The scheme should be thought of as 2 separate grants available to the self-employed.
The 1st grant covers the period March to May 2020 and this is worth 80% of your average monthly trading profits up to a cap of £7,500.
The deadline for claiming the 1st grant has now passed. A claim for the 1st grant can no longer be made.
The 2nd and final grant is for £6,570 and covers June to August 2020. This is worth 70% of your average monthly trading profits up to a cap of £6,570. This 2nd grant is referred to as the ‘SEISS Extension’ in the 2nd Treasury Direction issued on 2 July 2020.
The 2nd grant can be claimed if your business is adversely affected on or after 14 July.
Applications for the 2nd grant/SEISS extension will open on 17 August and end on 19 October 2020.
The eligibility criteria remain the same for both grants. However, HMRCs guidance shows that what they consider ‘adversely affected’ differs for each grant.
Individuals need not have claimed the 1st grant in order to claim the 2nd grant.
Penalties apply for not repaying an overpaid grant
The government provides for a maximum of 2 Taxable grants in order to support the self-employed who have been carrying on a trade that has been adversely affected by Coronavirus. There are, of course, rules and eligibility criteria and we will look at these in detail below.
Those that receive a grant can continue to work, start a new trade or become an employee.
A 2nd Treasury Direction was issued on 2 July and in response HMRC have updated guidance of their plans to relax the eligibility criteria for parents whose trading profits ‘dipped’ in 2018/2019 because they took time out to have a ‘new child’.
For this scheme any of the following would count as having a new child:
Where a parent has taken time out in the first 12 months of the birth or adoption of a child, being pregnant, giving birth (including a stillbirth after more than 24 weeks of pregnancy) and the 26 weeks after giving birth and this resulted in reduced trading profits for 18/19 or meant that the parent did not submit a 2018-2019 tax return.
Then HMRC will use either the 2017-18 or both their 2016-17 and 2017-18 self-assessment returns as the basis to check eligibility for the SEISS.
No claim will be permitted if a 2017-2018 tax return was not submitted.
The 2nd Treasury Direction, issued on 2 July, sets out the conditions for improved access for military reservists. It has been confirmed that reservists who were unable to access the SEISS as a direct result of their service in 2018-19 would be able to make a claim for both the first and second SEISS grant.
Further guidance was added on 2 July and all the following must apply:
- The claimant must have carried out specified reservist activities for at least 90 days in the period for which their trading profits or total income for the tax year 2018 to 2019 are determined
- The reservist activities affected their trading activities for 2018-2019
- A 2017-2018 TR was submitted showing self-employment income.
- All other eligibility criteria are met.
Specified reservist activities are: Full-time service commitment, additional duties commitment or call-out.
It is possible for a military reservist to make a claim even if a 2018-2019 tax return was not submitted. HMRC will not include reservist income in order to assess whether a claimant has met the trading profits tests.
Draft Legislation and Consultation
A new schedule will be inserted into the Finance Act 2020. This new schedule will be called ‘Taxation of coronavirus support payments’
The draft legislation confirms that the receipts of the grants are taxable and that they would be subject to the same discovery provisions contained in the Taxes Management Act of 1970 as any other entry on a tax return.
When will the grants be taxable?
Draft Legislation states ‘the whole of the amount is treated as profits of the tax year 2020-21.’
The background notes to the draft new schedule go on to state:
‘For grants made under the SEISS, the recipient of the grant is taxed on the amount as if it were profits of the trade to which it relates in the 2020-21 income tax year.’
What if you have been overpaid?
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 by the latter of:
- 20 October 2020 (if the grant was received before 22 July)
- 90 days after you receive the grant (if the grant was received after 22 July)
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 state 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.’
Is an overpaid grant to be included on the taxpayer’s 20/21 Tax Return?
Yes, unless you have repaid it before you have submitted your tax return.
The draft legislation also confirms that an individual partner of a partnership keeps the grant and he/she will be assessable fully on that grant rather than the other partners. HMRC also add that ‘if the partnership rules require the grant to be paid into the partnership pot, the partnership should give the full grant back to you.’
The grant will also be wholly taxable in respect of the 2020/2021 tax year, as set out below.
However, in factsheet CC/FS47 HMRC state that if the grant is paid over to the partnership rather than being kept by the individual partner then HMRC may assess any of the partners to collect the amount of the tax due as Income Tax. The partners will be jointly and severally liable for the tax.
