COVID-19: Taxation of coronavirus support payments

• Section 106 and Schedule 16 of Finance Act 2020 lay down the basis of taxation for Coronavirus support payments which include:
  • The Coronavirus Job Retention Scheme (CJRS).
  • The Self-Employment Income Support Scheme (SEISS).
  • Any other scheme under section 76 Coronavirus Act 2020 (for example, the Eat Out to Help Out scheme).
  • The Coronavirus Statutory Sick Pay Rebate Scheme (CSSPRS).
  • Any Coronavirus Business Support Grant Scheme.
  • Any other scheme which may be included under a Regulation made by the Treasury.
  • Public authority grants such as (but not limited to): the Small Business Grant Fund, the Retail Hospitality and Leisure Grant Fund and the Local Authority Discretionary Grant Fund.
• All Coronavirus support payments are revenue in nature.
• Where Coronavirus support payments relate to business they form profits of that business for Income Tax or Corporation Tax, as relevant.
• ‘Business’ for these purposes includes:
  
  • Trades, professions and vocations.
  • UK or overseas Property businesses.
  • Businesses consisting wholly or partly of making investments.

What's new? 

• Legislation was included in Finance Act 2021 to tax SEISS grants received on or after 6 April 2021 in the year of receipt.
  • The exception is the case of SEISS grants which are partnership income is unchanged.

General rules

• Where a Coronavirus support payment relates to two or more businesses, for example where multiple trades are carried on, it should be allocated between the businesses on a just and reasonable basis.
  
  • The eligibility criteria of some grants will dictate which business they should be allocated to.
  • For example, where an individual carries on a trade (which resulted in a SEISS payment) and has a property business (which resulted in a local government grant) the grants should be allocated to the relevant business.
• Payments received in respect of a trade that has ceased should be treated as a post-cessation receipt, if not already recognised in the final period the trade was carried on.
• Where a Mutual organisation receives a Coronavirus support payment, it is treated as mutual trading income if it relates to the mutual trading activities of the business.
  
  • If the mutual organisation has non-mutual trading income the payment will be a taxable receipt where it is just and reasonably apportioned to that non-mutual trade.
• Where HMRC raise an assessment to recover overclaimed SEISS, CJRS, or other section 76 scheme amounts, the taxable Coronavirus support payments reduces accordingly. 

Self-Employment Income Support Scheme (SEISS)

• The first, second and third grants under the SEISS are taxable in the 2020-21 tax year except where the payment forms part of Partnership income (see below).
  
  • The amount received should be added to the trading profits (or losses) of the basis period of the 2020-21 tax year.
• The fourth and fifth grants under the SEISS are taxable in the 2021-22 tax year except where the payment forms part of partnership income (see below).
  • The amount received should be added to the trading profits (or losses) of the basis period of the 2021-22 tax year.
• This treatment overrides GAAP (or the Cash basis, where applicable).
• If there is an overall loss for the year the normal Loss relief rules apply.
• A new box has been added to 2020-21 tax returns to report SEISS grants received. See 2020-21 tax return boxes tab.
• SEISS grants received by a partner in a trading partnership are added to that partner’s profit share unless the partner pays the amount into the partnership and it is not retained by the partner (but instead distributed among the partners).
  
  • Where the SEISS grant is paid to the partnership and distributed among the partners, it is treated as the partnership’s trading income and will be taxable income of the accounting period of the partnership.
  • In all other cases, the first, second and third SEISS grants are taxable in 2020-21 The fourth and fifth grants are taxable in 2021-22. 
• The Trading allowance cannot be claimed against a SEISS receipt.
  
  • If the individual has other trading income, the trading allowance may be claimed against that other income.
• SEISS grants should be included in the profit figure used for Averaging purposes.

SEISS Example 1

A sole trader with a 31 May 2020 year-end realises profits of £30,000 under the cash basis. In June 2020 they receive a SEISS payment of £7,500 and a further £6,570 in August 2020. No further SEISS amounts are claimed.

• Trading profits of £44,070 are taxable in 2020-21, including the SEISS grants.
• The SEISS amounts are not taxable in 2021-22 despite being accounted for in that year under the cash basis.

SEISS Example 2

A partner in a trading partnership receives a single SEISS payment of £4,500 in 2020-21 which they retain. No further amounts were claimed. For the year ending 30 April 2020, their share of partnership profits is £25,000.

