Legislation was introduced in Finance Act 2020, s. 106 and Schedule 16 setting out the tax treatment of an SEISS payment. All SEISS amounts received will be subject to income tax and National Insurance contributions.
Schedule 16, paragraph 3(3) confirms a payment received in 2020/21 is taxed in 2020/21 (irrespective of its treatment for accounting purposes) – with one exception involving partnerships mentioned below.
For sole traders, it will be necessary to add the SEISS payments received in 2020/21 to the trading profits or losses that form the basis of the year to 5th April 2021.
For example, if your sole trader client draws up their accounts to the year to 30th June 2020 making a trading profit of £10,000 for that year and receives payments totaling £13,070 in June and August 2020, your client will be taxed on a total of £23,070 in the 2020/21 tax year.
If the sole trader had made a trading loss in the year to 30th June 2020, the SEISS grants received in 2020/21 would be netted off against the loss and any resulting loss can be relieved subject to the normal trade loss relief rules.
There can be different rules applying to partners in a partnership depending on whether or not the SEISS grants are retained by the partner or distributed to the partnership.
Partner retaining SEISS payments
Where a partner receives SEISS payments in 2021/21 and retains them all, the partner will be taxed on the total of their share of the partnership profits plus the SEISS payments received in 2020/21.
Partner transfers the SEISS payments to the partnership
Where the SEISS grants are not retained by the partner but distributed to the partnership, the grant becomes part of the partnership trading income which is taxed according to the profit sharing arrangements in the basis period ending in the tax year – here the grants are not assessed in the tax year in which received.
Where the SEISS payments are included in a sole trader’s accounts or a partnership’s accounts, it is important to remember they will generally have to be added back in the tax computation except in a partnership where the partner has transferred their SEISS grant to the partnership.
HMRC has some examples of the above rules at BIM40458.
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