This TAXguide, prepared by the Tax Faculty, covers the Coronavirus Job Retention Scheme (CJRS) and the Self-employment Income Support Scheme (SEISS) and is available to all ICAEW members.
The government’s COVID-19 financial support schemes give rise to a number of tax issues, separate from the rules that apply to the schemes themselves. These include:
- Tax treatment of grants.
- Reporting grants on tax returns.
- Tax charge for grants to which the recipient is not entitled.
- Reporting overpaid grants to HMRC, directly and on tax returns.
- Professional Conduct in Relation to Taxation (PCRT) considerations and approval of tax returns.
CJRS grants received by taxpayers in business are subject to either income or corporation tax and the tax treatment follows Generally Accepted Accounting Principles (GAAP). SEISS grants are subject to income tax in the tax year in which they are received, with an exception for some partnerships.
Income tax self assessment and corporation tax returns include specific sections and instructions for the reporting of grants and require additional declarations that grants have been reported correctly on the return.
CJRS and SEISS grants to which taxpayers are not entitled are recovered by means of a 100% income tax charge. Taxpayers are required to notify HMRC and repay grants to which they are not entitled, generally within 90 days (details below). Penalty provisions apply where the taxpayer does not notify and repay by the appropriate deadline.
To minimise the risk of penalties, overpayments should be notified to HMRC and repaid as soon as possible, following the instructions on gov.uk. As a backstop, if an overpayment has not been notified and repaid by the time the relevant tax return is being filed, taxpayers are required to notify and repay the overpaid grant via the tax return. The latest versions of income tax and corporation tax returns include specific sections for reporting grants to which the taxpayer is not entitled.
The legislation that governs the tax treatment of the grants and the recovery of grants to which the taxpayer is not entitled is in s106 and Sch 16, Finance Act 2020 (FA 2020) (amendments in relation to SEISS are in Finance Bill 2021).
CJRS grants received by taxpayers in business are subject to either income or corporation tax and the tax treatment follows the accounting treatment required by GAAP. CJRS grants can be claimed by employers who are not in business (eg, employers of nannies and domestic staff); non-business employers are not liable to tax on CJRS grants.
SEISS grants are usually subject to income tax and class 4 national insurance contributions in the tax year in which they are received.
Paragraph 3(3), Sch 16, FA 2020 provides that all SEISS grants are taxable in 2020/21. This provision is amended by Finance Bill 2021 so that SEISS grants are taxable in the tax year in which they are received. This change was required because of the extension of the scheme to include fourth and fifth grants. In practice the first three grants are usually taxable in 2020/21 and the fourth and fifth grants in 2021/22. This tax treatment overrides GAAP and basis period rules. It can mean that there is a mismatch between the tax year in which the grant is taxed and the tax year showing reduced income - see further details of the possible impact in the box below.
Examples of impact of tax treatment of SEISS grants
Profits for the accounting period ended 30 April 2020 (one month after the start of the pandemic) are taxed in 2020/21 along with the first three SEISS grants. This may push some taxpayers into higher tax rates than expected and have other knock-on effects on their tax liability. Some commentators have suggested changing the accounting date to address this mismatch; this would require careful consideration. SEISS grants are trading income for loss relief purposes. Where a trading loss has been incurred in 2021/22, the receipt of a SEISS grant may turn that into a profit. This would prevent the taxpayer from carrying that loss back against profits in earlier periods under the extended loss carry back rules relating to 2020/21 and 2021/22 trading losses.
In most cases members of partnerships claim SEISS grants in their own right and the tax treatment is the same as described for individuals in the previous paragraph.
Paragraph 3(4), Sch 16, FA 2020 provides an exception for partnerships where the partnership agreement requires the partners to pay the SEISS grant into the partnership, with it then being distributed in accordance with the normal profit-sharing arrangements. Where this is the case the tax treatment follows the accounting treatment. The amounts for each partner will be part of their partnership profit share for the period.
Grants which have been repaid, either voluntarily or because the taxpayer is not entitled to them, are not taxable. This is not as clear as it might be in the legislation and tax return guidance but is confirmed in HMRC’s Business Income Manual at BIM40456.
Income tax self assessment and corporation tax returns include specific sections and instructions for the reporting of grants and an additional declaration that grants have been reported correctly.