• Trading profits of £29,500 are taxable in 2020-21, including the SEISS grant.

Employment-related schemes including the Coronavirus Job Retention Scheme (CJRS) and Coronavirus Statutory Sick Pay Rebate Scheme

• Employment-related grant income should be recognised by the business entitled to the payment in accordance with Generally Accepted Accounting Practice (GAAP) (or the cash basis, where applicable).
• The grant income recognised will be taxable with the associated employment cost of an Allowable deduction subject to the normal rules.
• Where an employment-related grant is received by a non-business, the grant income will not be taxable and the associated employment costs would not be an allowable deduction.
  
  • This would apply to an individual who employs a nanny in a private capacity to look after his/her children.
• Employment-related grants received before a trade has commenced will reduce the amount of any pre-trading expenditure.
• An anti-avoidance provision exists where the receipt of an employment-related grant is not taxable income for the recipient but another person obtains a deduction for the same employment costs.
  
  • Where this applies, the recipient is taxable on the support payment.

Grant schemes other than the SEISS and employment-related schemes

• In some circumstances, a Coronavirus support payment may not fall to be taxable as a trading receipt or post-cessation receipt of a business. For example, where the trade had not yet commenced.
  
  • In these circumstances, the amount is taxed as a miscellaneous receipt and left out of future trading profits.

Self-isolation schemes

• Individuals who self-isolate may receive a payment under:
  • The Test and Trace Support Payment Scheme (England).
  • The Self-Isolation Support Scheme (Wales).
  • The Self-Isolation Support Grant (Scotland).
• Payments under these schemes are taxable, but exempt from Class 1, Class 1A, Class 2 and Class 4 National Insurance (NI).

Self-isolation schemes: tax return reporting

Employees should:

• Include self-isolation support scheme payments in the ‘Other benefits (including interest-free and low interest loans) box of the ‘Benefits from your employment’ section of the employment pages (SA102).

The self-employed (including partners in a partnership) should:

• Bring the payment into account when computing trade profits for Income Tax purposes. 
• If 2020-21 ‘relevant profits’ are below £6,475, no further action is required.
  • Relevant profits are trading profits from all self-employments and partnerships, including self-isolation support payments.
• If 2020-21 ‘relevant profits’ are above £6,475:
  • Enter the self-isolation support payment in the ‘Adjustment to profits chargeable to Class 4 NI contributions’ box on either the:
    • Self-employed pages (box 102 on SA103F).
    • Partnership pages (box 27 on SA104F or SA104S).
• Individuals who normally complete a short tax return (SA200) may need to complete a full tax return (SA100) in order to make the necessary adjustments.

Partnerships

• Where self-isolation support payments are included in the partnership’s accounts, only the partner to whom the payment relates is to adjust their profit share for Class 2 and 4 NI purposes.
• Where self-isolation support payments are not included in the partnership’s accounts, the relevant partner should enter the payments received on their partnership pages (SA104F or SA104S) in:
  • Box 19: ‘Any other business income not included in the partnership accounts’.
  • Box 27: ‘Adjustment to profits chargeable to Class 4 NI contributions'.

Professional Conduct in Relation to Taxation (PCRT)

Tax agents must ensure they act appropriately when reporting grants received by clients where the eligibility conditions may not have been met.

The Chartered Institute of Taxation (CIOT) has prepared guidance which has been reviewed by HMRC: 

• CIOT: Guidance on members’ obligations in relation to the reporting of grants claims under the SEISS
• CIOT: Guidance on the treatment, and corrective action necessary, in relation to errors and tax return reporting obligations regarding the CJRS

The fundamental principles and requirements set out in PCRT also apply to other Coronavirus support.

Use this flowchart to help determine in which tax year SEISS grants should be taxed.  

A number of new boxes have been added to 2020-21 tax returns to report Coronavirus-related support. 

• HMRC are now correcting returns where SEISS grants have not been completed correctly.  
• If a return is incorrect, an amended return can be filed.

Natural persons

All taxpayers receiving coronavirus support payments

1. SA100: the main tax return

• If you have overclaimed any coronavirus support payments:
  • Complete the new boxes 1 and 2 on page TR 5 to report ‘Incorrectly claimed coronavirus support scheme payments’.
  • Do not include grants that HMRC already know should not have been claimed.
• All claimants:
  • Tick the new box 20.1 on page TR 8 to confirm:  "I declare that all coronavirus support payments (such as CJRS, JRB, SEISS & EOTHO) received in the period of this return have been included as taxable income when calculating profits."

