Taxation of SEISS.

Just a grouse, mainly...

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Just as an example, I have a client whose accounts year end is 30 April, net profit usually ranges between £35,000 - £40,000, with turnover £45,000 - £55,000.

For the fifth SEISS grant, I’ve recently calculated the turnover for the year ended 31 March 2021.  It comes to just under £2,000 (two thousand pounds). In 2020/21, my client received three SEISS grants totalling £21,570.

So for 2020/21, my client will be taxed on a “normal year” (year ended 30 April 2020 – profit 35,000 – 40,000) plus £21,570 SEISS money, resulting to a huge tax bill – well into higher rate tax and additional Class 4 NIC payable in and/or during a period when he’s achieved no profit at all.

Has HMRC made any provision whereby taxpayers adversely affected and in similar, somewhat ludicrous, circumstances can expect some degree of relief?  Is this fair and equitable to “the poorer off”?  

Replies (25)

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By GHarr497688
05th Aug 2021 23:12

The way HMRC have dealt with these Grants fails me . Why did they just not tax them as trading income and save us all a lot of hassle (including themselves).

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RLI
By lionofludesch
05th Aug 2021 23:38

Now might be the time to change the year end in preparation for the proposed mandatory change - coming soon to a self-employed fella near you.

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Replying to lionofludesch:
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By DKB-Sheffield
06th Aug 2021 01:23

I would agree. A perfect opportunity.

At £2K turnover, I would guess the 2020/21 year will have made a loss after fixed overheads (based on the suspected turnover and profits of previous years per SEISS grant levels). There may also be some overlap relief available?

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Replying to lionofludesch:
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By Tax Dragon
06th Aug 2021 06:26

Unless it's changed again (keeping up with real law is hard enough, let alone proposed law), the suggestion was to change to tax year taxation, not make 31 March/5 April year end mandatory. (With such a change, you could keep your 30 April accounts year, but would be taxed on 1/12th + 11/12ths.)

But of course what they want you to do is change your year end. And maybe throwing in a bribe of an "opportunity" such as you mention... or, as the OP has it, unfairly punishing those who don't...

Clever, aren't they?

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Replying to Tax Dragon:
RLI
By lionofludesch
06th Aug 2021 06:51

Tax Dragon wrote:

Unless it's changed again (keeping up with real law is hard enough, let alone proposed law), the suggestion was to change to tax year taxation, not make 31 March/5 April year end mandatory. (With such a change, you could keep your 30 April accounts year, but would be taxed on 1/12th + 11/12ths.)

But of course what they want you to do is change your year end. And maybe throwing in a bribe of an "opportunity" such as you mention... or, as the OP has it, unfairly punishing those who don't...

Clever, aren't they?

True. You don't have to change your accounting year end.

But you must use your overlap relief and you will be taxed on actual profits after the change. If you're on high profits and derisory overlap relief, here's a great opportunity to minimise the effect of the mandatory change.

Depends on the numbers, obviously. The taxpayer might be better off spreading over five years.

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By Tax Dragon
06th Aug 2021 06:30

Technical query: is a grouse a songb1rd?

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Replying to Tax Dragon:
RLI
By lionofludesch
06th Aug 2021 06:52

Definitely not. They sound like Edith off Still Game.

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Replying to lionofludesch:
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By User deleted
06th Aug 2021 09:36

Or Edith of Allo Allo

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Replying to User deleted:
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By lionofludesch
06th Aug 2021 13:26

AdamMurphy wrote:

Or Edith of Allo Allo

Naw - this lady. Brilliantly played by Maureen Carr.

https://www.youtube.com/watch?v=5eorWYa9p-0

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By User deleted
06th Aug 2021 09:15

Got the same situation in a case I'm working on now. But her overlap profit is so small she'd be even worse off if I changed the year end.

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RLI
By lionofludesch
06th Aug 2021 09:29

AdamMurphy wrote:

Got the same situation in a case I'm working on now. But her overlap profit is so small she'd be even worse off if I changed the year end.

Then she's on the five year plan.

There's no one size fits all plan.