In summary, for individuals, on the self assessment return, COVID-19 support grants to which the taxpayer is entitled should be entered on the page on which business profits are reported so they will be taxed at marginal tax rates, and grants to which the taxpayer is not entitled should be reported on the main pages of the tax return and will be subject to a 100% tax charge to recover the grant.
The relevant box numbers for the reporting of grants and the additional declarations that grants have been reported correctly are as follows:
Tax return section
|Self-employment full SA103(F)
Self-employment short SA103(S)
Short tax return SA200
Partnership full SA104(F)
Partnership short SA104(S)
Partnership return SA800
(in the exceptional cases where the SEISS grant is paid into the partnership)
Include in turnover (3.24 or 3.29)
CJRS (and other COVID-19 support)
Note: CJRS grants should not be netted off against employment costs
Tax return section
Self-employment full SA103(F)
|Self-employment short SA103(S)
|Short tax return SA200
UK property SA105
Include in income (5 or 20)
|Partnership return SA800
Corporation tax return CT600
Note: Boxes 471 and 472 on the CT600 require disclosure of the amount of CJRS received and the amount to which the company is entitled, although the amount received will also have been included in the company profit and subject to corporation tax at the normal rate. Where all amounts received are in relation to correct claims, boxes 471 and 472 will contain the same amount.
Additional declaration that all grants have been correctly reported on the return
|Tax return section
20.1, page 8
Short tax return SA200
Partnership return SA800
Reporting a grant in the wrong place on a tax return may lead to delay in the return being processed, a query from HMRC and possibly a formal enquiry, even if the taxable profits and liability reported are correct. The faculty understands that some software may not deal with grants correctly and particular care may be required; for example, where an SEISS grant is included in the accounts the software may treat it as turnover or other income and it would need to be moved to the correct box.
SEISS trading income and payments on accounts
Finance Act 2020 ensures that SEISS grants are treated as trading income when calculating trading profits or losses. It follows that SEISS grants should be included as income when considering whether to reduce payments on account for 2020/21 or, in due course, 2021/22. The grants are also trading income for pension contribution purposes and for loss relief rules.
CJRS and SEISS grants to which taxpayers are not entitled are recovered by means of a 100% income tax charge. This is the case even where the recipient is a company, and in practice, where the overpayment has not already been repaid to HMRC, the recovery is through the corporation tax return.
Taxpayers are required to notify HMRC and repay amounts to which they are not entitled, generally within 90 days (further details below). Penalty provisions apply where the taxpayer does not notify and repay by the appropriate deadline.
The legislation that allows HMRC to recover COVID-19 support payments to which a taxpayer is not entitled is in Sch 16, FA 2020. Paragraph 8 of the Schedule imposes an income tax charge on any payments to which the recipient is not entitled, the charge being the amount received (ie, 100%). The income tax charge also applies to companies.
Paragraph 12 of the Schedule requires notice of liability to be given to HMRC in accordance with s7, Taxes Management Act 1970 (TMA 1970) within 90 days of Royal Assent to Finance Act 2020, or 90 days after the date that tax became chargeable. Under para 8(4), the income tax is generally chargeable on receipt of the payment. Therefore, for payments made prior to the date of Royal Assent (22 July 2020), the income tax charge will arise when the payment was made, and notification should have been made by 20 October 2020.
For CJRS payments, where the recipient ceases to be entitled to retain the payment, the notification deadline is the later of 90 days after ceasing to be entitled to the monies or the two dates mentioned above.
All payments made by 22 July 2020, and an increasing number of payments made since then are now outside 90 days from receipt and a late notification penalty would now apply. This would be the case even where, for example, a SEISS claim was made by a client on the mistaken understanding that they were entitled to it. Claims for the third and fourth SEISS grants come within this provision on the date the funds are received.
Where an adviser identifies an incorrect claim to a support payment it is likely that the client is already potentially liable to a penalty under Sch 41, Finance Act 2008 (FA 2008) (failure to notify). However, unless the failure to notify is deliberate, unprompted disclosure can reduce the penalty to 0% if notified within 12 months of the tax being chargeable, or to 10% if later than the 12-month date.