The Self-Employment Income Support Scheme is a state aid.
What is the 1st grant?
The scheme allows individuals to claim a taxable grant worth 80% of their trading profits up to a maximum of £2,500 per month for the 3 months from March to May 2020.
The taxable cash grant will be in the form of a single lump sum to cover the three months from March to May 2020. The grant was capped at £7,500.
What is the 2nd grant/’SEISS Extension’?
The 2nd and final grant or SEISS Extension (An individual can claim a maximum of 2 grants) will cover the period June to August 2020. It is available for those that are adversely affected on or after 14 July.
The eligibility criteria are the same for both grants, however, it should be noted that it is possible to be adversely affected in one qualifying period and not the other.
An individual does not have to have claimed the 1st grant in order to claim the 2nd grant.
The scheme allows individuals to claim a taxable grant worth 70% of their trading profits up to a maximum of £6,570 for the 3 months to August 2020.
The 2nd grant will be the LOWER of 70% of the average trading profit and £6,570.
You will be eligible for the scheme if all of the following criteria apply:
Both the 1st and 2nd grant will be open to those that have submitted an income tax self-assessment tax return for the year to 5 April 2019 (the 18/19 tax year). Worth noting that HMRC’s guidance does state that the 18/19 tax return must have been filed by 23 April 2020 in order to eligible for this scheme.
- 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/Coronavirus
- 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 have released an online tool to help individuals check eligibility for this scheme. It can be accessed here.
Once the online check is complete, eligible customers will be given a date when they can submit their claim.
Taxpayers can also use this facility to have a webchat with HMRC.
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)’
(Set out in detail from para 5.1 of the Treasury Directive issued 1 May 2020 here ):
- Condition A: The self-employed trading profits for 18/19 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 16/17, 17/18 and 18/19 were no more than £50,000 and at least equal to the non-trading income (‘relevant income’) for those 3 tax years.or
- Condition C: For those individuals that traded in 17/18 and 18/19 but did not trade in 16/17 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 16/17 and 18/19 but not in 17/18 then the relevant period to look at is 18/19 alone and we would then apply the rules set out in Condition A above.
HMRC have 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 3 tax years then divide by 3 using the information set out on the tax returns that they have received.
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.
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.
HMRC announced on Tuesday 14 July that non-trading income does not include losses.
The losses are taken into account in calculating the trading income but not for calculating other income i.e. 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.
In general, you must have been unable to work due to coronavirus because you were
- Shielding, Self-isolating, on sick leave due to Coronavirus, have caring responsibilities because of coronavirus.
- You have had to scale down or temporarily stop trading because your supply chain has been interrupted or you have fewer customers, or your staff are unable to work. One or more of your contracts was cancelled or you had to buy protective equipment.
HMRC set out some examples of those that are adversely affected by way of a table.
Their examples show that it is important for an individual to consider whether they were eligible for the 1st grant but not the 2nd grant and vice versa.
For example, an individual was able to work, normally, until August when they caught the virus and had to self-isolate for 6 weeks. That person would not claim the 1st grant but they would consider claiming the 2nd grant.
There is no definition of ‘Adversely affected’ in the Treasury Directive so it is left to HMRC to provide their interpretation of what constitutes being adversely affected.
Remittance Basis users
The Treasury Directive states that a ‘qualifying person’ can include a non-resident who has made a claim for the remittance basis to apply under s809b ITA 2007. This would then appear to include those that are deemed domicile under s835ba ITA 2007.
Importantly, HMRC say ‘You will have to confirm to HMRC that your UK trading profits are at least equal to your other worldwide income.’
This will of course mean that those making a claim under s809b will have a major decision to make. They will have to decide whether they are willing to certify that their UK trading profits are at least equal to their worldwide income.
The Payment – 1st Grant
Paragraph 6.1 states the amount of the SEISS payment is the lower of-
(a) £7,500, and
(b) 3x (TP×80%).
There are then two definitions of Trading Profits or “TP”. One for a person not subject to “the loan charge”) and one for a person who is. “Trading Profits” are defined in our next section and in para 7 of the directive.
