Tax returns, SEISS and other coronavirus support
HMRC is noting an increase in early filing this year, and one of the entries on returns is causing problems – SEISS. SEISS and other coronavirus support grants are taxable, but where does SEISS go on the tax return?
Taxation of coronavirus support measures
In the absence of specific tax rules to the contrary, it is usual to follow normal accounting practice when dealing with government grants.
So for the likes of CJRS, and local authority coronavirus support, HMRC guidance in the Business Income Manual is a useful jumping off point. There is an index at BIM40450, and an overview of the general approach at BIM40456 - Specific receipts: Coronavirus Support Payments - General rules.
In terms of accounting, ICAS has issued guidance: Accounting for Government Grants awarded under the Small Business Grant Fund and the Retail, Hospitality and Leisure Grant Fund. This sets out an approach to accounting which carries through into the tax treatment.
But SEISS is different. Schedule 16, FA 2020 specifically requires Self Employed Income Support payments for phases 1 -3 to be taxed in the 2020-21 income tax year (per schedule 16 FA 2020 para 3 (3)). How does this work out in practice, and what are some of the snags?
Partnerships and SEISS
One immediate issue is partnerships. The HMRC guidance (in SA 850 notes) and legislation in Schedule 16 don’t use identical wording.
Going with the legislation, this says that where the SEISS grant claimed by one partner is ‘distributed to all partners’ (para 3 (4)), rather than being retained in full by the partner who claimed it, the SEISS grant is taxed according to the partnership basis period, and included in the profits allocated to each partner.
This means that each individual partner’s return will include a proportion of the total SEISS claim, according to the basis period of receipt and the profit allocation, and it will be included in their total shares of trading profits and not shown separately.
This route, where SEISS is included in partnership profits, is not trouble free from a compliance angle, as it could prompt HMRC intervention. This is because the specific box for showing SEISS received box on the individual partner's tax return will be empty, yet HMRC's records will show the full amount of SEISS as paid to that individual.
There is no simple fix here. It will be prudent to include a ‘white space’ note explaining what has happened, but this does not rule out HMRC ‘correcting’ the return to include all the SEISS shown in their records as paid to the individual partner.
If this ‘correction’ is not spotted, then the partner could be double taxed: once on a share of the SEISS grant included in the partnership profits, and again on the ‘corrected’ personal tax return, through inclusion of the full grant received in the tax year.
From a practical point of view, even if a SEISS grant is paid into a partnership bank account, has it been ‘distributed’ to all partners? For example, what if the individual partner who made the claim increased their drawings and withdrew an additional amount in respect of the grant? Or if this partner wanted to treat the SEISS paid in as capital introduced into the partnership business? In either case, the partner who claimed the SEISS may have effectively retained all the SEISS money.
Where the individual partner who claimed the SEISS grant retains all the SEISS money (or the SEISS grant was into a private bank account), then the basis of taxation changes. The partner is taxed in the same way as a sole trader, i.e. on the amount of SEISS grants 1-3 received in the tax year 2020-21.
Further HMRC guidance on SEISS for sole traders and partnerships can be found in the Business Income manual at BIM 40458.
Accounting dates ending early in 2020-21 tax year may result in higher tax charge
Another oddity, resulting from the fact that trading profits are taxed according to basis periods (except for some partnerships as noted above), but SEISS is taxed on the amounts received in the tax year, is that businesses with accounting dates ending early in the 2020-21 tax year, such as 30 April 2020, or 30 June 2020, potentially face an increased tax bill for 2020-21. This could also affect payments on account for 2021-22, which are then likely to need revision.
The increased tax bill is because the rules may result in an accounting period which was largely unaffected by the pandemic being taxed in the same tax year as SEISS grants received during the following accounting period, which may have been significantly impacted by the pandemic.
|Profits to 30 April 2020||40,000|
|Profits to 30 April 2021||30,000 - reduced due to coronavirus|
|SEISS claimed 1-3||10,000 (estimate for illustrative purposes)|
|£40,000 profit + £10,000 SEISS = £50,000|
But the Scottish Higher rate starts at £43,430, so part of the SEISS grant is taxed at higher rates: Scottish income tax at 41%. plus National Insurance Class 4 at 9% - a marginal rate of 50%.
This means that even if the SEISS grant exactly compensates for lost profits, it could attract a higher tax charge, due to the different basis of taxation for trading profits and SEISS.
Particularly dramatically affected are Scottish taxpayers with income in the £43,430 and £50,000 range, though any UK taxpayers could see an increased tax bill where SEISS grants are based on profits in the £30,000 – £50,000 range.
SEISS is not available where trading profits have averaged over £50,000 pa. Above £50,000, the National Insurance rate on trading profits falls to 2%, so the marginal rate is less severe. This means that it is a very specific group of traders impacted here.
There are possible ways to mitigate the result. In a few cases, changing the year end (by up to six months) might produce a more equitable result, but the consequences are complex and would need very careful evaluation.
