Since it was first announced in March 2020 as part of the government’s package of Covid19 relief measures, the self-employed income support scheme (SEISS) has proved to be very popular, with around 5 million claims being made for the first two rounds.
We have just passed the deadline of 29 January 2021 by which eligible self-employed sole traders and partners could claim the third SEISS grant. Anyone who met the conditions could claim 80% of their average monthly trading profits capped at £7,500.
On 3 March, details of the fourth grant, covering the three-month period 1 February to 30 April, will be announced.
Who will be eligible for the fourth grant?
It is worth a reminder of the criteria for claiming the third grant as this is likely to form the basis of the fourth grant. Individuals must:
- be self-employed or a member of a partnership. They cannot claim the grant if they trade through a limited company or a trust.
- have traded in both the tax years 2018/2019 and 2019/2020.
- either be currently trading but impacted by reduced business activity, capacity or demand, or have been previously trading but temporarily unable to do so due to coronavirus.
- declare that they intend to continue to trade, or restart trading, and that they reasonably believe that the impact on their business will cause a significant reduction in their trading profits.
- only claim if the reduction in profits is caused by reduced business activity, capacity or demand, or inability to trade due to coronavirus. Reduction in profits due to increased costs (such as having to buy masks) did not make a business eligible for the third SEISS grant.
In deciding whether the reduction in profits is significant, it is necessary to consider the wider business circumstances. HMRC expect individuals to make an honest assessment of whether they reasonably believe their trading profits will be significantly reduced compared to profits they would otherwise expect to achieve during this period. Claimants must keep evidence that shows how their business has been impacted by coronavirus, resulting in reduced activity, capacity or demand, or a temporary inability to trade.
How and when to report SEISS grants to HMRC
Recipients of these grants may be surprised to learn that they will be subject to tax and National Insurance.
Grants 1,2 and 3 will be taxable in the 2020/21 tax year regardless of the accounting year end of the business, although this may not be the case for some partnerships (see below). The fourth SEISS grant could fall to be taxed in 2021/22 as we don’t yet know when it is going to be paid.
The SEISS grants form part of the recipient’s taxable income and, as a result, could impact on the recipient’s High Income Child Benefit Charge (HICBC), personal allowance reduction, student loan repayments and net relevant earnings for pension contribution purposes.
HMRC have indicated that self-assessment tax returns for 2020/21 may be pre-populated with the amount of SEISS grants received, although checks should be made to ensure that the amount entered is correct.
Potential complications for partnerships
If each partner claimed and retained their own grants, he or she should identify and report these on their personal tax return; in this situation grants 1,2 and 3 will be reported and taxed in 2020/21.
The exception to this is when each partner is required to account to the partnership for the grants he or she claims, to be distributed amongst the partners in accordance with the general profit-sharing arrangement. In these circumstances, the grants should be included as turnover for the accounting year in which they are received and they will form part of each partner’s profit share to be declared on his or her tax return as part of trading profits. Depending on the year end of the partnership, this could result in some of the grants being taxed in 2021/22 rather than 2020/21.
Difference between taxation of SEISS grants and local authority grants
The timing of the taxation of SEISS grants should not be confused with that of local authority grants.
Whilst the first round of local authority grants were paid out to eligible businesses in April 2020, those traders preparing their accounts on the accruals basis are taxable on this sum according to the date when the business became eligible for the grant which was immediately on its announcement in March 2020. This means that the £10,000 is taxable in 2019/20.
For businesses preparing accounts on the simpler cash basis, the local authority grant will be taxed in the year of receipt which will generally be 2020/21.
VAT treatment of grants
Finally, it is worth noting that although the SEISS grants are based on profit levels, they do not represent a supply of goods or services and therefore are not subject to VAT.
The SEISS is not part of taxable turnover for VAT purposes. This means it does not have to be taken into consideration when looking at the VAT registration threshold; HMRC has confirmed that traders will not need to register for VAT on account of the SEISS grant pushing them over the turnover threshold for VAT.