Tax implications of government financial support offered under Covid-19 Special Provisions

This article from Ian Walker of Ian Walker & Co Chartered Accountants aims to provide an overview of your tax obligations if you received a grant, loan and/or concession issued by the UK Government under the UK Government’s CV19 (Covid-19) Special Provisions. This includes financial support received through furlough, self-employment income support, local authority grants, loan schemes and ‘Eat Out to Help Out’.

Since spring/summer 2020, there have been two principal types of support on offer:

• Grants
• Loans

Grant support packages are detailed below, but as an overview; CV19 support grants are deemed as “Revenue Grants”. Revenue Grants are made in support of lost turnover or more specifically lost profits.

To note – Revenue Grants differ materially from Capital Grants; which are utilised for the acquisition of tangible or intangible fixed assets. Capital Grants are not issued in support of turnover or profit support. Revenue Grants represent taxable income to the recipient entity.

Loan support does not represent compensation for loss of profit/turnover. As such, this support is not taxable in the same way as grant monies received. These loans are to be repaid across the agreed term, with you securing tax relief solely on the attributable interest (and charges, where applicable). Tax relief is unavailable on the monthly capital repayment of the loan – see below.

Grants

Coronavirus Job Retention Scheme (CJRS) – aka “furlough“

Under CJRS, monies received from the Government are passed on to the employee via the usual payroll system and framework. No sums receivable under CJRS are to be retained by you as an employer. They are utilised to meet wages and salary obligations of your employees.

This means that the net position between monies in from HMRC and monies out to the employee is £NIL. Therefore, your accounts and tax computations are to be drawn on this basis.

Under CJRS you are entitled to receive up to 80% of the manpower costs of furloughed staff (these percentages varying across the scheme term). If you opted to “top up” the CJRS grants from HMRC and pay the furloughed employees the remaining 20% of their standard salary/wage, these additional sums expended remain deductible for tax purposes in the usual way.

To note – as an employee receiving monthly/weekly sums from your employer, all gross earnings are deemed to include the CJRS elements. As such, any employee can rely upon their employer to have accounted for the correct sums of Income Tax and NIC across usual earnings + CJRS supported earnings. Standard wage/salary and CJRS supported sums will all be reflected on annual Form P60, or if you are a leaver, Form P45; for each employee.

Self-Employment Income Support Scheme (SEISS)

These grants are paid by HMRC to qualifying self-employed business ventures. Such does not relate to businesses trading as Limited Companies, other body corporates or domestic Landlords.

Again, these sums represent compensation for loss of profits (arising from CV19) and therefore form taxable income upon the recipient. These sums should be added to usual taxable profits derived from trading activities, when computing the overall Income Tax and NIC liabilities falling due to HMRC.

Local Authority Grants

These grants were distributed by local authorities to varying businesses, across differing business sectors. Some were targeted for small business occupying premises in certain circumstances; whereas other Local Authority grants were targeted at specific sectors (i.e hospitality, sport, entertainment, tourism etc…).

Again, these grants are intended to support the ongoing activities of each venture and therefor become taxable income in the hands of the recipient. Taxed at usual Income Tax & NIC rates, or Corporation Tax rates.

Trade Associations

Certain Trade Associations secured funding and support for their members from the Government. These are also deemed as Revenue Grants and were distributed in specific sectors on the same basis as the Local Authority Grants above (at the discretion of specific associations).

Again, these grants are intended to support the ongoing activities of each member’s venture and therefore become taxable income in the hands of the recipient. Taxed at usual Income Tax and NIC rates, or Corporation Tax rates.

Loans

Recovery Loan Schemes – Bounce Back Loan (BBL), Coronavirus Business Interruption Loan Scheme (CBILS)

The Government offered differing loan schemes to provide working capital and cashflow to affected trading entities. As touched upon at the start of this article, the sums received by each applicant represent a loan. These monies are not treated in the same way as grants, for tax and NIC, and accounting purposes.

Loans sit on your Balance Sheet, with only fees and interest being deductible in the calculation of taxable profits. These specific elements are included in the calculation of taxable profits across the loan term.

In short, you may only secure tax (and NIC where applicable) relief on the interest and associated fees; not the actual repayment of the capital loan sum originally advanced.

Concessions

Separate to the above sources of CV19 support, the Government has granted specific support to the hospitality sector.

Eat Out to Help Out

Customers utilising an Eat Out to Help Out voucher (£10 per head) were entitled to present this to the restaurant/food outlet at time of settling the bill. This discount duly being honoured by the provider, with the customer paying the discounted sum for the meal enjoyed.

The restaurant/food outlet then redeemed the vouchers from the Government, for cash.

Again, these cash sums constitute a contribution to support failing turnover, and more specifically profits. The monies received from the Government duly representing taxable turnover in the hands of the restaurant/food outlet. Taxable income to be included in the calculation of overall taxable profits. These sums were subject to VAT also.

Temporary 5% VAT rate

Purveyors of food under a catering supply (i.e. restaurants, pub food, take-aways…) are eligible to reduce the amount of VAT payable to HMRC to 5%, on food alone.

Some outlets reduced their prices accordingly, whereas some maintained prices and retained the benefit as a contribution to support their business. Either being acceptable to HMRC.

No sums are advanced by or received from HMRC on this basis. Instead, the venture’s VAT liabilities reduce significantly under this scheme, so less outlay when settling said VAT liabilities.

If you need further support regarding your tax obligations under these schemes or need signposting to addition support around financing for your business, please get in contact.