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What are the tax implications of government grants?

What are the tax implications of government grants
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    Governments worldwide have implemented a variety of measures to aid companies, individuals, and small businesses struggling due to the impact of the Covid-19 pandemic. In the UK, the government issued its own set of grants and relief actions. Let’s take a closer look.

    Self-Employment Income Support Scheme (SEISS)

    A self-employed individual could claim aid under the Self-Employment Income Support Scheme if the Covid-19 virus badly impacted their business. Deadlines for claiming SEISS grants were 13 July 2020; 19 Oct 2020; 29 Jan 2021; 1 June 2021; and 30 September 2021.

    Any grant money received should be taken into account when calculating 2020/21 tax return profits, which are due for submission by 31 January 2022. If profits exceed £9,500 for 2020/21, Class 4 National Insurance Contributions (NICs) will need to be paid. Also, if profits exceed £6,475, Class 2 NICs must be paid.

    There is no commitment to pay Class 2 NICs if profits are below £6,475 for 2020/21. However, it can be to your advantage to pay them on a voluntary basis, to ensure that 2020/21 remains a qualifying year for state pension and contributory benefit purposes.

    Coronavirus Job Retention Scheme (CJRS)

    The Coronavirus Job Retention Scheme (CJRS) was a temporary measure to help employers retain employees rather than laying them off. The payments awarded under the Coronavirus Job Retention Scheme (CJRS) were for employees either completely furloughed or flexibly furloughed, and need to be included in the calculation of the employer’s profits. Payments made to employees and any related employer’s National Insurance and pension contributions may be deducted.

    The grant payments paid to employees are treated as wages and are subject to PAYE and Class 1 National Insurance Contributions.

    The grant ended on 30 September 2021. HMRC reimbursed 60% of salaries up to a maximum threshold of £1,875 for employees on furlough for claims relating to August and September 2021.

    Employers in receipt of CJRS payments from 1 July 2021 were expected to boost the grant so employees received 80% of their wages (up to £2,500) for the hours they were on furlough. The limits are proportionate to the hours worked.

    Small Business Grants Fund (SBGF) and Retail, Hospitality and Leisure Grant Fund (RHLGF)

    Because of the Covid-19 pandemic, the government announced there would be financial assistance for small businesses and businesses in the hospitality, retail, and leisure sectors. This took the form of two grant funding schemes in the financial year 2020–2021: the Small Business Grant Fund, and the Retail, Hospitality, and Leisure Grant Fund.

    Businesses in England that were eligible for either Small Business Rates Relief (SBRR) or Rural Rates Relief (RRR) received a payment of £10,000 from the Small Business Grant Fund (SBGF). Businesses in England that should have received the Expanded Retail Discount (which covers retail, hospitality, and leisure) on 11 March with a chargeable value of less than £51,000 qualified for the following cash grants per property under the Trade, Hospitality and Leisure Grant (RHLG):

    • Businesses in these sectors with a chargeable property value up to £15,000 received a grant of £10,000.
    • Businesses in these sectors with a property chargeable value of over £15,000 but below £51,000 received a grant of £25,000.

    Businesses with a chargeable value of £51,000 or above were not eligible for this scheme. Neither were companies that were not ratepayers in the business rates scheme.

    Other grants

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

    The tax implication for those is as follows:

    1. If grants were made to a business incorporated as a company, they must be included in profits and will be subject to Corporation Tax.
    2. If grants were made to a sole trader or an unincorporated business, they should be considered as income and will be subject to Income Tax.

    VAT on Grant Income

    VAT does not need to be paid on grant income because it is exempt. Supposing the grant falls outside the scope of VAT, it is still possible to recover the VAT paid for expenditure incurred in relation to the grant. This VAT may be reclaimed as usual, and it will be subject to VAT registration.

    Accounting Treatment

    Any grants received should be presented as revenue instead of netting off against the relevant expense. For example, if grant funds received from the CJRS should be classified as other operating income, then the payments to your workers should be classified separately as an expenditure of your business.

    We highly recommend you speak to a qualified and experienced accountant to obtain a better understanding of how you and your business will be affected by the taxes on grants.

    If you have any queries or require specialist advice on what the tax implications of government grants are, you are welcome to contact us on 0203 0111 898, or you can e-mail us at [email protected].


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