Failure to notify where the taxpayer knew that they were not entitled to a grant is covered by para 13 of the Schedule. This covers the situation where the person knew at the time the tax became chargeable that they were not entitled to the payment (ie, usually on receipt of the payment except for CJRS monies which became chargeable at some time after receipt). Paragraph 13(3) sets the degree of culpability for a penalty under Sch 41, FA 2008 as deliberate and concealed, which carries a tariff of 100%. Where para 13 applies, the overpayment must be notified, or repayment made in full by the end of the notification period.
For example, if an employer was aware at the time of a claim that an employee was working, then they are not entitled to the CJRS grant for that employee from the start. If an employer became aware at a later date that an employee was working, they become not entitled to the grant at the point they discover this.
Taxpayers and their advisers may seek to appeal the penalty on the grounds of reasonable excuse, but evidence from appeal cases suggest that ignorance of the rules is generally not successful.
- HMRC helpsheet on CJRS overpayment penalties
- HMRC helpsheet on SEISS overpayment penalties
- HMRC helpsheet on COVID-19 support overpayment penalties
SEISS and amendments to tax returns
The first three SEISS grants were based on tax returns filed up to 23 April 2020 but no account was taken of any amendments made after 18:00 on 26 March 2020. Amendments made after this date were disregarded for the first three grants.
HMRC is basing its calculations for grants four and five on the tax return data for 2016/17 to 2019/20 held in its systems on 2 March 2021. All 2016/17 to 2019/20 tax returns filed by 2 March 2021 are taken into account, as are any amendments made by that date.
A new requirement has been introduced for grant four and is expected to apply to grant five. Amendments to tax returns for any of the relevant tax years which are made after 2 March 2021 and which would reduce the amount of the grant or would cause the taxpayer to be no longer be eligible must be notified to HMRC and the appropriate amount of grant repaid, subject to a deminimis of £100. There is no requirement to notify the impact of amendments on the first three grants.
HMRC has confirmed that amendments includes HMRC corrections, taxpayer amendments and HMRC amendments made as a result of an enquiry. Amendments does not include contract settlements, revenue assessments or charges raised as these are not considered to modify the tax return.
The main risks to consider when reviewing claims and considering whether there is an overpayment that needs to be notified to HMRC:
- Employees must not do any work for the employer, including unpaid work (CJRS1). Employees must not work during their furloughed hours, (ie, actual hours must be recorded (even for monthly paid staff) and be correct) (CJRS2 onwards).
- The employee must be paid in accordance with their employment contract. The CJRS grant is a contribution towards the employer’s cost in this regard. Pension contributions must be paid to the pension provider and PAYE/national insurance contributions deducted and paid to HMRC in the usual way.
- When calculating reference pay, care must be taken to correctly classify employees as being paid at a fixed or variable rate. Ineligible discretionary pay, (eg, tips, must be excluded).
- The national insurance contributions element of the grant must be reduced by any employment allowance claimed unless the employer has sufficient secondary (employer) liability to cover both on an annual basis - see ICAEW’s guidance CJRS claimants must act now on EA and NIC.
- Claims must not include any maternity, paternity or adoption pay that has been funded by HMRC.
- HMRC’s guidance on how to calculate the grant must be followed, including the use of calendar rather than working days. Employers must assess the best outcome for variable paid employees each pay period rather than simply using a base month of the last pay period before 19 March 2020.
- Usual hours must be calculated according to the formulae in HMRC's guidance. The answers these give may not be as you might expect. For example, they will not give a 40/60 split for a weekly paid employee who usually works for five days a week, was furloughed and now returns to work for two, because all seven calendar days in the weekly pay period must be considered and taken in the context of the whole year.
- The rules on rounding when calculating usual hours are complex and have changed as CJRS has been amended. The guidance on GOV.UK applies to the most recent version. Previous guidance is available on the National Archive website. When performing the calculation for the entire pay period you can round up. When calculating the usual hours for part of a pay period you must follow the standard mathematical rounding rules (round to nearest whole number and round down 0.5). HMRC’s calculators, when rounding, do not always follow the law.
The following taxpayers are ineligible for SEISS grants:
- Taxpayers who ceased trading in 2019/20 or in 2020/21 before the date of the claim.
- Taxpayers who incorporated their business before the date of any claim.
- Taxpayers who, at the date of the claim, did not intend to continue to trade.
- Taxpayers whose trade was not ‘adversely affected’ during the relevant dates for each grant.
