HMRC announced on Friday that it will be consulting on draft legislation to tax certain of the Covid-19 support measures provided to businesses.
HMRC is consulting on draft legislation to:
(i) tax business support grants that have been made in connection with Covid-19 so that such grants will be treated as income where a business is within the scope of either corporation tax or income tax; and
(ii) recover payments made to recipients under the Coronavirus Job Retention Scheme ("CJRS") or Self-Employment Income Support Scheme ("SEISS") by imposing a 100% tax charge, where such recipients were not entitled to those payments or where those payments have been used other than for the purpose intended by the UK government.
The consultation closes on 12 June 2020 and is available to view here.
- Why are payments being treated as taxable?
- Key points
- Who will the legislation apply to?
- When does the measure come into effect?
1. Why are payments being treated as taxable?
Broadly, the coronavirus support grants that have been made will have replaced the revenues of businesses and individuals, and therefore those grants made should be subject to tax.
For example, in the context of payments made under the CJRS, those payments will be taxable where (i) the amount has not been brought into account in calculating the profits of the business and (ii) the expenses incurred by the employer (in respect of the employment costs which are the subject of the coronavirus support payment) have been deducted in calculating the profits of the employer. In that case, if the payments have been treated as deductible for the purposes of calculating corporation or income tax, it is fair that the coronavirus support payment is brought into account as taxable income by the employer.
2. Key points
The basic premise of the draft legislation is that payments received under the grants are taxable payments like other taxable receipts. Whether tax is paid will depend on the business or trade profits of the grant recipient, taking into account the grant and other business income and expenditure under the normal tax rules. Businesses within the scope of the new rules include any trade or profession, any UK or overseas property business and any businesses which makes investments.
However, there are a number of exemptions to the principle that coronavirus support payments are taxable, including where (i) any such income is outside the scope of tax, the support payment may also be outside the scope of tax and (ii) payments are made to charitable companies or community amateur sports clubs.
If businesses have received coronavirus support payments under CJRS, SEISS or under a direction given under section 76 Coronavirus Act 2020 to which they are not entitled, HMRC can raise income tax assessments against the recipient of the payment, who will be liable to an amount of income tax equal to the amount of the payment that the recipient was not entitled to and which had not been repaid. For deliberate failures to notify HMRC of a liability to income tax chargeable where a business was not entitled to a payment; penalties can be levied.
In the context of the CJRS, this concept is extended to apply where a payment received under the CJRS was used for costs other than those that the CJRS is intended to reimburse i.e. costs relating to PAYE, NICs and pension contributions of employees.
In the context of SEISS, where the grant is retained by an individual partner (and does not feature in the firm's calculation of partnership profits) then that grant is treated as taxable income of the partner alone, rather than of the partnership.
Importantly, directors of any company which is subject to an insolvency procedure, or where there is a serious possibility of that company becoming subject to an insolvency procedure, where there is a serious possibility that some of its income tax liability will not be paid following receipt of a coronavirus support income payment will be joint and severally liable to HMRC with the company for the income tax due.
3. Who will the legislation apply to?
The legislation will apply to businesses, employers, individuals, and individual members of a partnership who received or applied for a payment from the CJRS, SEISS, the Small Business Grant Fund, the Retail, Hospitality and Leisure Grant Fund, the Discretionary Grant Fund, other payments made by public authorities to businesses in response to Covid-19 and any other Covid-19 support scheme specified or described in regulations made by the Treasury.
4. When does the measure come into effect?
The measure will have effect from Royal Assent of Finance Bill 2020 and will apply to all payments made under the Covid-19 support schemes outlined above, regardless of when those payments were made.