Not Subject to Loan Charge
Paragraph 6.2a states “TP” is:
(i) if the person carried on a trade in the tax years 2016-17, 2017-18 and 2018-19, the average trading profits of those tax years, or
(ii) if the person did not carry on a trade in the tax year 2016-17, the average trading profits of the tax years 2017-18 and 2018-19, or
(iii) if the person did not carry on a trade in the tax year 2017-18, the trading profits of the tax year 2018-19.
We explore this by way of examples (see below)
Subject to Loan Charge
Paragraph 6.2b states “TP” is:
(i) the average trading profits the tax years 2016/17 and 2017/18, or
(ii) if the person did not carry on a trade in the tax year 2016-17, the trading profits of the tax year 2017-18.
Trading profits (TP)
Paragraph 7.1 of the Treasury Directive issued 1 May 2020 defines “trading profits” of a tax year as TIC – TL:
- TIC – the amount of the trading income component of total income at Step 1 of section 23 of ITA 2007,
- TL is the amount of any trading loss in that year.
Example – 1st Grant: Where the individual made losses in one or more of the tax years
A sole trader has the following profits and losses for the 3 years and more than 50% of their income stems from self-employment.
- £45,000 profit in tax year 2016/2017
- £60,000 profit in tax year 2017/2018
- £20,000 loss in tax year 2018/2019
First, add £45,000 and £60,000 then deduct £20,000 loss. This gives us a total of £85,000 and dividing this by 3 this gives us an average of £28,333. 80% of this would be £22,666. We do not treat loss making years as zero, however, we do not take into account brought forward or earlier year losses either.
The grant will be the LOWER of 80% of the average trading profit (here £1,889 which is £22,666/12) or £2,500 per month. Here the grant would be £1,889 per month as it is lower than £2,500 per month.
For the purposes of working out the average trading profit HMRC will not deduct losses brought forward from previous years. HMRC will not deduct the personal allowance either in arriving at the reference figure.
For those that started trading between 2016-19 HMRC will only use those years for which a Self-Assessment tax return has actually been filed.
The above example assumes that trade was continuously carried out over the 12 months of each year. Looking at HMRCs methodology it is clear that whether or not trade was carried out over the full tax year or say, 4 months of it does not matter. The averaging calculation will always use 24 for 2 years or 36 months for 3 years.
More than one trade
HMRC has confirmed that it will sum the profits and losses of all trades to arrive at the average annual income.
Example – Where the individual did not trade in all 3 tax years
If tax returns were only submitted for 2017/2018 and 2018/2019 then HMRC would take the average of those 2 years. This would be the case where no self-employment was carried out in 2016/2017.
To reiterate, HMRC are taking a 12-month average per tax year even if the self-employment only lasted 4 months of a tax year. So the denominator for 2 years would be 24 months even if the self-employment did not start until part way through the two years.
Disguised Remuneration Scheme
The loan charge affects individuals if they used disguised remuneration tax avoidance schemes and they did not repay their loans, or provide HMRC with all the necessary settlement information by 5 April 2019. HMRC released updated Guidance on 1 May 2020 in respect of the Loan Charge.
HMRC offer the following advice to those individuals who have reported their Loan Charge, are aiming to settle their disguised remuneration scheme use by 30 September 2020 and wish to claim a grant under this scheme will have different criteria to adhere to. HMRC state that their grant will be based on either (presumably HMRC mean the higher of):
- the average of the tax years 2016 to 2017 and 2017 to 2018
- the tax year 2017 to 2018 if you were not self-employed in the tax year 2016 to 2017
In this circumstance, note that the 2018/2019 figures are not used in order to arrive at an average.
Note also that those that are declaring a Loan Charge should file their 2018/2019 self-assessment tax return by the 30 September 2020 (rather than 23 April 2020) in order to qualify for a grant under this scheme.
Newly self-employed: Started trading during 2019/2020?
If the self-employment began after 5 April 2019, i.e it began in the 2019/2020 tax year onwards, then unfortunately, the individual will not qualify for this scheme.
An individual can still apply for the SEISS even if their immigration status is listed as ‘no recourse to public funds’ and the grant can be claimed on all categories of work visa.
Farmers Averaging + Creative Artists
HMRC will use the amount of profit before the impact of an averaging claim to assess eligibility.
Tax Credits and Universal Credit
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 claimants online journal.
HMRC state: ‘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’.
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 state ‘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.
We continually update this guidance and we hope that this article helps you to help your clients.
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