- Taxpayers who did not meet the additional conditions for the third and subsequent SEISS grants:
- be currently trading but are impacted by reduced demand due to coronavirus, or
- have been trading but are temporarily unable to do so due to coronavirus.
- intend to continue to trade, and
- reasonably believe there will be a significant reduction in trading profits.
Note that the SEISS impact tests should be applied at the time that the claim was made. The Tax Faculty recommends that claimants retain contemporaneous evidence. There is no requirement to apply hindsight and reassess the impact on the business to take into account changes to trading conditions that occur after the claim was made.
Accidental overpayment by HMRC
In a small number of cases, HMRC overpaid SEISS 1 and 2 grants due to a data discrepancy. On 23 November 2020 HMRC wrote to those affected, informing them that the overpayment does not need to be repaid but that they may choose to repay voluntarily. These cases are apparent because the third grant is lower than the first grant when the amount received should be the same.
To minimise the risk of penalties overpayments should be notified to HMRC and repaid as soon as possible.
Note that there are two different forms, one for notifying overpayments following a tax return amendment and one for repaying in other circumstances.
Note that this HMRC guidance says: “We will not be actively looking for innocent errors in our compliance approach.”
As a backstop, if an overpayment has not been notified and repaid by the time the relevant tax return is being filed, taxpayers are required to notify and repay the overpaid grant via the tax return. The latest versions of the income tax and corporation tax returns include specific sections for reporting grants to which the taxpayer is not entitled.
The relevant box numbers for the reporting of grants overpaid are as follows:
Incorrectly claimed coronavirus support scheme payments section on page 5, one box for CJRS and one for SEISS
Short tax return SA200
A full SA100 return must be filed.
Partnership return SA800
Corporation tax return CT600
471-474 and 526
It is important that when entering amounts on page 5 of the SA100 these amounts are not reported on the self-employment or partnership income pages, as this will result in a double charge to tax. Amounts received to which the client is not entitled should only be reported on SA100 page 5.
Payments on account
The tax calculation specification provided to software companies includes the 100% tax charge to recover overpaid grants reported on the tax return in the tax for the year. This is used to calculate payments on account for the following year. Payments on account will need to be carefully reviewed in such cases.
Agents who are making CJRS claims on behalf of clients are advised to confirm the terms of engagement in an updated engagement letter. ICAEW has published additional engagement letter schedules for CJRS V1 and V2.
Agents who are completing tax returns on behalf of clients need to have appropriate checks in place to ensure that grants are correctly reported on the return and that the client notifies HMRC of any overpayments of grants or authorises the agent to make the notification. PCRT is relevant to overclaims as the recovery of grants to which the recipient is not entitled is by way of a tax charge.
Where the client has received COVID-19 support payments it is important that they actively approve the entries on the tax return concerning the grants and confirm their entitlement to the amounts received. The taxpayer has primary responsibility to submit complete and correct filings to the best of their knowledge and belief. Agents might consider adding a specific paragraph to their letter inviting approval of the tax return before submission drawing the client’s attention to the relevant boxes on the return.
Agents are not required to verify the information that a client provides for inclusion in a tax return. However, agents should take care not to be associated with presentation of facts they know or believe to be incorrect or misleading. This means that if the agent disagrees with the grant details the client wants to disclose in their tax return, the agent must insist on correct disclosure, or not file the return. Further guidance can be found in Helpsheet C of PCRT.
Where a client refuses to repay a grant the guidance on dealing with errors in Helpsheet C of PCRT should be followed.
- See also: Tax, ethics and fraud. (TAXline, May 2021)
Members may also wish to refer to the following publications:
- ICAEW’s guidance on SEISS
- ICAEW’s guidance on CJRS
- Helpsheet from ICAEW’s Technical Advisory Service: COVID-19 - Ethical issues for members in practice
- Helpsheet from ICAEW’s Financial Reporting and Tax Faculties: Accounting and tax consequences of COVID-19 related support
This guidance is created by the Tax Faculty, recognised internationally as a leading authority and source of expertise on taxation. The Faculty is the voice of tax for ICAEW, responsible for all submissions to the tax authorities. Join the Faculty for expert guidance and support enabling you to provide the best advice on tax to your clients or business.
- 05 Jul 2021 (11: 50 AM BST)
- Update to the section "SEISS and amendments to tax returns" to include HMRC's confirmation of what does and does not constitute an amendment.