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Tax implications of grants received from the government

After the unprecedented impact of the coronavirus pandemic on individuals and businesses worldwide, the UK Government issued a package of relief measures aimed at helping businesses that have been impacted or have been forced to close. Chancellor Rishi Sunak announced further steps to assist businesses amid the coronavirus outbreak as part of the Winter Economy Plan. On 24 September 2020, the chancellor announced the Job Support Scheme and an extension of the Self Employment Income Support Scheme.

Tax implications of grants received from the government

Various government support payments have been provided to people and businesses to help mitigate the consequences of the Covid-19 epidemic. Is the payment taxable, and if so, how should it be treated?

In this article we cover:
  1. Coronavirus job retention scheme (Furlough scheme)
  2. Self-employment income support scheme
  3. Other grants
  4. VAT on Grant income
  5. Accounting treatment

Coronavirus job retention scheme (Furlough scheme)

Furlough essentially refers to a leave of absence granted to your employees in the event of a coronavirus pandemic. HMRC will reimburse furloughed workers for 80% of their wage costs, up to a maximum of £2,500 per month. Under the Coronavirus Job Retention Scheme (CJRS), Grants paid by the UK government for fully and flexibly furloughed employees are included in the employers profit calculation. However, they can deduct payments made to employees and associated employer contributions to National Insurance and pension schemes. Grant payments made to employees are treated the same as regular wage and salary payments. They are subject to PAYE taxation and are supposed to pay Class 1 National Insurance contributions.

Period Scheme
1 March 2020 - 30 June 2020 Coronavirus Job Retention scheme (CJRS) full furlough 80% cap
1 July - 31 August 2020 CJRS flexible furlough 80% cap
1 - 30 September 2020 CJRS flexible furlough 70% cap
1-31 October 2020 CJRS flexible furlough 60% cap
1 November 2020 - 30 June 2021 CJRS flexible furlough 80% cap
1 - 31 July 2021 CJRS flexible furlough 70% cap
1 August 2021 - 30 September 2021 CJRS flexible furlough 60% cap

Self-employment income support scheme

Self-employed individuals or partners in firms who have experienced income loss as a result of coronavirus may be eligible for a grant under the Coronavirus Self-Employment Income Support Scheme (SEISS). The first grant could be claimed in May, and the second can be claimedin August.

The grants should be considered to compute profits for 2020/21, which should be reported on the self-assessment tax return due on 31 January 2022. As they are included in profits, they are subject to Class 4 National Insurance contributions if they exceed £9,500 in 2020/21. In case profits exceed the amount of £6,475, the trader also liable to pay Class 2 contributions. There is no need to make Class 2 contributions if profits are less than £6,475 in 2020/21. However, paying them voluntarily may be beneficial to ensure that 2020/21 remains a qualifying year for state pension and contributory benefits reasons.

Name Claim period Claim deadline Grant size
Fifth grant May 2021 - Sept 2021 30 September 2021 Up to £7,500
Fourth grant Feb 2021 - April 2021 1 June 2021 Up to £7,500
Third grant Nov 2020 - Jan 2021 29 Jan 2021 Up to £7,500
Second grant 14 July - Oct 2020 19 Oct 2020 Up to £6,570
First grant March - July 2020 13 July 2020 Up to £7,500

Other grants

Various other grants were also provided to specific types of firms, including those eligible for small business rate relief and those in specific sectors, including those payable to the hotel, retail, and leisure businesses, as well as to Ofsted-registered nurseries.

  1. Where the business is incorporated as a company, the grants should be taken into consideration to work out profits subject to corporation tax.
  2. If the grants were provided to a sole trader or unincorporated business, they should be taken into consideration to determine taxable profits (Income tax).

VAT on Grant income

When you receive grant money, no VAT is required to be paid because it is outside the scope of VAT. Care is needed as HMRC is extremely careful to ensure that income is not exempt from VAT only because a label is applied to the income. Assuming the grant fall outside the scope of VAT, it is still possible to recover the VAT paid on expenditures related to the grant. This VAT may be reclaimed (subject to VAT registration and normal reclaim requirements) if the expenditure is related to a VAT trade.

Accounting treatment

Grants should be recorded as revenue rather than being netted-off against the relevant expense. For example, grant funds received from the CJRS should be classified as income, but payments to workers should be classified separately as an expenditure.

In case you have any queries or want specialist advice on "Tax implications ofgrants received from the government", kindly call us on 03330886686, or you can also e-mail us at info@dnsaccountants.co.uk.

Disclaimer :- "This article was correct at the date of publication. It is intended for general purposes only and does not constitute legal or professional advice. Independent professional advice should be sought before proceeding with any transaction".

Also See: Penalties for not telling HMRC about SEISS grant over payments

Also See: Accountants for Self Employed

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