Written by Kyle Barford, Product Manager (Tax)
Over the past few months, the introduction and operation of support grants and loans for businesses and employers have been among the most critical of the UK Government’s responses to the Coronavirus emergency.
In order to roll out the grant and loan schemes in as short a time as possible, the Government relied heavily on HMRC’s existing systems for PAYE and Self-Assessment taxation. A few months after the introduction of the schemes, it is important to understand how the payments should be reported and taxed under Schedule 16 of the Finance Act 2020, both for individuals and for businesses.
The legislation broadly separates Coronavirus related support payments into two categories: earnings support payments intended to cover wages or sole trade business income that might not otherwise have been paid due to the crisis, and grant funds available to support business activities.
Earnings support payments
Earnings support payment schemes include the Coronavirus Job Retention Scheme (CJRS), Self-Employed Income Support Scheme (SEISS) and the Coronavirus Statutory Sick Pay Scheme (CSSPS).
Earnings support payments are treated as taxable income of the recipient for income or corporation tax purposes. The amounts are generally reportable on Self-Assessment tax returns based on the period of receipt. For taxpayers under corporation tax, the return on which the payment is reported will depend on the company’s year-end. The payment schemes began to run in March 2020, so many businesses with a March year end will need to start reporting the payments on their return for the period to 31st March 2020.
For individuals and most partnerships, the payments will form part of their 2020/21 Self-Assessment return. Note that there are specific provisions concerning the timing of taxation of an SEISS grant: this is taxable in the 2020/21 tax year whether or not the recipient accounts on the cash or accruals basis.
Under the CJRS, furloughed employees began by receiving up to 80 percent of their usual wages paid through the RTI system. As the payments were processed through RTI, they were subject to PAYE and NIC deductions at source before being passed net to the employee. Since 1 July the CJRS “phase 2” or “flexible furlough” scheme has been running, which operates in the same way, but with staff able to work part-time and with employers starting to bear a greater proportion of the staff costs, starting with the Employer NICs due.
CJRS payments must be reported as taxable income of the employer, however the income will be offset by the allowable tax deductions for the associated employment costs.
There is an exception to the taxation of the CJRS for individual households who furlough domestic staff such as cleaners or carers. In such cases the household is not taxable on the payment received, but the employee will still have PAYE and NIC deducted at source.
The treatment of CSSPS follows the tax treatment of Statutory Sick Pay, being subject to tax and NIC in the hands of the recipient.
Grant funds available to businesses
Payments to businesses from grant funds such as Small Business Grants and Retail, Hospitality and Leisure Grants are added to the normal trading revenues of the recipient business. As such, the payments will only be subject to tax if the business makes a profit in the period.
Where a payment is received after the cessation of trade, the revenue is treated as a post-cessation receipt.
Clawback of support payments
A number of provisions are included in the Finance Act to empower HMRC to claw back in full support payments that were wrongly claimed, by subjecting the amount of excess support payment to a special tax rate of 100%.
For CJRS payments, the clawback can also operate where the employer has not paid the funds to furloughed staff within a “reasonable period”.
A mechanism has already been introduced for taxpayer’s to self-assess amounts of over-claimed CJRS. These can be reported to HMRC and repaid either by reducing the amount of the next CJRS claim made, or by making a special standalone payment. There is a deadline for reporting over-claimed amounts which is the later of 20th October 2020, or 90 days from the receipt of the payment.
As the clawback mechanism is a special tax charge, the payment due date is based on the usual tax payment dates for the taxpayer.
Under the Finance Act, HMRC are given powers to inspect and raise tax assessments to recover claimed amounts that the recipient was not entitled to. They are also able to charge penalties for incorrect claims under the failure to notify rules. Under the failure to notify rules, penalty rates for deliberate and concealed actions apply which can be between 30% and 100% of the over-claimed amount.