In this excerpt from the report ‘COVID-19 Tax Issues For Businesses’, Sarah Bradford gives some advice for employers and employees in this current situation.
The Covid-19 pandemic affects the self-employed as well as the employed, and there are some support measures available. The flagship measure for the self-employed is the Self-Employment Income Support Scheme (SEISS) which provides grants those affected by Covid-19 and who meet the eligibility condition. However, grants are only available to those whose income from self-employment is not more than £50,000 and who meet other eligibility conditions.
Grants are also available for small businesses benefitting from small business relief, and for certain business sectors particularly hard hit by the pandemic, such as those operating the retail, hospitality and leisure sectors who were forced to close their doors during the lockdown. Business rate relief may also be available.
Where further financial support is required, businesses can take advantage of the various loans on offer, including bounce-back loans and Coronavirus business interruption loans
Individuals and businesses facing cashflow difficulties may struggle to pay their tax on time. In recognition of this, deferral options were available for both VAT and the second self-assessment payment on account for 2019/20. Taxpayers can also contact HMRC to agree a time-to-pay agreement.
The pandemic may mean that a business changes the nature of its trade. An example of this would be a restaurant that was not allowed to open during the lockdown offering a takeaway or delivery service instead. Where the trade changes, there be associated tax implications.
Sadly, despite these measures, many businesses may make a loss. From a tax perspective, relief is available for losses, and care should be taken to utilise the loss in the best possible way.
Unfortunately, not all businesses will remain viable, and where a business ceases, it is important that this is done in a tax-efficient manner to take advantage of possible reliefs that may be available. It is also important to ensure that compliance obligations on the closure of the business are met.
The Self-Employment Income Support Scheme
The Self-Employment Income Support Scheme (SEISS) initially allowed the self-employed and individual partners in partnerships to claim a grant equivalent to 80% of three months’ average profits to a maximum of £7,500, provided that the eligibility conditions are met. An extension to the scheme allows those whose business was adversely affected by Coronavirus on or after 14 July 2020 to claim a second grant in August, based on 70% of three months’ average profits to a maximum of £6,570. A claim can be made for the second grant even if the first grant was not claimed.
Grants paid out under the scheme are taxable.
Where a grant is paid, the recipient can start to work, start a new trade or take on other employment.
Grants are not available to those whose income from self-employment is over £50,000 in both 2018/19 and on average over the three years from 2016/17 to 2018/19. Likewise, claims for the SEISS grant cannot be made by those who started trading in 2019/20 or 2020/21.
Eligibility for grant
A self-employed individual or a member of a partnership is eligible for a grant under the self-employment income support scheme (SEISS) if:
- they have submitted their self-assessment tax return for 2018/19 by 23 April 2020;
- they traded in 2019/20;
- they are continuing to trade when they claim the grant, or would be except for the Coronavirus pandemic;
- they intend to continue to trade in 2020/21; and
- they carry on a trade that has been ‘adversely affected’ by Coronavirus.
Traders who had not submitted their 2018/19 tax return by 23 April 2020 are not able to claim a grant under the SEISS.
The availability of the grant is limited to traders whose trading profits are not more than £50,000 either for 2018/19 or on average for the three years 2016/17 to 2018/19 inclusive. This means that traders with profits of more than £50,000 in 2018/19 can still qualify if their average profits over 2016/17, 2017/18 and 2018/19 do not exceed £50,000.
Further, the trader’s income from self-employment must be at least 50% of their total income.
Traders can check whether they are eligible online.
Prior to the claim portal opening for the first grant, HMRC wrote to taxpayers they believed to be eligible.
Meaning of ‘Adversely Affected’
One of the conditions that must be met in order to qualify for a grant under the SEISS scheme is that the trade is ‘adversely affected’ by Coronavirus.
HMRC have published guidelines of where a trade may be regarded as being ‘adversely affected’ by Coronavirus. These include:
- being unable to work because you are shielding, self-isolating, ill with Coronavirus or have caring responsibilities as a result of the virus;
- the business having to scale or stop trading temporarily because of supply chain interruptions;
- the business having no or fewer customers or clients;
- staff being unable to come to work;
- one or more of your contracts have been cancelled;
- you had to buy protective equipment so that you can trade following social distancing rules.
