Iain Rankin explains the rules on self-employed income support scheme grants, how they are taxed and why they are still causing a degree of confusion among some taxpayers and agents.
Following its launch in March 2020 as part of the UK government’s response to the Covid-19 pandemic, the self-employed income support scheme (SEISS) has proved a huge success. In total, almost 10 million claims have been made, with a total value of £27 billion.
Taxation of the SEISS grants
SEISS income is a revenue receipt in nature, to be brought into account in calculating the profits of the business to which they relate for income tax and Class 4 National Insurance contributions.
Self-employed taxpayers who have received the first, second and third grant payments from HMRC will need to report these on their self-assessment tax returns for the tax year 2020/21, regardless of the accounting year end of the business and whether it has adopted the cash or accruals basis. The grant income should be stripped from the business records and reported as follows:
- Box 70.1 in the Self-Employment (Full) pages.
- Box 27.1 on the Self-Assessment (Short) pages.
- Box 9.1 of the Partnership (Full) pages.
Accounting years
This lack of flexibility can produce an inequitable outcome if an individual has a different accounting year end, such that the taxation of the grants does not correspond with the period of lower profits.
A way to mitigate this problem would be to adjust the accounting period so that the grants are taxed in the accounting period which has had a profit reduction due to the pandemic.
Partnerships
The position can be more complicated for partnerships. Ordinarily, SEISS payments claimed by a particular partner will be retained by them and declared on the same basis as a sole trader, as described above.
Where exceptional SEISS payments claimed by a particular partner are not retained by them in full, but instead included in partnership income and distributed between the partners, the SEISS payments are included within the turnover of the partnership return for the accounting year of receipt.
Cessation of trade
Some business owners will have incurred losses and ceased trading because of Covid-19. To be eligible for a grant, the claimant must, at the time of making their claim, have intended to continue trading in the tax year 2020/21.
If a business has stopped trading, HMRC will need to check with the taxpayer that they were eligible for the grant and whether the grant needs to be repaid. There are further implications for loss relief, and the closing year rules need to be considered carefully.
Payments on account
The potential impact on payments on account for 2021/22 should be considered, and it may be appropriate to request a reduction if profits for 2020/21 are inflated due to the inclusion of SEISS grants.
Other compliance issues
Whilst SEISS grant income can be offset by losses and the personal allowance (though not the £1,000 trading allowance), it is taken into account when calculating the level of student loan repayments collected via self-assessment.
This could result in higher payments than might otherwise be expected.
VAT treatment of grants
Finally, it is worth noting that the SEISS grants do not represent a supply of goods or services and thus do not form part of taxable turnover for VAT purposes, including the flat rate scheme.
Practical tip
As well as the issues that can arise from grants being taxed in 2020/21, there are other important compliance points which need to be considered carefully by SEISS grant claimants and their advisers, specifically on accounting periods, cessation of trade and in calculating payments on account.
