Frequently Asked Business Question:
My business has claimed some Covid supports since March 2020, can you explain the tax impact of these and what I need to be aware of?
During the Covid pandemic, the UK Government and NI Executive were instrumental in providing a range of supports to businesses. These included the Coronavirus Job Retention Scheme (“CJRS”), Self Employment Income Support Scheme (“SEISS”), Loan Schemes, Grants, Rates Relief, Reduction in VAT Rates, Time to Pay Arrangements, Deferral of VAT, and more recently, the Temporary Extension to the Carry Back of Trading Losses. I have set out below some of the more common areas that businesses need to be aware of as they emerge from the Covid Pandemic.
Furlough “Fraud” has become a key area of investigation by HMRC. The rules on the CJRS were very fluid and regularly updated throughout the Covid pandemic. Therefore, it is critical that businesses that have made claims under the CJRS have sufficient information to back up all furlough claims based on the rules at each relevant point in time. It is also important to note that furlough fraud covers a large number of areas and can extend to CJRS monies being used for alternative purposes, for example, buying an asset (car, equipment), holding the CJRS monies in a deposit account or making a claim whilst your business was able to continue to trade seamlessly and profitable.
Claims made under the CJRS and/or the Coronavirus Statutory Sick Pay Rebate Scheme (“CSSPRS”) can also impact other aspects of your business. For example, if you are a limited company and carry out R&D activities your R&D tax credit claim could be reduced. A key condition of the CJRS was that the employee would cease all work in relation to their employment. Therefore, if any member of your R&D team was on furlough or Flexi-furlough, they would not be able to engage in R&D activities, meaning, any employment costs in the furlough period would not be eligible costs for R&D with the exception of holiday pay or sick pay (this would need to be considered).
A second point to note, on R&D relief, relates to the CJRSPRS, which is notifiable state aid. Therefore, if a claim for the CSSPRS was claimed for any member of the R&D team, the whole R&D project would fall under notified state aid rules, The means that an R&D claim could only be made on that project under the RDEC scheme. The RDEC scheme results in a tax saving of 10% compared to the SME scheme where the tax savings could be up to 33%.
If a business has received any Covid related grants and, if they were used for R&D activities, consideration should be given to what impact, if any, they could have on the eligibility of the company to make a claim for R&D under the SME and RDEC schemes. It is also important to note that if a company has a tax refund resulting from R&D activities and there is an outstanding debt, for example, VAT or PAYE, HMRC’s approach has been to net the repayment against the outstanding tax debt (even if there is time to pay arrangement in place). This is an important point to note in respect to cash flow planning.
In relation to SEISS payments, these payments are treated as grants and taxable under the self-assessment regime. SEISS grants 1 to 3 will fall will within the tax year 2020/21 with SEISS grants 4 and 5 taxable in the 2021/22 tax year. However, if you believe you were not entitled to make a SEISS claim and have received the payment(s), you should consider how the position needs to be corrected. In recent HMRC guidance, it has been noted that where taxpayers have made incorrect SEISS claims, they have until 31 January 2022 to repay the SEISS grants 1 to 3 and until 31 January 2023 to repay the SEISS grants 4 to 5. It is also important to note that in some instances, where HMRC views the actions of the taxpayer as deliberate and concealed a 100% penalty could be charged. HMRC has stated penalties will not be charged where payments are received by these dates as detailed.
Businesses and taxpayers should also be aware of the temporary extension to the loss carryback claims, announced by the Chancellor in the last budget. This measure will extend the loss carry-back period from 1 year to 3 years and should provide additional cash flow for businesses. It is important to note that this measure is due to get Royal Assent in July and HMRC is not accepting early claims.
In order to secure all available tax reliefs and assess the exposure to tax, it is essential that businesses are proactive, have their accounts completed in a timely manner, and be aware of any issues that could arise. If in doubt, reach out to your trusted advisor.