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13 April 2021

Sole traders must remember that SEISS funding is subject to taxes

Frequently Asked Business Question:

I own a sole-trader business and have been negatively impacted by the Covid pandemic, however, as the restrictions are lifted, I am hopeful that I can open my business again. I received Self Employed Income Support Scheme grants and have been told that they are taxable.  Is this correct and when is any tax owed?

Top Tip:

The Self Employed Income Support Scheme (SEISS) was introduced in March 2020 by the Government to support self-employed individuals in an unprecedented pandemic. Since then there have been further rounds of SEISS funding.

The SEISS funding is a taxable grant and should be included in the calculation of the profits of your business, taxed through the Self-Assessment regime and subject to both income tax and Class 4 NIC.  As the grant forms part of your trading income, trading losses and the personal allowance can be utilised in the normal way.  It is also important to note that the SEISS grants would also be considered when calculating the payments of account.

Under the tax legislation, the general rule is that the SEISS grant is taxable in the 2020/21 tax year, however,  there are slightly different rules in relation to when the SEISS grant is taxable for partnerships.

For individuals (sole-traders), this means that the grant would not follow your normal accounting date.  As noted, the legislation states that the SEISS grant must be taxed within the 2020/21 tax year, i.e. the filing date of this return is 31 January 2022.   If a grant was received in the first round of funding in March 2020 (2019/20 tax year), it would be taxable in the 2020/21 tax year, not the 2019/20 tax year.

For businesses, with a 31 March accounting period end, the tax position may not change significantly, for example, a business may have experienced a decline in profits or even a loss in 2020/21.  The  SEISS grant would be taxable as part of the trading income for the accounting period ended 31 March 2021 but it may not push the taxpayer’s taxable income into the higher tax bracket.

However, if a business has a year-end of 30 April the position may be different.  For example, a business with an accounting period end of 30 April 2020 would pay tax on these profits in the 2020/21 tax year.  The reality of the Covid pandemic only hit businesses from March 2020 onwards.  Therefore, if a business has a 30 April accounting period, was profitable and received SEISS grants, they could potentially end up paying tax at the higher rate of (40%) on the SEISS grants.  In addition to this, the business they may not be in a position to pay the tax due as a result of the impact that the  Covid pandemic had on the trade.

If partnerships have received SEISS grants, the year in which the grant is taxable remains unchanged, i.e. 2020/21 if the recipients of the funding were the individual partners.  However, if the grant had to be accounted by the partnership (as an entity), the rules are slightly different. In this latter instance, the grant would be taxable as part of the partnership’s profits and would follow the normal accounting period and tax assessment year.  It is worth noting that HMRC expects most partners to account for the SEISS grant individually (taxable in the 2020/21 tax year)  as it would have been claimed on an individual basis in almost all cases.  Therefore, for most partnerships, the SEISS grant income would not be recognised as income in  the partnership accounts.

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It is also important to note that the SEISS funding would also be considered when assessing eligibility for the tax credit and universal tax credit.

As some business owners start to realise the real financial cost of Covid and rebuild their businesses, it is important that they connect with their trusted advisor, have accounts completed in a timely manner, assess the tax implication of receiving SEISS funding, and plan for any surprise tax liabilities.  Businesses planning their way out of the Covid pandemic will be key to their future success.

The advice in this column is specific to the facts surrounding the questions posed.  Neither FPM nor the contributors accept any liability for any direct or indirect loss arising from any reliance placed on replies.

Contact Siobhan

Siobhan McCreesh / Associate Tax Director

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