COVID-19: Guidance on the final SEISS grant application process for the self-employed

In a nutshell, the fifth grant will be determined by how much an individual’s self-employment turnover has been reduced in the year April 2020 to April 2021. If an individual’s turnover has fallen by 30% or more over this period, then they will receive 80% of three months’ average trading profits to a maximum of £7,500. Individuals whose turnover reduction is less than 30% of three months’ average trading profits will receive a grant of 30% capped at £2,850.

Whilst this appears reasonably straightforward, the problem is that claimants will need to prepare two separate turnover figures as part of their submission, and this won’t be easy for many self-employed business owners.

When the portal opens later this month, there’s a real risk that applications will be disqualified if business owners haven’t prepared their submission correctly. Chris Bowles, who specialises in working with smaller owner managed businesses comments: “If people are not careful there’s a concern that their grant application will fall at the first hurdle. As advisers, we are precluded from making an application on behalf of our clients, but I would strongly urge anyone considering applying for this final SEISS grant to have an upfront conversation as there appear to be some areas of confusion on the turnover test that could cause people problems.”

Firstly, a taxpayer needs to reasonably believe there will be a significant reduction in their trading profits due to the impact of COVID-19 between 1 May 2021 and 30 September 2021.As with previous grants, there is no precise definition of ‘significant’ given though, so it is left to taxpayers to make their own judgement call on this. Different people will clearly interpret this differently, which is not ideal.

Secondly, there has been a progressive tightening of the application process since the first SEISS grants were introduced. Initially, business owners just needed to make a declaration that their firm had been ‘adversely affected’ by the Covid restrictions. To qualify for the third and fourth SEISS grants, self-employed traders also had to declare that sales had reduced in the qualifying period as a direct result of lockdown compared to what would reasonably be expected for that period. Significantly they were not asked to supply any figures to back up their claim that sales were less than expected.

This time HMRC have tightened the ‘turnover test’ so that business owners will need to prove their sales have reduced to qualify for the fifth grant. Guidance has now been released on how to work out turnover for this test but there has been some criticism that it is not clear and will potentially confuse many applicants.

Click here for HMRC’s guidance on calculating your turnover.

Step 1: 2020/21 turnover

Notwithstanding your own accounting period, HMRC wants you to calculate your turnover that essentially matches the 2020/21 tax year. You need to work out your turnover for a 12-month period, starting on any date from 1 to 6 April 2020.

You can use one of the following periods:

• 1 April 2020 to 31 March 2021
• 2 April 2020 to 1 April 2021
• 3 April 2020 to 2 April 2021
• 4 April 2020 to 3 April 2021
• 5 April 2020 to 4 April 2021
• 6 April 2020 to 5 April 2021

It’s important to note that this turnover figure is not the taxable turnover for the said tax year but this is somewhat confusing as the guidance points people to their 2020-21 self-assessment tax return to establish their turnover figure (or alternatively recommends speaking to your accountant).

Step 2: Adjustments for grants

HMRC suggests that checking your business bank account for cash received from your customers is a good way to determine the turnover figure for the required 12-month period. You must then deduct any amounts of Covid-related business support grants received from that figure including SEISS and Eat Out to Help Out grants, and any local authority grants.

Although these grants are all taxable and must be included in the taxable profit reported on your tax return, they are not part of the turnover figure for this calculation.

Even more confusing is HMRC’s guidance on businesses that have commenced or ceased trading which states that, where a business has started or ceased in 2020/21, the applicant should include all the turnover received in the year to April 2021 even if the trading period was less than 12 months. This appears to be odd in that if the business has ceased trading before 6 April 2021 and doesn’t intent to trade in the 2021/22 tax year then they will not qualify for the fifth SEISS grant.

Similarly, the claimant must have been in business before 6 April 2020 and submitted a tax return including self-employed profits for 2019/20 by 2 March 2021 to qualify for the SEISS grant. If the business had multiple or concurrent trading activities, then the sales figures for all trades should be aggregated for the year to April 2021.

There’s also a lack of clarity around partnerships in those partners who have no other businesses, are instructed to use the partnership’s total turnover figure for the tax year to April 2020 with no adjustment for the proportion relating to the partner’s particular profit share.

Step 3: Reference year

The reference year is used to determine the turnover figure used as the base comparison to the 2020/21 turnover.

For most people, the reference year is the turnover reported on their 2019/20 tax return, but for new partners it will be turnover/profit share for 2020/21. Also, if 2019/20 was an unusually low year, the reference year turnover is that reported on the 2018/19 tax return.

So, the guidance has now switched to looking at turnover for an accounting period not the turnover received in the tax year. For a business with accounts to 30 April, it will compare the sales booked in:

• Reference year: 1 May 2018 to 30 April 2019; to
• 2020/21: 6 April 2020 to 5 April 2021

Step 4: Compare the figures

Finally, only where the reference year turnover is higher than the 2020/21 turnover will the taxpayer qualify for the fifth SEISS grant.

If the 2020/21 turnover has reduced by 30% or more compared to the turnover in the reference period, the grant will be 80% of three months average profits capped at £7,500. In other cases where the reduction in turnover is less than 30%, the grant is 30% of three months average profits capped at £2,850.

It’s also important to remember that in all cases the comparison is of turnover not profits of the business.

For further information please contact your usual adviser, or alternatively click here…