Government and local authorities have announced and distributed grants to help smaller businesses adversely affected by the coronavirus crisis. These include the Small Business Grant Fund and the Retail, Hospitality and Leisure Grant Fund.
As business owners start to think about their tax returns for the 2019/20 tax year, it is time to take a closer look at the amount of tax that will be payable on these grants and when it will be due.
When these grants were announced in the Budget in March 2020, it was confirmed that the funding for these two schemes was to come from local councils’ 2020/21 budgets. Most claimants will not therefore have received their grant until after 5 April 2020.
For a sole trader or partnership preparing accounts on the cash basis, this income will be taxable in the 2020/21 tax year and the income tax payable by 31 January 2022. This should give these businesses time to recommence trading and enjoy a period of recovery before the tax is due. The grant should replace income lost, and so hopefully tax will be payable at no more than their normal marginal rate of tax.
However, many businesses are not eligible for cash-basis accounting (including companies, LLPs and unincorporated businesses with turnover of £150,000 or more to name a few). These businesses could end up with a tax bill both sooner and larger than they anticipated.
Where a business prepares accounts on an accruals basis, the government grant income will be recognised on 11 March 2020 irrespective of when the amount is received, because no performance conditions are attached to the grant (other than the business’ rateable value as at 11 March 2020).
Self-employed individuals with a year end of 31 March will also need to include this grant income in the 2019/20 tax year, so the tax on it will be due on 31 January 2021, 12 months earlier than they might have thought. As the grant income can be up to £25,000, this could also push an individual’s profits into the next tax band for the 2019/20 tax year. This sounds like a raw deal when compared to paying the tax on the profits in 2020/21, being the year that their profits will actually be adversely affected.
What can businesses do about this? One possibility is to consider changing the accounting period reference date to ensure the income falls into the 2020/21 tax year or reflects subsequent lower profits. Another possibility is to convert to the cash basis of accounting if possible. However, as ever, there are many more factors to consider before making such big changes.