Self Employed Grant extension - 4th & 5th Grant
Table of Contents
Overview of Self employed SEISS grants
The government has released more information relating to the 4th grant which will cover the period from February 2021 to April 2021.
Eligibility for the 4th and 5th grants will be based on the 2019/2020 tax return as submitted by midnight on Tuesday 2 March and so the grants will now be open to those that became self-employed from 6 April 2019. This was not the case in respect of the earlier grants.
Capped at £7,500 the 4th grant will be again set at 80% of three months’ average trading profits.
There will also be a 5th grant covering May to September 2021 and will take the individual’s trading position for 2020/2021.
The 5th grant will be worth:
- 80% of three months’ average trading profits, capped at £7,500, for those with a turnover reduction of 30% or more; or
- 30% of three months’ average trading profits, capped at £2,850, for those with a turnover reduction of less than 30%.
The proposal is that for any grant received on or after 6 April 2021 it will be taxable in the tax year of receipt. Grants 4 and 5 are thus likely to be taxable in 2021/2022. We explore how this might differ for partnerships later.
HMRC will contact those that are eligible and the claims for the 4th grant can be made from ‘late April 2021’. The 5th grant can be claimed from late July 2021.
There is no requirement that an earlier SEISS grant has been claimed in order to be able to claim the upcoming 4th grant.
The overall qualifying criteria for the 4th grant is the same as it was for the original SEISS and the 3rd grant.
The grants are taxable income and are also subject to National Insurance contributions (NICs). The tax treatment of the SEISS payment overrides GAAP or the cash basis.
What does ‘Significant reduction’ refer to?
HMRC does not define what they mean by a ‘significant reduction’ in trading profits but they do provide the following contrasting examples:
- a plasterer cannot get materials due to supply chain issues due to coronavirus. This has reduced the amount of work he can complete and be paid for. He reasonably believes this will significantly reduce his trading profits. He is eligible to claim the third grant.
- a plasterer cannot get materials due to supply chain issues due to coronavirus. This has reduced the amount of work he can complete and be paid for, but he manages to quickly find a new supplier. He does not believe that the reduced demand will cause a significant reduction in his trading profits. He is not eligible to claim the third grant.
The taxpayer does not need to take into account the 1st or 2nd grant, nor any other governmental covid support in deciding whether there has been a significant reduction in trading profits.
When will the 1st, 2nd and 3rd self employed grants be taxable?
In most cases, the straightforward answer is: 2020/2021 as per Para 3 Schedule 16 Finance Act 2020 (FA 2020). However, this might differ for partnerships.
When will the 4th and 5th grants be taxable?
For any SEISS payments received on or after 6 April 2021, Section 106 and Schedule 16 FA 2020 will be amended so that the grant will be taxable in the tax year it was received. For most people this means that the 4th and 5th grants are likely to be taxed in 2021/2022.
The answer for all five grants might be different where a partnership is concerned. See below.
Self employed grants for partnerships
The payments (grants 1-3) should be taxed in 2020/2021 except where the payment forms part of partnership income. Where a partner pays the SEISS into the partnership and it is not retained by the partner then it will be treated as partnership income and it will be taxable income of the accounting period of the partnership.
What if you have been overpaid and you want to pay a grant back?
A grant can be thought of as overpaid if the taxpayer was not eligible for the grant or if the taxpayer received more than HMRC said they were entitled to.
The taxpayer must notify HMRC of an overpayment within 90 days of receiving the grant to avoid a penalty. The penalty could be up to 100% of the grant.
Penalties for not repaying an overpaid grant
If a taxpayer was not entitled to the grant and has not repaid it by the latter of the above dates then HMRC can charge a ‘failure to notify’ penalty. This penalty very much depends on the taxpayer’s behaviour. Please refer to factsheet CC/FS11.
HMRC will charge late payment interest.
Having said that, HMRC states in factsheet CC/FS47 ’If you did not know you were ineligible for the grant when you received it, we will only charge you a penalty if you have not repaid the grant by 31 January 2022’.’ We expect the following to result in a change to the factsheet.
Is an overpaid self employed grant to be included on the taxpayer’s 20/21 tax return?
Yes, if we are considering the three earlier grants, unless you have repaid it before you have submitted your tax return.
Eligibility criteria for the 4th and 5th Self employed grants:
The 2019/2020 tax return must have been submitted by 2 March 2021 and show self-employment/partnership trading profits to be no more than £50,000 and at least equal to non-trading income.
If this is not the case then HMRC can look at the tax years 2016-17, 2017-18, 2018-19 as well as 2019-20.
You must also have traded in both tax years:
- 2019-20; and
You must either:
- be currently trading but are impacted by reduced demand due to coronavirus; and
- have been trading but are temporarily unable to do so due to coronavirus.