HMRC have published examples on the Gov.uk website of circumstances in which they will accept that a business has been adversely affected by the virus. These can be found here.
Both the amount of the grant and eligibility depend on the trader’s profits as shown on the filed self-assessment tax returns for 2016/17, 2017/18 and 2018/19. To prevent fraud, any amendments made to returns after 26 March 2020 are ignored.
The grant is based on average trading profits over the following three tax years:
- 2017/18; and
The average profits are the total profits for the three years (as per the filed self-assessment returns) divided by three.
The first grant is worth 80% of the average trading profits (capped at £2,500 per month) for three months. The second grant is based on 70% of average trading profits for three months, capped at £6,570.
James is a self-employed barber. During lockdown he is unable to work. He has no other income
He has filed self-assessment returns for the last three years which show profits as follows:
Tax year Profits
James would not qualify for the grant based on his profits for 2018/19 as these exceed £50,000. However, his average profits over the three years 2016/17 to 2018/19 inclusive are £44,000 (£132,000 ÷ 3) and as this is less than £50,000 he is eligible to make a claim.
His average monthly profits are £3,667 and average profits for three months are £11,000. As this is more than the maximum, he is eligible for a grant of £7,500 for the first claim period. If his business continues to be affected by Covid-19 and he is eligible for the second grant, he will receive the maximum of £6,570.
Taxpayers who have not submitted returns for each of the years from 2016/17 to 2018/19 will have their grant and eligibility determined by consecutive tax years ending with 2018/19.
Claiming The Grant
The grant must be claimed via the portal on the Gov.uk website.
Prior to the portal opening in respect of the first grant, HMRC wrote to those who they believed to be eligible telling them how much they were entitled to and the first date that they could make their claim (which fell between 13 and 18 May 2020). The first grant must be claimed by 13 July 2020.
Claims for the second grant can be made in August 2020.
It is important to note that the trader must make the claim; it cannot be made by an agent on their behalf. Agents should not attempt to claim on behalf of claimants as this will delay the payment of the claim.
To make a claim, a trader will need:
- Their Government Gateway ID and password; and
- details of the UK bank account into which the grant should be paid.
When making the claim, the trader has to confirm that their business was adversely affected by Coronavirus.
Traders who feel their grant amount is too low should contact HMRC.
Tax And NIC Treatment of SEISS Grants
Grants paid out under the SEISS are taxable and should be included when working out taxable profits.
As liability to Class 2 and Class 4 National Insurance contributions is based on profits, the grant payments will be taken into account in determining liability to National Insurance too.
For 2020/21 a liability to Class 4 National Insurance contributions arises where profits exceed £9,500, and for Class 2 contributions, a liability arises where profits exceed the small profits threshold, set at £6,475 for 2020/21. Where profits are below the small profits threshold, the trader is eligible but not obliged to pay Class 2 contributions. Where this is the case, consideration should be given as to whether it is worthwhile paying Class 2 contributions voluntarily to ensure that 2020/21 is a qualifying year for state pension and contributory benefit purposes. Paying Class 2 contributions voluntarily at £3.05 per week for 2020/21 is much cheaper than paying Class 3 NIC at £15.30 per week.
The SEISS imposes record-keeping requirements on trader eligible to claim a grant under the scheme. Records should be kept for five years from 31 January after the end of the tax year, as for all self-employment records.
As regards the scheme, for each claim, a record should be retained of the amount claimed and the claim reference number.
The trader should also keep evidence to show how the business was affected by Coronavirus, such as:
- business accounts showing a reduction in turnover;
- confirmation of any Coronavirus-related loans that have been received;
- date that the business had to close due to lockdown restrictions;
- dates that the taxpayer or his or her staff were unable to work due to Coronavirus symptoms or a positive test, self-isolation, shielding or caring responsibilities due to school closures;
- how the business was adversely affected by Coronavirus, e.g cancelled contracts, expenditure on PPE, etc.
To download the whole Covid-19 Tax issues for Businesses Report visit this page here.