If a sole trader has 30/04/2020 year end, tax profit of say £45k + SEISS grants of 3 x £7,500 = total trading income for 2020-21 tax year of £67,500. Giving rise to a huge tax bill for 2020-21 with hefty 40% tax liability. Is it right, or fair, that the SEISS grants are taxable in the tax year of receipt rather than the FINANCIAL year for which they are supporting. Or have I misread something ?
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Sounds fair - just paying tax at 40% on grants of £22,500. So gets to keep £13,500 of free money after tax.
You sound like the client who complains to his accountant that his tax liability has increased, only to be told that the sole reason for the increase is that his profits / income have doubled.
For an April year end, you have 1-2 months' income impacted by Covid in 2019/20 and up to 12 months' income impacted in 2020/21.
SEISS payments 1-3 would all have been received in 2020/21, so all you have is 1-2 months with any mismatch between impact and grant receipt, with a mirror impact for SEISS 4. Seems to me (based on the dates quoted) that the grant falls into tax correctly.
My thought process was that the SEISS was to cover a drop in income in the current financial year. Had covid not happened then assuming profits stayed level then there probably would never have been a 40% tax liability. That's why I questioned the "fairness" of paying the higher rate.
That's not the question you asked -
Is it right, or fair, that the SEISS grants are taxable in the tax year of receipt rather than the FINANCIAL year for which they are supporting.
That's entirely about timing. You're now saying there's more income than there would have been without covid. As others have said, more income=more tax, and some of that is chargeable at higher rate.
Perfectly fair.
If the trading profits are lower for 11 months to 31 March 2021, you have the option to extend the AP, claim your overlap relief and reduce the tax bill.
And don't overlook the fact that the increase in tax is likely to be first reflected in the 31/01/2022 payment.
If your client (or you?) doesn't like the increased tax-bill, then repaying the Grant will sort things out!
Sometimes replies on this web don't quite seem right. Firstly it is not me that I'm concerned about. I do believe that many on here will be questioned by their clients when tax returns for 2020-21 are completed. ( Many next January when you have to inform clients of the hiked tax bills ). As for repaying the grants, doesn't that miss the point of SEISS grants completely which are supposed to be helping those whose income has dried up ?
OK, I was being a tad flippant ... possibly due to mis-reading your OP?
"a sole trader has 30/04/2020 year end, tax profit of say £45k + SEISS grants of 3 x £7,500 = total trading income for 2020-21 tax year of £67,500 .. giving rise to a huge tax bill for 2020-21 with hefty 40% tax liability."
So you are indicating that the 'normal' level of profit has been maintained - and 3 x SEISS (taxable) grants were banked on top in the same tax year?
"Is it right, or fair, that the SEISS grants are taxable in the tax year of receipt rather than the FINANCIAL year for which they are supporting?"
From .. Further Treasury Direction made under Sections 71 and 76 of the Coronavirus Act 2020:
"The purpose of the modification and extension to SEISS 3 is to provide for payments to be made to persons and relevant persons carrying on a trade the business activity or capacity of which, or demand for which, has been reduced, or cannot be carried on, due to the health, social and economic emergency in the United Kingdom resulting from coronavirus and coronavirus disease in the period beginning on 1 November 2020 and ending on 29 January 2021".
So if it is 'compensation' for a reduction in trade at a specific point in time, then why would it not be treated as taxable 'income' in the tax year when it was received? It is NOT "supposed to be helping those whose income has dried up" if by that you mean subsidising forecast reductions in trade (in the next tax year).
Thanks for your reply Hugo.
If it was " compensation" then I agree that it is taxable in 2020-21.
But as I read it the SEISS grants are TRADING income.
As far as I can remember trading income is reported in the accounts for a financial period. Tax is assessed on the financial year ending in the tax year. If that is the case then grants 1-3 would fall in the trading period ended 30/04/2021 = tax year 2021-22 = due 31/01/2023.
As you do seem to be taking this seriously, how do you think SEISS grants, being trading income, will be reported on the 2020-21 tax return. And what effect on payments on account.
[quote=geraldw]
''how do you think SEISS grants, being trading income, will be reported on the 2020-21 tax return. And what effect on payments on account.''