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By meadowsaw227
06th Aug 2021 09:48

So going by your figures has your client made any "provisions" for their tax liability from their massively increased income.
I warned all my SEISS clients ages ago to prepare for a big 2021 tax bill.

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Replying to meadowsaw227:
By petersaxton
07th Aug 2021 21:46

meadowsaw227 wrote:

So going by your figures has your client made any "provisions" for their tax liability from their massively increased income.
I warned all my SEISS clients ages ago to prepare for a big 2021 tax bill.


Exactly what I was thinking. There seems to be a complaint that there's two tax years: one with a large profit and one with a loss. They get taxed on the large profit yet they complain as if they have to pay the tax bill with funds from the loss year!
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Replying to petersaxton:
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By DKB-Sheffield
07th Aug 2021 22:59

I agree with the provision comment for SEISS claimants. They knew they would be taxed on it and were advised accordingly by their advisors and HMRC. I further agree with the fact many clients have a low profit year and complain they have to pay the previous year's tax from it - advice to keep a "tax fund" so often falls on deaf ears!

However, I think the main part of the "grouse" is that in this case, the client has a non-standard accounting period. At the time of claim, the taxpayer (i.e. not their advisor), was blissfully unaware that SEISS payments received in the 2020/21 tax year would be taxed as income in the 2020/21 tax year (in addition to their reportable profits for the 2019/20 year - in this case, the year ended 30/04/2020). They assumed the SEISS would be reported as income in the relevant accounting period (the period they suffered reduced profits) - hence, also assumed it would follow that they would be taxed on the 2021/22 return.

I certainly don't recall any detailed explanations from HMRC in July 2020 to explain this would not be the case, or that SEISS would follow the tax year - regardless of accounting period. However, I may have missed this or, I may not have looked hard enough, as I have very few non-standard year end clients.

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Replying to petersaxton:
RLI
By lionofludesch
08th Aug 2021 07:35

petersaxton wrote:

meadowsaw227 wrote:

So going by your figures has your client made any "provisions" for their tax liability from their massively increased income.
I warned all my SEISS clients ages ago to prepare for a big 2021 tax bill.

Exactly what I was thinking. There seems to be a complaint that there's two tax years: one with a large profit and one with a loss. They get taxed on the large profit yet they complain as if they have to pay the tax bill with funds from the loss year!

I don't think it's that at all. It's more that SEISS is supposed to replace lost income but will be taxed at a different rate to that which would have applied to the lost income.

41% instead of 29%. 29% instead of nothing. Possible HICBC charge instead of no charge. Lost personal allowances.

It's a very valid grouse for those affected.

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Replying to lionofludesch:
By petersaxton
08th Aug 2021 17:02

Can't he change the period end to 31 March?

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Replying to petersaxton:
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By lionofludesch
08th Aug 2021 17:12

petersaxton wrote:

Can't he change the period end to 31 March?

Won't always help. It depends on the numbers.

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By DKB-Sheffield
08th Aug 2021 18:02

Notwithstanding the option of extending the accounting period to 31/03/21, I am assuming a claim to reduce POA for 2021/22 is also being considered?

Justification: Profits for the accounting period ending 30/04/2021 are expected to be low (re. £2K turnover per OP) leaving only SEISS 4 & 5 in 2021/22 SATR. It seems profits are certainly much lower than those subject to IT for 2020/21 (relatively normal trading year (30/04/2020) + SEISS 1, 2 & 3). POA already made for 2020/21 should cover much of the balacing amount (assuming profits of the accounting period ending 30/04/2019 were similar to those ending 30/04/2020).

However, in many other cases the "grouse" will stand. Well, until Thursday 12th August anyway!!!

Edit: Reference to "balancing amount"... revise to "tax liability". SEISS 1, 2 & 3 would create a "balancing amount" based on 70% profit for 3 qtrs! Sorry for the confusion!

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By TASG
09th Aug 2021 10:03

If you have a good year, not only will your tax be higher proportionately, but your tax rate will be higher and your tax bill will therefore increase disproportionately. That's the essence of a "progressive" tax system. You will however always be left with more money than if you hadn't made the extra profits at all. This isn't new.

