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Tax treatment of local authority grants
Under the coronavirus special measures, local authorities can help businesses with Small Business Grant Fund (SBGF) and Retail, Hospitality and Leisure Grant Fund (RHLGF) payments. If your business receives such a grant must it pay tax on it?
Qualifying for a grant
One of the first business sectors to be hit by the lockdown was the leisure industry, quickly followed by retail. They were offered help through a central government-funded scheme administered by local authorities, the Retail, Hospitality and Leisure Grant Fund (RHLGF). For small businesses not qualifying for the RHLGF an alternative local authority grant is available, the Small Business Grant Fund (SBGF). There are few conditions that need to be met to qualify for either, but businesses receiving them need to understand the tax consequences.
Taxable or potentially taxable?
Many business owners, individuals and companies have been confused by the language that’s been used to explain the tax treatment of RHLGF and SBGF payments. The phrase “potentially taxable” has been bandied about in official and other guidance, while some information simply says that payments are taxable. So which is correct? The answer is both, but the position is simpler than this answer suggests.
Capital and income
While some types of lump sum payment count as “capital” and may or may not be taxable, depending on why they are paid, RHLGF and SBGF payments are “business income” for tax purposes and must be recorded as such in your business records. In effect, they are treated in the same way as sales income. This isn’t an underhand plan conjured up by the government to claw back some of the SGBF and RHLGF payments through the tax system; the tax position for similar types of payment is well established and HMRC’s Business Income Manual contains examples of court rulings going back many years. The phrase “potentially taxable” is used because although the grant payments are taxable, the income might not result in a tax bill.
Example. Jane owns a hair salon and nail bar. She shut the doors on her business in mid March 2020 and doesn’t reopen them again until September. Her financial year runs from 1 April to 31 March. In April 2020 she received a grant of £10,000. Because of the loss of trade her accounts for the year to 31 March 2021 show a loss of £15,000 (it would have been £25,000 but for the grant). While the grant is taxable income it does no more than reduce her losses. Therefore there is no tax to pay on the grant income.
VAT issues
Unlike direct tax, there’s no specific HMRC guidance on how businesses should treat the RHLGF and SBGF grant payments for VAT purposes. However, the general rules for VAT say that it only applies if a payment is in return for a supply of goods or services. Therefore, grant income, which doesn’t require the recipient to do anything to receive it, is outside the scope of VAT.
Tip. Make sure your bookkeeper records the grant income as “outside the scope of VAT” and not as “exempt” as the latter can adversely affect the amount of VAT your business can reclaim for purchases.
Grant payments under the SBGF and RHLGF are taxable and must be recorded as business income in your records. Consequently, you will pay tax on it if your business accounts for the period in which the grant is received show a profit. Where your accounts show a loss or your profits are covered by tax reliefs, tax is not payable.