HMRC have now confirmed the basis on which the Self Employed Income Support Scheme (SEISS) will be taxed on individuals. It will be taxed in the tax year in which it was received, rather than being treated as additional income in the accounts year in which it was received. There will be a separate section in the self assessment return in which to complete the relevant details.
Taxing the grant on a receipts basis is likely to cause some significant differences in tax liabilities for those with certain year ends, due to the degree of impact of Covid restrictions on particular accounting years.
If the SEISS payment falls to be taxable in the 2020/21 tax year. The amount received should be added to the trading profits (or losses) of the basis period of the 2020/21 tax year. If there is an overall loss for the year, the normal loss relief rules then apply.
Example : Sole trader with profits and an accounting year end of 30 April
A sole trader draws up accounts to 30 April 2020 in which a profit of £25,000 arises. In June 2020, the sole trader receives a first SEISS payment of £7,500, with a second SEISS payment of £6,570 received in August 2020. No further SEISS payments are received.
The sole trader will be taxable on trading profits of £39,070 for 2020/21. This is the sum of the profits of £25,000 in the accounts and the two SEISS payments received during the tax year.
For the year ended 30 April 2021, the sole trader draws up accounts which record a profit (including the SEISS receipts) of £30,000. The sole trader will not be taxable on the SEISS payments in the 2021/22 tax year as they were taxed in 2020/21. The sole trader will be taxable on trading profits of £15,930 in 2021/22.
So this could mean businesses with year ends of 30 April, 31 May and 30 June which were only partly affected by Covid issues, having exceptionally high taxable profits for 2020/21. However, there will be scope for reducing payments on account generated for the following year by these liabilities, when trading income and grants would be much less.
We would advise information to complete tax returns is provided as soon as possible so that the extent of this approach can be quantified.
June 15th, 2021