presented a NIS 6 billion economic plan. This will be available to all families in Israel by granting each family with a child NIS 500 for each child up to the fourth child and an additional amount of NIS 300 for each additional child. Also, those aged 18 and over, who have an annual income of less than NIS 651,000, will be entitled to receive NIS 750. The grants for children have no qualifying criteria and the money should be paid directly into bank accounts. The plan, which has been heavily criticized by political opponents and has undergone several changes, is due to receive approval from the Knesset in the coming days

Access to Finance

The Israeli government previously granted loans dedicated to helping small and medium-sized businesses struggling with cash-flow difficulties. Israel has announced that this will be extended from NIS 22 billion to NIS 50 billion and the ratio of loan to turnover is being increased from 16% to 24%.

The UK government also launched five temporary schemes to help to support businesses across the UK that may need to respond to cash-flow pressures as a result of the impact of Covid-19 by seeking additional finance.

Conclusions

In Israel, according to the Central Bureau of Statistics, GDP fell by 6.9% on an annualized basis in the first quarter of 2020. It is clear that the measures taken by the government to slow the spread of the virus also led to a substantial slowdown in the economy. In addition, it appears that the early stimulus packages and other economic measures taken were deemed inadequate or did not reach the people most in need. As a result, the Israeli government is aware that it needs to adopt new and more extensive measures to help stimulate the economy and support those individuals and businesses most in need.

The Economic Safety Net 2020-2021 is intended to begin addressing these needs. However, matters are not helped by the fact that Israel does not yet have an approved budget for 2020 and that coalition partners are currently at loggerheads over whether the government should adopt a shorter 5-month budget until the end of the year or a longer budget until the end of 2021.

The UK Office for National Statistics estimates that Gross Domestic Product in April in the UK was around 25% below the level recorded in February. The UK had to put together comprehensive and generous economic measures to respond to this and is currently focusing on its objective to protect and create jobs. Clearly, the UK will need to take on more debt to achieve its objectives. The Autumn Budget will set out how the UK will recover after the coronavirus bill of more than £300 billion. With the UK press floating predictions including a new Wealth Tax and significant changes to UK Inheritance Tax, it will be an interesting budget to say the least.

Claire Shelemay, BFP FCA, is the founder and CEO of CrownStone Consulting Ltd - a UK tax boutique in Tel Aviv. Simon Marks is a partner and head of the high-tech & start-ups practice, and Bar Mor is an associate, at the Tel Aviv-based law firm of Epstein Rosenblum Maoz.

Published by Globes, Israel business news - en.globes.co.il - on July 29, 2020

© Copyright of Globes Publisher Itonut (1983) Ltd. 2020

Demonstration near prime minister's residence July 25 / Photo: Elor Levy
Demonstration near prime minister's residence July 25 / Photo: Elor Levy
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