SEISS grants bring potential tax return headache for HMRC and advisers
Special rules in Finance Act 2020 were meant to mean that checking SEISS grants on tax returns would be a piece of cake. But that may not be how things are working out. What’s your experience?
Coronavirus business support
Self Employed Income Support Scheme (SEISS) grants have been paid out to millions of small business owners as part of the Government’s coronavirus business support measures. But these grants are taxable and need to be entered on returns for the year to 5 April 2021.
Though the final filing date for these returns is 31 January 2022, many people are already filing.
Early filing will help crystallise loss claims and establish more accurate payments on account for both the first income tax self assessment payment on account for 2020-21, which was due on 31 January 2021, and the forthcoming second instalment, due by 31 July 2021. It needs to be a balanced decision. Early filing closes the window for carry back Gift Aid claims, and mismatches when reporting SEISS grants, potentially more avoidable as understanding develops, may bring delays.
The influx of 2020-21 returns has the potential to bring headaches for HMRC and practitioners, due to the unusual rules about how SEISS is taxed.
Normally, self employed businesses and partnerships pay income tax based on their accounting year. And the entire profits of an accounting year are normally matched to a tax year, simply depending on when the accounting year ends. The accounting year which ends in a particular year is taxable in that year.
New rules for SEISS
But then came SEISS. SEISS for the first three grants, (and except for one specific case with partnerships mentioned below), is taxed on the amount received in the tax year to 5 April 2021. This means that it is taxed on a cash received basis for the tax year, in distinction to the accruals basis applied to the accounting period, which is the default for trading income.
It can be helpful in terms of accounts presentation to the business owner, to show SEISS receivable/received in the accounting period in the profit and loss account/income and expenditure account. This enables a swift double check as to how nearly SEISS has replaced profits lost due to the pandemic.
The earnings period affected by coronavirus, being matched to the SEISS grant due for that period. This would usually be done by including SEISS as other income, as distinct from trading profits, in the accounts.
But unless the business accounting period runs to 31 March (or 5 April), and accounts are prepared on the cash basis (an optional alternative for trading income for tax), the amount of SEISS for tax purposes is likely to differ from the amount shown in the accounts.
This brings the potential headache of a mismatch between SEISS shown in the accounts and that shown on the tax return.
Accounts and tax returns
An additional complication is the need for possible manual intervention on the tax return.
If SEISS is treated as other income in the accounts, then the tax software default is likely to be to the wrong box on the tax return.
Other income in tax-speak usually means ‘other non-trading taxable income’ of the accounting period. Yet SEISS is not taxed according to the amount due for the accounting period, but on the basis of actual receipts in the tax year. Potentially a different basis of calculation and a different time period to look at.
So the amount of SEISS which would be appropriate to show in business accounts is likely to be different from the figure which goes on the tax return. What is more, in 2020-21 there is a separate box on the tax return just for the SEISS received.
A widespread issue?
Figures in the accounting software normally flow through onto the tax return, with destinations based on their accounting treatment. But SEISS is exceptional and doesn’t fit the usual model.
ICAS and others have received reports of SEISS grants recognized in accounting software ending up in the ‘other taxable income’ box (box 16 of the normal self employment SA 103 f form). Where this happens, a manual correction is likely to be needed, both as regards the amount and the location. Where SEISS received in the accounting period has ended up in box 16, the entry will need to be adjusted, the SEISS removed, and the correct amount received in the tax year entered instead in box 70.1.
ICAS would be interested to know if firms have experienced such complications with SEISS and whether this has complicated submission of returns this year, with the need for additional manual adjustments.
Some firms have opted to exclude SEISS from the accounts to avoid this issue. In either case, it is likely that additional information will be needed to obtain the correct SEISS figure for tax purposes. Have you experienced any difficulties in obtaining this data?
HMRC easy check
For HMRC, initial compliance checks were meant to be easy. The SEISS shown as taxable on the tax return (eg in box 70.1 on form SA 103f) should exactly match the amount held on HMRC’s records as paid out to that individual claimant.
But if SEISS has ended up in box 16, the simple check might not work. There may be multiple tax return entries so that SEISS is entered in the correct box, but also in other boxes, so the final answer is mathematically correct, but presentation would not be as HMRC expected. In some cases the amount received in the accounting period may have been used for box 70.1.
Where there are data mismatches, HMRC may decide to amend the return to reflect the data it already holds. If this happens the taxpayer and their agent should be notified. This will mean additional time checking the returns and delays in processing.
A further complication is partnerships. Where the SEISS grant claimed by an individual partner is ‘distributed to all partners’ rather than being retained in full by the partner who claimed it, then the SEISS grant is included as part of the partnership income on the partnership return (see SA 850 partnership return notes).
This means that part of the SEISS grant will be included in each partner’s share of taxable profit, to be entered on their personal tax return.
However, when this approach is adopted, the simple SEISS compliance check between amounts paid out and taxable amounts shown on an individual’s 2020-21 tax return won’t hold.
The individual partner who claimed the SEISS grant won’t be showing anything as SEISS on their tax return, as their share of the taxable grant is already included in their share of partnership profits.
What is your experience? Has the anomalous way in which SEISS is taxed caused additional work for you or your practice? Have you seen an increase in HMRC queries/correction of returns – including cases where the ‘correction’ is incorrect?
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