Covid-19 has proven to be a very challenging time for us all. But in times of great strain, the government took action, and designed a wide range of financial support systems to keep the UK afloat while we battled our invisible enemy. Covid-19 financial grants were a welcome relief for many business owners, but over a year later, they have discovered a hidden downside. Because along with the grants, comes the Tax Man, and taxes on Covid-19 grants are now coming due.
The Covid-19 financial support
The last year and a half has been incredibly difficult for business owners across the board. And while everyone has struggled, some industries have been hit far worse than others. The government, keen to keep the economy running and prevent the closure of as many businesses as possible, launched a series of financial support options. These included grants, loans, deferrals and rate relief. Each type of support was designed to cover as many businesses and industries as possible, and provide a financial safety net for any business, large or small, who has been adversely affected by the pandemic.
The range of financial support options offered by the government means businesses have been able to choose the support that was right for them from a long list, which includes:
- The job retention scheme
- Claiming back statutory sick pay paid to employees due to Covid-19
- Deferring VAT due to Covid-19
- Business rates relief
- Discretionary grant funds
- Kickstart scheme
- Restart grant scheme
- Self-employment income support grants
- Recovery loans for businesses of any size
- Additional restrictions grants
- Small business grant fund
You will notice that each of these options caters to a different need and works in a different way. Some of them are to be temporary – loans designed to just give a little breathing room during the hardest times and paid back once businesses had a chance to recover. But others were given with no repayment needed. But as many businesses are now finding out, the grants they received didn’t come with absolutely no strings attached.
Is a grant income taxable?
In a nutshell, yes. Every grant issued by the government would have a tax bill to go with it eventually, and as a business owner you will need to account and prepare for that. Most of the issues seem to stem from the fact that the grants were announced in the March 2020 budget, and so businesses applying would receive their money after the 5th April 2020. This means they did not need to declare or pay it until a year later, by which time the business should have an active plan and be on the road to recovery. But businesses, and self-employed business owners in particular are being hit with the surprise news that they need to pay tax on the grants they received. Not only that, but self-employed business owners are required to pay Class 4 National Insurance payments on them too, with both tax and NI contributions payable by 31st January 2022. An unwelcome surprise to so many.
But this should not have been a surprise, as all grants are generally considered to be taxable income by HMRC, regardless of why they were given or where they came from. In order to prevent any further confusion, the government have confirmed that the grants subject to income and corporation tax are:
- Self-employment income support scheme
- Coronavirus job retention scheme
- Discretionary grant fund
- Small business grant fund
- Retail, hospitality, and leisure grant fund
- Other payments made by public authorities to businesses in response to Covid-19, and any other Covid-19 support scheme specified or described in regulations made or to be made by the treasury.
Whether or not any tax is actually due will depend on the business profits of the recipient, any other taxable income or tax allowances the company or individual might have.
A lot of companies have been operating under the impression that their grants were completely tax free, and so were not prepared for the bills that have turned up. The reason for this, we think, is the Finance Bill 2020. This is a piece of draft legislation that states that grant payments made during Covid-19 are not subject to VAT payments, as they were not made in return for goods or services. They will not need to be included in VAT returns, and nor will the payment count towards the VAT threshold of your business. But this does not mean they are free from tax – something many businesses have been wrongly assuming.
At Purple Lime, we know how confusing this can feel. We have already been working with several businesses to help them manage their tax payments, readjust their cashflow and implement sound financial and tax plans for their business’ future after Covid. And we would love to help you do the same. If you would like to know more, please get in touch by emailing firstname.lastname@example.org or by calling us on 01249 691360.