Have you been scratching your head over rules on taxation of the Self-Employment Income Support Scheme from the Government? We want to clear up how the taxation of SEISS works and whether or not you need to pay it.
Schedule 16, paragraph 3 confirms a payment received in 2020/21 is taxed in 2020/21 (irrespective of its treatment for accounting purposes) – with one exception involving partnerships.
For sole traders, it will be necessary to add the SEISS payments received in 2020/21 to the trading profits or losses that form the basis of the year to 5th April 2021.
For example, if, as a sole trader, you draw up your accounts to the year to 30th June 2020 making a trading profit of £10,000 for that year and you receive payments totalling £13,070 in June and August 2020, you will be taxed on a total of £23,070 in the 2020/21 tax year.
If you had made a trading loss in the year to 30th June 2020, the SEISS grants received in 2020/21 would be netted off against the loss and any resulting loss can be relieved subject to the normal trade loss relief rules.
There can be different rules applying to partners in a partnership depending on whether or not the SEISS grants are retained by the partner or distributed to the partnership.
Where a partner receives SEISS payments in 2020/21 and retains them all, the partner will be taxed on the total of their share of the partnership profits plus the SEISS payments received in 2020/21.
Where the SEISS grants are not retained by the partner but distributed to the partnership, the grant becomes part of the partnership trading income which is taxed according to the profit-sharing arrangements in the basis period ending in the tax year – here the grants are not assessed in the tax year in which received.
Where the SEISS payments are included in a sole trader’s accounts or a partnership’s accounts, it is important to remember they will generally have to be added back in the tax computation except in a partnership where the partner has transferred their SEISS grant to the partnership.
HMRC has some examples of the above rules in the Business Income Manual. If you are looking for more information on the taxation of the Self-Employment Income Support Scheme then please get in touch with our team.