Many businesses have closed because of the pandemic despite government coronavirus grants. Special tax rules apply to these payments if they are received after a business stops trading. What do business owners need to know?
A sole trader, partner or company that was eligible for a CSP (coronavirus support payments (CSPs)) but received it after their trade or property business ceased is not required to repay it. However, they must follow the special rules for calculating the tax on it.
The legislation says any part of a CSP that isn’t “referable” to the carrying on of the business is taxable as a “post-cessation receipt”. This rule overrides the normal accounting practices which determine the financial period for which a CSP should be recorded as income. The position is made more complicated for Self-Employment Income Support Scheme (SEISS) payments by another rule which says they are always taxable for 2020/21.
Fortunately, as it stands, the effect of both the special post-cessation and the SEISS rules produce the same outcome, i.e. they both cause the payment to be taxable for 2020/21. However, our understanding is that the post-cessation rule trumps that for the SEISS. This might be important when working out the tax on it.
Choose your tax year
Where the post-cessation receipts rule applies to a CSP (SEISS or other) it’s taxable for the tax year in which it is received. So, because most if not all CSPs were paid in 2020/21 they are wholly taxable for that year. However, the general rules for post-cessation receipts, not just those in respect of CSPs, allow you to elect for the payment to be treated as if it had been received on the last day that your business traded. Expenses you incurred in obtaining the post-cessation amount are tax deductible from it. In practice, it seems unlikely that there would be any such expenses for a CSP.
Example. John’s business ceased trading at the end of May 2020. His final accounts cover the period from 1 November 2019 to 31 May 2020. They show a profit for tax purposes of £3,000. John received a coronavirus grant of £4,000 in July 2020. It’s taxable for 2020/21 under the post-cessation receipts rule. However, John can elect to treat it as if it was received on 31 May 2020. The effect of this is that the profit is increased to £7,000 (£3,000 +£4,000). £5,000 of this is taxable in 2019/20 and £2,000 in 2020/21.
John should review his tax position for 2019/20 and 2020/21 and check whether an election to carry back the post-cessation receipt will reduce or increase his tax bill. As 2020/21 doesn’t end until 5 April 2021 he can wait until after that date to make his review which will mean he can properly assess the effect of an election. He has up to six years in which to make an election.
Companies that receive a CSP for a business which has ceased and which counts as a post-cessation receipt can also make an election to treat it as income received on the last day of trading.
Coronavirus grants received after a business ceases are taxable as post-cessation receipts and so taxable for the tax year in which they are received. However, an election can be made to tax the payment as if it had been received on the date the business ceased. This could reduce the tax payable on the grant payment.