Client has, thanks to gov. grants, had a exceptionally good year. Even after taxes it will be an unprecedentedly good year. Certainly we should do our best to make the tax bill as small as possible. But if that's not possible - I'm struggling to understand the point of view of those who think this is unfair?

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Replying to TASG:
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By DKB-Sheffield
09th Aug 2021 12:39

Hi TASG,

I think this slightly misses the point. The OP is not questioning your viewpoint as such. Nor are they suggesting that the client's overall profits have inceased. The are, instead, questioning the disparity that has occurred due to the reporting of profits (based on accounting period) and SEISS (based on tax year).

2020/21 - Client had a 'normal' or 'good ' year by vitue of their profits to 30/04/2020. We have no idea as to how this compares to prior years (hence reference to 'normal' or 'good')

2021/22 - Client has a bad year by virtue of their profits to 30/04/2021. We don't know if this is a profit or loss but do know the turnover was only £2,000

During the 2021/22 accounting period (01/05/2020 to 30/04/2021), the client received 3 (or 4) grants that were paid to compensate them for losses due to COVID-19.

Client is not taxed on SEISS in the 20/21 accounting period (as one would believe should have been intended), they are taxed on the 20/21 tax year (which is where profits for the 2019/20 accounting period are reported).

The result is... client pays more tax in 2020/21 (potentially at higher rate due to thresholds) and less in 2021/22 - possibly losing tax free amounts.

Compare this to a client with 31/03 accounting periods. They receive SEISS in their 2020/21 accounting year (the year with reduced profits/ losses) and pay tax on it (which will be offset against reduced profits/ losses). If they make higher profits because of SEISS, they are taxed at higher rates - which is fair.

That is the Lagopus lagopus (grouse).

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Replying to TASG:
Cragside Lake
By Jacqueline Murray
09th Aug 2021 12:39

TASG wrote:

If you have a good year, not only will your tax be higher proportionately, but your tax rate will be higher and your tax bill will therefore increase disproportionately. That's the essence of a "progressive" tax system. You will however always be left with more money than if you hadn't made the extra profits at all. This isn't new.

Client has, thanks to gov. grants, had a exceptionally good year. Even after taxes it will be an unprecedentedly good year. Certainly we should do our best to make the tax bill as small as possible. But if that's not possible - I'm struggling to understand the point of view of those who think this is unfair?

The point is that because of his year end he hasn't had a 'good year', he's had a not terrible NEXT year thanks to the grants. He will be taxed on it in one year pushing him into a higher tax bracket that, had he earned the equivalent of the grant money through trade, he would not have otherwise been in. He hasn't made extra profits, that's the point; that's why it's unfair.

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Replying to TASG:
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By lionofludesch
09th Aug 2021 13:25

TASG wrote:
I'm struggling to understand the point of view of those who think this is unfair?

Sorry to be blunt - but, as explained above, you clearly haven't thought this through properly.

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Morph
By kevinringer
09th Aug 2021 14:10

As pointed out to HMRC, their proposal adversely affects those with early year ends. There's going to be some taxpayers who in normal times are basic rate but become higher-rate 2020-21 (because of the combination of SEISS and 30/04/2020) and might not have any tax to pay 2021-22. I've got a case like this but it's a partnership and not all partners are willing to change the year end so they're having to keep 30 April. The only thing we can do is reduce the PoA for 2021-22.

I guess HMRC prefer this because the total tax take 2020-21 will be much higher than 2020-21 and 2021-22 combined if SEISS had been taxed on an accounting year basis. And HMRC get all the tax 31/01/2022.

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Replying to kevinringer:
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By lionofludesch
09th Aug 2021 14:17

If it was just a question of timing of payment of tax, I wouldn't complain.

But in many cases, it affects the quantum of tax too. It's not difficult to come up with a scenario where income are taxed at 40% (+ maybe HICBC for three kids, which amounts to around another 26% in the marginal band) which might have been covered by personal allowances had SEISS counted as business profits.

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By possep
11th Aug 2021 17:26

What is the amount overlap relief? New year end of 31/03/21 might help?

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