The SEISS grants are taxable in the tax year of receipt. If you are a sole trader who has an accounting year end after 5 April 2020, the tax effect could be unexpected.
For example, if your accounting year end is 30 June 2020, you may have had a good year up to the middle of March but then profit drops in the final three months. Those accounts form the basis of the tax year 2020/21. You will have been entitled to claim the grant in June, and may receive the second, third and fourth grant in due course. These will also be taxed in the tax year 2020/21 (i.e. tax year of receipt). The trading profit for the year ended 30 June 2021 is likely to be considerably less. So you could end up with:
- Tax year 2020/21 – 9 months of “normal” trading taxable PLUS all the SEISS grants received in that tax year. This could result in the grants being tax at 40% when you have never been a higher rate tax payer before.
- Tax year 2021/22 – 12 months of reduced trading and very little taxable profit, and no grants, so a significantly reduced tax liability.
To try and put this into context. Lets assume you have made average profits of £45,000 in the three tax years to 5 April 2019. Then in March 2020 you were forced to stop trading due to the coronavirus crisis. Your profit for the year ended 30 June 2020 decreased to £33,750 and you claimed the maximum you could in SEISS grants.
- Tax liability for the year ended 5 April 2020 (based on profit of £45,000 for the year ended 30 June 2019) is £9,932
- Tax liability for the year ended 5 April 2021 (based on profit of £33,750 plus the four lots of grants of totalling £17,820) is £12,041
The SEISS is intended to replace lost income but you will be paying in excess of £2,000 more in tax, despite the fact your income will have dropped.
You will have total income for 2020/21 of £51,570, so you will be a higher rate tax payer for the first time. You will also have breached the threshold for paying back child benefit if you or your partner are in receipt of it (so an additional amount payable in respect of that). Your income from your business for the year ended 30 June 2021 could be severely affected resulting in unutilised basic rate band, or worse, personal allowance in that year. So a huge tax bill at a time when your have very little income coming in.
If the accounting year is 5 April or 31 March this won’t be a problem, as your year ended 31 March/5 April 2020 coincides with the start of the crisis. So in all probability the only income in the tax year to 5 April 2021 is the self employment grants plus whatever profit you have managed to achieve this year. If your costs exceed the grant then, you will not be taxed on that grant. If your accounting year end is not 31 March or 5 April it is worth keeping a close eye on this, as it could be possible to counteract the timing impact by changing your year end. We will be happy to look into this for anyone affected to ensure income and tax liabilities are spread as evenly as possible.
If you have any questions about the SEISS grants and how they affect you, you can call us on 01243 782 423 or head to our contact page and we will be in touch!