Sole traders must remember that SEISS funding is subject to taxes
QUESTION: I own a sole-trader business and is has been negatively impacted by the Covid pandemic. But as the restriction are lifted, I'm hopeful I can open my business again. I received SEISS grants and have been told that they are taxable. Is this correct and when is any tax owed?
ANSWER: The Self Employed Income Support Scheme (SEISS) was introduced by the government to support self-employed individuals in an unprecedented pandemic. Since then there have been further rounds of funding.
The SEISS funding is a taxable grant and should be included 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 January 31 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 March 31 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 March 31 this year but it may not push the tax-payer's taxable income into the higher tax bracket.
However, if a business has a year end of April 30 the position may be different. For example, a business with an accounting period end of April 30 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 an April 30 accounting period, was profitable and received SEISS grants, they could potentially end up paying tax at the higher rate of (40 per cent) 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 expect 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.
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.
:: Siobhan McCreesh (firstname.lastname@example.org) is associate tax director at PKF-FPM Accountants (www.pkffpm.com). The advice in this column is specific to the facts surrounding the question posed. Neither the Irish News nor the contributors accept any liability for any direct or indirect loss arising from any reliance placed on replies.