2. Self-employed sole traders

If you have claimed SEISS grants you will have received up to three cash grants in the tax year ending 5 April 2021.

• Total up the grants received.
• Ignore the fourth grant payment received in May 2021 (if claimed) as although it was for the period ending 31 March 2021, it will be reported next year, together with the fifth grant, i.e. in 2021-22.

SA103S & SA103F Self Employment pages

Your SEISS grant income is reported in the Self Employment section of your tax return:

• Do not add it to the Business Income box [box 10 on the SA103S short return or box 16 on the SA103F long version ] "Any other business income (include coronavirus support payments such as CJRS, but not SEISS)", this is the wrong place.
  • Warning! If you are using Taxfiler software, that box only says "Any other business income (including Coronavirus Job Retention Scheme payments)", it fails to say 'but not SEISS'.
• Scroll down to the Adjustment section and the box [box 27.10 on the short return or box 70.1 on the long version] , "Self-Employment Income Support Scheme grant": add the SEISS grant there.

3. Partnerships

SEISS grants paid to a partnership bank account and not retained by the partner are treated as the partnership’s trading income and are taxed according to the accounting period of the partnership.

Alternatively, if the SEISS grant was claimed and received by individual partners into their bank accounts and not reported as partnership income, the grants are declared by the individuals as follows:

SA104S: Partnership (Short)

• Complete new box 9.1 on page SP 1 to report SEISS grants which are not treated as income of the partnership.

SA104F: Partnership (Full)

• Complete new box 9.1 on page FP 1 to report SEISS grants which are not treated as income of the partnership.

4. Landlords

SA105: UK Property

• Coronavirus support payments are likely to be CJRS and local authority grants. These are reported:
  
  • In box 5 for Furnished Holiday Letting businesses.
  • In box 20 for all other letting businesses.

HMRC's tax return notes contain further detail of how to deal with specific cases.

Non-natural persons (companies)

Coronavirus support payments should be included as income when calculating taxable profits in the usual way, in line with the relevant accounting standards.

• Filing software should tag grants automatically. 

There are additional CT600 reporting requirements for CJRS and EOTHO grants:

• Box 471: CJRS grants received (even if already disclosed as overpayments, assessed by HMRC or repaid voluntarily).
• Box 472: CJRS entitlement (even if repaid voluntarily).
• Box 473: CJRS overpayment already assessed or disclosed (this should exclude amounts received that the company was entitled to but which were repaid voluntarily).
• Box 474: EOTHO overpayments.
• Box 526: Coronavirus support schemes overpayment now due (Boxes 471 + 474 less Boxes 472 + 473).
• Box 647: EOTHO reimbursed discounts included as taxable income.

These boxes were added to the CT600 on 6 April 2021.

• Where a business received a CJRS grant or EOHO payment and their return was either filed before 6 April 2021 or after that date but without completing the relevant boxes, their return may need to be amended.
• An amended return is required if:
  • The company did not declare all their Coronavirus grants and payments as taxable income.
  • The company still has overpayments due from those grants.
• There is no need to amend the return if the company's Coronavirus support overpayments:
  • Were already repaid. 
  • Have already been assessed before the tax return was filed, and there is no overpayment remaining due for payment.

HMRC have released guidance addressing common errors in the calculation of taxable CJRS grants for eligible employees.

The full guidance can be found here, but a summary of its contents is below:

How does an employer disclose an error to HMRC?

An employer who has overclaimed needs to notify and repay HMRC.  HMRC’s guidance for repayments can be found here.

Does HMRC expect claims not calculated in line with the HMRC direction and guidance to be corrected and the amounts repaid?

Where reasonable care has not been taken in following the guidance at the time of a claim, any error should be repaid. Where guidance has changed, claims from the following month should reflect that updated guidance.

If an employee has acted on incorrect HMRC advice do they have to make a correction?

A correction is not required if HMRC have advised (including webchat) and the employer:

• Was asked questions by HMRC.
• Was provided with an honest answer.
• Has received and can evidence unambiguous advice.

If a different method has been used to HMRC’s preferred method for calculating the reference pay but it is consistent with the guidance, does it need correcting?

HMRC changed the calculation of reference pay in its third Direction of 25 June 2020.