This has been done to death on this forum, for months.
Unfortunately as a sole practitioner I don't have the time to constantly keep an eye on the forum. My fault entirely.
A quick summary of the answer would have been useful.
Unfortunately as a sole practitioner I don't have the time to constantly keep an eye on the forum. My fault entirely.
I agree. As a sole trader myself, I find most of the stuff on this forum invaluable.
Fwiw and imho, the grants should've been matched to the time the profits were lost but, as we so often say, them's the rules.
So your client is upset that he has to pay tax on free money, which leaves him with less free money, but still leaves him with free money, whilst some of us have had no free money, have worked throughout with no grants whatsoever, and still pay our taxes without complaint?
Do I detect some envy and bitterness here. Congratulations on not having taken any grants BUT that is because your tading has not been affected by Covid. Also, can I make it quite clear to everyone on here; the issue is not a complaint about paying tax, just the higher rate.
Do I detect some envy and bitterness here. Congratulations on not having taken any grants BUT that is because your tading has not been affected by Covid. Also, can I make it quite clear to everyone on here; the issue is not a complaint about paying tax, just the higher rate.
''because your tading has not been affected by Covid'' (sic)
Not necessarily the case. You shouldnt make assumptions. Some folk have been very badly affected but unable to claim/have not received a single penny.
Its a 1st world problem - being given a handout/still being able to work, yet having to pay tax at higher rate.
No bitterness/envy. That comment was uncalled for btw.
Life is unfair. Someone has to start to pay it all back.
You could lobby your MP.
We don’t know if such a trader was able to continue to work. Profits in the year ending 30 April 21 could be nil but the 20-21 tax still falls due per above.
I just think there have been winners and losers for a whole year now and we have to accept it. That is how I intend to communicate with clients if there are adverse consequences like this or if they moan about their grants being taxable.
Life is unfair. Someone has to start to pay it all back.
If someone has to start to pay it all back, why is the national debt constantly increasing?
Do I detect some envy and bitterness here.
No, what you detect is a dose of harsh reality that you didn't want to hear.
Right, as in being in line with legislation, yes.
Fair, as in being equitable, no.
The grants should have been allowed to follow the accounts. How else can HMRC see pretty much at a glance that the grants have been warranted?
As it is, the horse doth bolt and indeed hath bolted.
Wow
At last I think someone has cottoned on to what I've been trying to say.
If I could then I would buy Granville a pint.
Most non trading income is taxed in year of receipt.
SEISS was not earned
Solution is to catch up accounts to 31 March 2021 and it all gets straightened out
Most non trading income is taxed in year of receipt.
SEISS was not earned
Solution is to catch up accounts to 31 March 2021 and it all gets straightened out
Surely you mean March 2020.
Most non trading income is taxed in year of receipt.
SEISS was not earned
Solution is to catch up accounts to 31 March 2021 and it all gets straightened out
Surely you mean March 2020.
A good time to change their year end?
It is fairly unusual for a sole trader to have a 30/4 year end, because the large overlap period at the start means they have paid more tax up-front. Now would seem to be a good time to review that.
In all honesty, you have let thinking about this very late though. You should have spotted this issue ages ago (when the first SEISS grants came in really). Why didn't you?
Incidentally, many accountants ended up working harder without getting extra income for it (dealing with COVID related schemes that changed often). Also people who operate through companies for non-tax reasons received nothing. Complaining because you have a client that presumably did not work harder (not a given, but likely if claiming affected by COVID) and will still have got some money for not working (when others had no work and also got no money) is not a good look.
It is in fact VERY common for those in self employment pre 1996/1997.It is fairly unusual for a sole trader to have a 30/4 year end, ........
Solicitors considered it compulsory
A way to not pay tax now, pay it later. An interest free loan from HMRC.
A good time to change their year end?
It is fairly unusual for a sole trader to have a 30/4 year end, because the large overlap period at the start means they have paid more tax up-front.
I strongly disagree with that. Low profits at the start of a business's life usually mean the opposite.
Fair point all, though it would depend on the growth and capacity of the business as to whether the overlap tax was worth it.
My point that the OP should have been aware of this a while ago and planned accordingly still stands.