Putting SEISS on tax returns
While agents have not been directly involved in the claims process for SEISS, they will be involved in including SEISS claimed by the client on the tax return. This means that, in line with Professional Conduct in Relation to Tax, agents should take care that items included on the return are not misleading.
Considering the tax return for 2020-21, the agent’s duty in terms of tax submissions is covered in the Professional Conduct in Relation to Tax help sheet Submission of tax information.
This says, at paragraphs 12 and 13:
12. A member should act in good faith in dealings with HMRC in accordance with the fundamental principle of integrity. In particular, the member should take reasonable care and exercise appropriate professional scepticism when making statements or asserting facts on behalf of a client.
13. Where acting as a tax agent, a member is not required to audit the figures in the books and records provided or verify information provided by a client or by a third party. However, a member should take care not to be associated with the presentation of facts they know or believe to be incorrect or misleading, not to assert tax positions in a tax filing which they consider to have no sustainable basis.
More widely, it may be worth alerting SEISS claimants to the likely increase in HMRC compliance activity. With additional HMRC staff recruited for the purpose, this is likely to go on for a few years.
HMRC compliance activity on SEISS is likely to intensify following submission of the 2020-21 return. For a 2020-21 return, there would normally be a 12-month enquiry window from submission of the return. The client needs to be sure that they are able to show HMRC sufficient evidence that their claim was justifiable at the time it was made.
In this regard, it may be worth highlighting the changes in the requirements over time. In particular, the more stringent requirements from SEISS 3 onwards. The ‘adversely affected’ rule for SEISS 1 and 2, becomes ‘reduced capacity, activity or demand’ for SEISS 3 (and 4). From SEISS 3 onwards, there also needs to be a reasonable expectation that there will be a significant impact on trading profits which will follow through into reported results in a tax return in due course.
Penalties and paying back SEISS claimed in error
The penalty position for SEISS is made more serious by the provision is FA 2020 schedule 16, especially para 13 and 14, which result in automatic ‘deliberate and concealed’ penalties of up to 100% applying where an individual claimed SEISS when they knew they were not entitled (or from SEISS 4 onwards, where a later amendment makes them ineligible).
The factsheet, Penalties for not telling HMRC about Self-Employment Income Support Scheme grant overpayments - CC/FS47, provides detailed background.
Grants claimed in error need to be notified to HMRC within 90 days of making the claim (or of a change in circumstances, such as an amendment to a tax return, which leads to reduced or no entitlement).
While it is possible to repay SEISS claimed in error, via a box on the SA 100 tax return, this is something of a last resort (eg to be used in January 2022, if filing 2020-21 return just before the deadline). It would be more usual to repay the amount directly to HMRC before submitting the return. The process is outlined on the page Paying back SEISS claimed in error.
Processing delays and HMRC corrections
There are reports of delays in processing income tax returns which include SEISS. This is especially so if the amount reported differs from the amount recorded by HMRC as paid out, or if the amount has been entered in a different box on the returns, or was accidentally included in turnover.
HMRC will be expecting SEISS grants to be reported in the following boxes for 2020-21 returns:
- box 70.1 on the Self Employment (Full) page of the tax return
- box 27.1 on the Self Employment (Short) page of the tax return
- box 9.1 of the partnership supplementary pages of the tax return
- box 3.10A of the SA200 (Short) tax return.
As agents may be unable to directly access SEISS information without additional authority from clients (see HMRC bulletin 7 June 2021), it is particularly important the clients supply their adviser with the correct figures for SEISS.
An additional issue to be alert to is that HMRC may ‘correct’ the return, issuing an SA 302 notice, where amounts reported on the return are not as expected.
In some cases, this could lead to double taxation. For example, if the correct amount of SEISS has been included elsewhere on the return, and HMRC ‘corrects’ the return by adding the SEISS paid out according to its records in one on the boxes listed above.
The solution here will be to amend the return to remove any SEISS included elsewhere on the return, leaving only the amount ‘corrected’ by HMRC on the tax return. In exceptional cases, where there is a discrepancy between the amount HMRC shows as paid to the taxpayer/client and the amount the client received, it will be necessary to contact HMRC.
Payments on account
HMRC is endeavouring to process early filed returns so that the second payment on account for 2020-21, due 31 July 2021, can be adjusted before the due date.
SEISS adds another layer of complexity to tax return filing this year. To reduce the risk of compliance intervention, it would be well to review the position carefully and make any needed adjustments before submitting the return.
Useful links: Treasury directions SEISS 1 direction; SEISS 2 direction; SEISS 3 direction;
HMRC archived guidance SEISS 1 24 April 2020; 22 July 2020; SEISS 2 1 Oct 2020 adversely affected (30 Sept 2020)
HMRC guidance and links SEISS 4 Check if you can claim SEISS – earlier SEISS grants - read guidance for previous SEISS grants on The National Archives.
Check if you need to change your Self Assessment return for SEISS.