Unless required by direction, HMRC will accept the use of amounts paid/earned/payable provided they are reasonable, consistent and not abusive.

This is acceptable from 1 March 2020 to 30 September 2021.

When do NICs overclaims need to be corrected?

NIC overclaims do not need to be corrected where it has resulted from a reasonable simplification and the employee has either been on furlough for a short period of time or is very highly paid and:

• There is no evidence of deliberate conduct or serious abuse.
• After the guidance was changed on 21 May 2020, the ceiling for the NICs element was applied.

Claims made on or after 1 June 2020 should be corrected.

If a different method has been used to HMRC’s preferred method for calculating the unworked hours in the claim period but it is consistent with guidance, does it need correcting?

No recalculation or amendment is required if a reasonable interpretation of the guidance was used to calculate usual hours for claims made to 14 September 2020 even if those hours fell after the end of the furlough agreement.

Incorrect claims made on or after 1 October 2020 should be corrected.

What will HMRC accept for calculating the lookback period for reference pay?

A consistent and reasonable interpretation of the corresponding calendar period made in good faith will be accepted for calculating reference pay.

HMRC accept this approach for all claim periods from 1 March 2020 to 30 September 2021.

What if an employer has not used the higher of the average pay and lookback methodology for variable paid employees?

Where employers have not used the method which would lead to a higher level of pay, they must top up pay to at 80% of the higher amount.

Do calculations need correcting if the employer has used the fixed pay method for employees with elements of variable pay where they considered this best represented how they were paid?

HMRC accept that the fixed pay method would be appropriate for an employee paying a fixed annual salary plus non-discretionary payments (such as overtime) until the guidance changed on 7 August 2020, provided the employer considered the method best reflected how that employee was paid.

Changes should have been considered by employers for the calendar month following the change of guidance on 7 August 2020.

HMRC consider the fixed pay method is not an appropriate method for an employer paying fixed annual salaries plus significant and variable non-discretionary payments after 7 August 2020.

If an employer claimed 80% of reference pay after the taper was introduced is a recalculation required?

Yes, a recalculation is required

If the value of benefits in kind provided via salary has been included in a calculation of reference pay, does this need to be corrected?

Amounts of benefits in kind and any salary sacrificed should not be included in earnings when calculating reference pay.

Claims for the various COVID-19 support schemes are beginning to work their way through to the tribunals.

Self Employment Income Support Scheme (SEISS)

In Thomas Merlin Ash v HMRC [2023] TC08749, the First Tier Tribunal (FTT) denied claims under the Self Employment Income Support Scheme (SEISS). Mr Ash, a sole trader who had incorporated his business, had no legitimate expectation of receiving the support just because HMRC had written to him suggesting that he might be eligible.

Coronavirus Job Retention Scheme: (CJRS)

In Zoe Shisa Events Limited v HMRC [2023] TC8805, the First Tier Tribunal found that backdated payslips could be used for CJRS claims where increased pay had been evidenced by bank statements for that period.  Where that salary increase could not be evidenced, the CJRS claim was restricted.

In Oral Healthcare Limited v HMRC [2023] TC8781, the First Tier Tribunal (FTT) found the conditions for the CJRS payments were rigid and had not been met.  The FTT expressed sympathy with the taxpayer and agreed the incorrect claims were caused by a misunderstanding, but the assessments of £35,739 were upheld.

In Luca Delivery Limited v HMRC [2023] TC8752, the First Tier Tribunal (FTT) heard an appeal against a reclaim of a cash grant paid under the Coronavirus Job Retention Scheme (CJRS). It found that failure to meet the scheme conditions was due to a mistake by the taxpayer’s accountants and that was no defence. It did not allow the claim to be validated.

Useful guides on this topic

COVID-19: Grant funding for business
What cash grants are available to support businesses during the coronavirus crisis?

COVID-19 Zone
All about tax and financial support during the crisis.

COVID-19: Government support tracker
This tracker covers measures announced by the government to support individuals and businesses, as we get through COVID-19.

GAAP & FRS: Changes tracker
UK Generally Accepted Accounting Practice (GAAP) changed for accounting periods beginning on or after 1 January 2015, with the introduction of FRS101 and FRS102.

New UK GAAP: Unincorporated businesses
What is the new UK GAAP? Does GAAP affect unincorporated business?

External links

Finance Act 2020, Section 106

Finance Act 2020, Schedule 16