In our weekly Q&A, Pras Patel, tax advice consultant at Croner Taxwise, examines the rules relating to the Self-Employment Income Support Scheme (SEISS), grant eligibility and trading profits
The extended scheme is open to self-employed individuals who meet the eligibility criteria for the original SEISS and are actively continuing to trade and facing reduced demand due to Covid-19 between 1 November 2020 and the date of the claim.
The extension provides two further grants and will last for six months, from November 2020 to April 2021.
Grants will be paid in two lump sum instalments each covering a three-month period. These are the 3rd and 4th overall grants taking into consideration the fact that the original scheme consisted of the two grants.
The 3rd grant covered the three-month period from November 2020 to January 2021 and was open to those that had a new or continuing impact from coronavirus between 1 November 2020 and 29 January 2021.
HMRC states ‘you must reasonably believe that you will suffer a significant reduction in trading profits’ due to the impact of coronavirus in order to qualify for the 3rd and 4th grants.
The 3rd grant was worth 80% of a claimant’s average monthly trading profits.
This was paid in a single lump sum for the three months and it was capped at £7,500 in total.
This 3rd grant must have been claimed between 30 November 2020 and 29 January 2021. As the deadline has now passed, the 3rd grant can no longer be claimed.
The government has announced that they will release more information relating to the 4th grant on 3 March 2021. It will cover the period from February 2021 to April 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.
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.
More than one trade
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.
3rd Treasury Direction
This was issued on Tuesday 24 November 2020.
Now we will take a more in-depth look at the original scheme and the eligibility criteria as these remain relevant for the SEISS grant extension:
Self-Employment Income Support Scheme (SEISS) – the original scheme
The earlier variant or ‘original’ scheme should be thought of as two separate grants available to the self-employed.
The 1st grant covered the period March to May 2020, and this was worth 80% of average monthly trading profits up to a cap of £7,500.
The 2nd grant amounted to £6,570 and covered the period from June to August 2020. This was worth 70% of average monthly trading profits up to a cap of £6,570.
Neither the 1st nor the 2nd grant can now be claimed. The deadlines have both now been passed.
Penalties apply for not repaying an overpaid grant.
When will the grants be taxable?
These are to be included on your 2020/2021 tax return. Please do not include them on the tax return that is to be filed by the end of January for 2019/2020.
HMRC manuals also state that the SEISS grant overrides the GAAP, or where applicable, the cash basis rules.
The payment 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 for the accounting period of the partnership.
The Trading Allowance
The Trading Allowance cannot be claimed against an SEISS receipt.
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 claimant’s online journal to the Department for Work and Pensions (DWP) in the month the grant is paid and may affect the amount of Universal Credit 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’.
A 2nd Treasury Direction was issued on 2 July 2020 and in response HMRC 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 2018-19 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 2017-18 tax return was not submitted on or before 23 April 2020.
It is possible to claim the Maternity Allowance as well as a SEISS grant.
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.
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 2018-19 are determined;
- the reservist activities affected their trading activities for 2018-19;
- a 2017-18 tax return was submitted showing self-employment income; and
- 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 2018-19 tax return was not submitted. HMRC will not include reservist income in order to assess whether a claimant has met the trading profits tests.
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.
Overpayment notifications can be completed on the HMRC website.
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’.
Is an overpaid grant to be included on the taxpayer’s 2020-21 tax return?
Yes, unless you have repaid it before you have submitted your tax return.
The Self-Employment Income Support Scheme is a state aid.
The grants 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). It is worth noting that HMRC’s guidance does state that the 2018/19 tax return must have been filed by 23 April 2020 in order to be 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 2020-21 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 2018-19 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 Income Tax Act 2007 (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; and
• 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 the subject of a contractual settlement.
HMRC has released an online tool to help individuals check eligibility for this scheme. It can be accessed here. https://www.tax.service.gov.uk/self-employment-support/enter-unique-taxpayer-reference
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 one of the following ‘Profit Condition(s)’
- Condition A: the self-employed trading profits for 2018-19 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); or
- 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; or
- 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.
Relevant income is expressed as total income plus overseas income minus trading income component (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 a section 809b 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 Income Tax (Trading and Other Income) Act 2005 (ITTOIA 2005) Part 6A 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 the 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, 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.
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 says: ‘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 (trading profits (TP)×80%).
There are two definitions of trading profits (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 trading profit 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 trading profit is:
(i) the average trading profits for 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 is 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 three years and more than 50% of their income stems from self-employment.
• £45,000 profit in tax year 2016-17;
• £60,000 profit in tax year 2017-18; and
• £20,000 loss in tax year 2018-19.
First, add £45,000 and £60,000 then deduct £20,000 loss. This gives us a total of £85,000 and dividing this by threes 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 and 2019 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 HMRC’s methodology, it is clear that whether or not trade was carried out over the full tax year or say, four months of it does not matter. The averaging calculation will always use 24 for two years or 36 months for three years.
Example – where the individual did not trade in all three tax years
If tax returns were only submitted for 2017-18 and 2018-19 then HMRC would take the average of those two years. This would be the case where no self-employment was carried out in 2016/2017.
To reiterate, HMRC is taking a 12-month average per tax year even if the self-employment only lasted four months of a tax year. So, the denominator for two 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 provided 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 offers the following advice to those individuals who have reported their Loan Charge, settled their disguised remuneration scheme use by 30 September 2020 and wish to claim a grant under this scheme as they will have different criteria to adhere to. HMRC states that their grant will be based on either (presumably HMRC mean the higher of):
• the average of the tax years 2016-17 and 2017-18;
• the tax year 2017-18 if you were not self-employed in the tax year 2016-17.
In this circumstance, note that the 2018-19 figures are not used in order to arrive at an average.
Note also that those that are declaring a Loan Charge had to file their 2018-19 self-assessment tax return by the 30 September 2020 (rather than 23 April 2020) in order to qualify for a grant under this scheme.
If the self-employment began after 5 April 2019, ie, it began in the 2019-20 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.
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.
About the author
Pras Patel is a tax advice consultant at Croner Taxwise
This summary is subject to change at short notice as the government releases its own updates – this summary was last updated 1 February 2021.