SEISS Tax Issues
In this blog post we identify the tax issues that have arisen following the ‘in practice’ use of Self-Employment Income Support Schemes (SEISS), which launched in March 2020.
Self-Employment Income Support Scheme (SEISS)
SEISS was announced back in March 2020 as a Government support grant for the self-employed and partnership businesses trading in the UK. Since the SEISS has provided three rounds of SEISS grant payments.
The latest round was available to self-employed and partnership businesses adversely affected by COVID-19 during the period from 1 November 2020 to 29 January 2021, with the deadline being the last day of this period.
Like the SEISS grants for the first and second rounds, the grant for the third round is to be taxed for the tax year 2020/21. Details of the fourth round of the SEISS grant (to cover the period from February 2021 to April 2021) are due to be announced by the Government on the 3 March and is to include the tax year for which the SEISS fourth round grant is to be taxed.
The SEISS grants received under rounds one, two and three are included as business income and are to be added to the taxable profits of the business to be liable to Income Tax or if the business made a loss then that loss can be relieved against the SEISS grant income in the normal way.
SEISS Self-Employed Tax Year
For the self-employed (but not partnerships) the dates the SEISS grants were received, the business’s annual accounting reference date and whether the business uses the cash or accrual accounting basis are all irrelevant as the aggregate of the SEISS grants received by the self-employed business under the first three rounds is all taxed for the tax year 2020/2021.
For the self-employed, the above-mentioned position that all SEISS grants received under the first three rounds are taxed for 2020/2021 are very clear and straightforward but it can produce an anomaly if the self-employed person’s 2020/2021 annual accounting reference date is after 5 April 2020.
Let us say it is 30 April which gives the ‘basis accounting year’ for the tax year 2020/2021 as the year to 30 April 2020 i.e. an accounting year of which only 1 month or so would have been adversely impacted by COVID-19. In view of this, it could be that the taxable profit for the year to 30 April 2020 plus all of the taxable SEISS grants for the first three rounds will be sufficient to tip the taxpayer’s taxable income for the tax year 2020/2021 into a higher Income Tax rate income threshold – say from the 20% to the 40% Income Tax rate- whereas the taxable income for the whole of the next accounting year to 30 April 2021 will be adversely impacted by COVID-19 and thereby will result in a much lower profit than for a normal trading year which even with the accounting (which is currently not allowed) for the addition of all of the SEISS three rounds of grant income would have still have kept the taxpayer’s 2021/2022 Income Tax rate to the lower 20%.
You can see the anomaly-by insisting to tax the SEISS income for 2020/2021 the tax rate can increase to say 40% whereas under normal accounting rules the SEISS income would have been taxed at 20%. More worryingly is the negative effect of the potentially increased 2020/2021 tax bills on the cash flow for those small businesses already adversely hit by COVID-19 if the SEISS grants remain fully taxable for 2020/2021 with disregard for the normal accounting rules for when trading income is receivable!
It is not expected that the Government is looking to alleviate this problem by allowing flexibility in deciding the tax year for which the SEISS grant income is taxed!
SEISS Partnerships Tax Year
For partnerships, the tax year for which the SEISS grants received to date are taxed depends on if the SEISS grants are claimed and retained by the individual partners in which case they are taxed for 2020/2021, as for the self-employed, with the same tax liability anomaly as described above.
However, if the SEISS grants are paid to the partnership and distributed to the partners under a partnership agreement then the SEISS grants are included in the partnership accounts and taxed in accordance with the usual tax rules applicable to the partnership’s basis period. For example, if the partnership accounting year-end (basis period end date) is say 30 April 2021, then the SEISS grants for the first three rounds will be taxed for the tax year 2021/2022 not 2020/2021. In this case, the tax liability anomaly described above is not relevant!
Another concern to look out for is that the inclusion of the SEISS grant income for the first three rounds as taxable income for the tax year 2020/2021 may also increase the required payments on account for the tax year 2021/2022 which are based on the 2020/2021 Income Tax and Class 4 NIC liabilities and are due for payment to HMRC as 50% by 31 January 2022 and the other 50% by 31 July 2022.
Given that the taxable income for the tax year 2021/2022 will be hit harder by COVID-19 as compared to the tax year 2020/2021 then closer to the January 2022 tax payment date consideration should be given to claiming to HMRC for the reduction of the calculated tax payments on account for the tax year 2021/2022 as based on the evidence of the business’s COVID-19 hit and reduced taxable profits for the tax year 2021/2022.
Businesses that Ceased Trading
HMRC are beginning to raise enquiries if they have evidence that self-employed and partnership businesses who have claimed SEISS grants have ceased to trade in the tax year 2020/2021. You will remember that to qualify for the SEISS grants under the first three rounds the claimant had to confirm that they are to continue to trade throughout the tax year 2020/2021. If when the SEISS claim was made the business was trading and intended to carry on trading but subsequently the business owner decided to close the business then the received SEISS grants do not have to be refunded to HMRC.
It is understood that the Self-Assessment Tax Return for the tax year 2020/2021 is to include a box for declaring the SEISS grants. It is thought this SEISS grant income box will be on the Self-Employment and Partnership pages. Furthermore, HMRC is considering providing the SEISS grant income as part of the ‘HMRC information’ you will need for the completion of the 2020/2021 Self-Assessment Tax Return as being accessible from the relevant taxpayer’s or Agent’s HMRC online account.
Just to be clear the SEISS grant income is outside the scope for VAT and therefore is not subject to VAT. Furthermore, the SEISS grant income does not have to be included to assess if a business’s income has exceeded the VAT registration income threshold or included in the income threshold to qualify for the VAT flat rate scheme.
The received SEISS grant income is taken into account as income for the purposes of claims for Universal Credits and Working Tax Credit support.
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