You must also declare that:
- you intend to continue to trade
- you reasonably believe there will be a significant reduction in your trading profits due to reduced business activity, capacity, demand or inability to trade due to coronavirus
Eligibility criteria for the earlier three grants:
- all three grants were or will be open to those that have submitted an income tax self assessment tax return for the year to 5 April 2019 (the 2018-19 tax year);
- the individual must be currently self-employed (including partners in partnerships and LLPs);
- have carried on a trade in the tax years 2018-19 and 2019-20;
- the individual must have lost trading profits due to Covid-19;
- the trader intends to trade in the current 2020/2021 tax year and are trading at the point of application or would have been except for Covid-19. The business must not have ceased – even if no work is being done;
- the individual must have submitted their 2018/2019 self-assessment tax return by 23 April 2020 in order to qualify for this scheme;
- if that person is a non-UK resident or has made a claim under section 809B of ITA 2007 (claim for remittance basis to apply), certify that the person’s trading profits are equal to or more than the person’s relevant income for any relevant tax year or years;
- any changes relating to tax returns that were amended after 6pm on 26 March 2020 will not be taken into account.
In addition, HMRC will only use the information in your original return if your return is under enquiry or has been subject of a contractual settlement.
HMRC has released an online tool to help individuals check eligibility for this scheme which can be accessed here.
Once the online check is complete, eligible customers will be given a date when they can submit their claim.
In addition to the criteria set out above, there are some alternative entry conditions relating to earnings and sources of those earnings. These are set out below:
A trader only needs to meet 1 of the following ‘Profit Condition(s)’
Condition A: the self-employed trading profits for 2018-9 must be no more than £50,000 (but more than nil) and at least equal to the non-trading income (‘relevant income’) for the tax year.
They make more than half of their income from self-employment, up to £50,000 in profit per year.
Condition B: average trading profits for the tax years 2016-17, 2017-18 and 2018-19 were no more than £50,000 and at least equal to the non-trading income (‘relevant income’) for those three tax years.
Condition C: For those individuals that traded in 2017-18 and 2018-19 but did not trade in 2016-17 the average would relate to the two most recent years. Again, the average trading profits were no more than £50,000 and at least equal to the non-trading income (‘relevant income’) for those tax years.
If an individual traded in 2016-17 and 2018-19 but not in 2017-18 then the relevant period to look at is 2018-19 alone and we would then apply the rules set out in Condition A above.
HMRC has said that they will apply the conditions in the same order in order to determine eligibility.
To work out the average trading profit, HMRC will add together your total trading profits and deduct trading losses for the three tax years then divide by three using the information set out on the tax returns that they have received.
What is ‘Relevant income’ for Self employed grant?
Relevant income is expressed as TI+ OI –TIC
Putting this into words we see that relevant income is the total income for the year plus any overseas income for that year (that an individual is making an s809b claim for) less the amount of the trading income component of total income at Step 1 of section 23 of ITA 2007.
Put very simply, perhaps too simply, for each year the ‘relevant income’ is total income less trading income for a non-remittance basis user.
A non-resident or a s809B remittance basis user will have to take into account overseas income not usually disclosed to HMRC, that income which is not charged to tax in the UK. An SEISS claim will therefore allow HMRC access to information that they don’t usually receive, but which this Direction gives them power to check.
More than one trade for self employed grant?
If the taxpayer has more than one trade then he/she does not need to consider the two trades together. Each trade is to be considered in isolation when deciding whether a claim is to be made.
Tax credits and Universal Credits for Self employed grant
Individuals that claim tax credits would need to include the grant as part of their income. The grant will be treated as earnings for Universal Credit too and should be reported in the claimant’s online journal to the DWP in the month the grant is paid and may affect the amount of the UC claimed.
HMRC states: ‘You can make a claim for Universal Credit while you wait for the grant, but any grant received will be treated as part of your self-employment income and may affect the amount of Universal Credit you get. Any Universal Credit claims for earlier periods will not be affected’.
Trading and property allowances
Remember that the Trading and Property Allowances of Part 6A ITTOIA 2005 are given before arriving at Step 1 of s23. For example, an individual with gross rents of up to £1,000 will use ‘nil’ in Step 1 of s23.
The draft legislation states that the Trading Allowance cannot be deducted from the grant, however, individuals can deduct the Trading Allowance from other trading income that they receive in the year. (Bullet point 30 in the draft new clause and schedule)
Non-trading income losses
Non-trading income is amount left when we take the total income that the individual has received in the relevant year less trading income. Non-trading income does not include losses.
The losses are taken into account in calculating the trading income but not for calculating other income, ie, no loss relief is given.
Non-trading income would include income from earnings, rental income, dividends, savings income, pension income, overseas income and miscellaneous income.
Farmers’ averaging and creative artists
HMRC will use the amount of profit before the impact of an averaging claim to assess eligibility.
Making a claim
It is crucial to observe that HMRC will contact and invite those that are eligible to apply. Applications will need to be made online when the invitations have been issued by HMRC. HMRC states: ‘Your tax agent or adviser cannot make the claim for you. You must make the claim yourself.’
The taxpayer will need a Government Gateway user ID and password and they can create one when they use the eligibility tool (see above). They will also need their UTR and NI number as well as their banking details.
This seems an opportune moment to remind readers that HMRC does not send texts or make calls asking for bank or credit card details. If this happens then it is likely to be a scam. Please be wary.
Note: This summary is subject to change at short notice as the government releases its own updates – this summary was last updated Wednesday 3 March 2021.
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Furlough & Self employed grant extension