Coronavirus - The Self-Employment Income Support Scheme (SEISS) and losses

The SEISS will pay a  taxable grant, which can be applied for from 13 May, to the self-employed (including members of partnerships) based on 80% of profits averaged over the last three tax years (or shorter periods if self-employment started after 2016/17), subject to a maximum of £2,500 a month.

• The initial payment term of the SEISS grant will be “at least three months”.
• The payment of the grant will not prevent the claimant from continuing to work.

The restrictions on the SEISS are as follows:

1. Self-employment must provide the majority of the claimant’s income (based on the period used for the £50,000 test set out below).

2. Trading profits either:

       -     were no more than £50,000 in 2018/19; or

       -     trading profits were no more than £50,000 averaged over the three tax years from 2016/17. If trading started between 2016-19, HMRC will only use those years for which a Self-Assessment tax return has been filed.

According to the Chancellor, these thresholds mean the scheme covers 95% of the self-employed. The corollary is that it creates a cliff edge at £50,000, a figure that appears elsewhere in the tax system (e.g. the higher rate tax threshold).

3. The claimant must have submitted a 2019 tax return (covering the 2018/19 tax year). As a concession, any late filer will have four weeks to submit their overdue return if they wish to be included in the scheme.

4. The claimant must have traded in 2019/20 and still be trading when making the application (unless affected by Covid-19).

5. The claimant must have lost trading profits due to Covid-19.

 

The treatment of losses

Well, for both the qualification test and the determination of the amount of the grant payable, it seems that losses have a full impact. Where there is just one year to refer to (2018/19) then a loss in that year will mean that the profits would be less than £50,000 (self-evidently) but the “more than 50%” test couldn’t be satisfied and, of course, even if it could 80% of a loss amounts to a negative figure, so no grant.

Where an average period is referred to, then the loss would definitely have a diminishing effect on the average. This could be good for “qualification” but could then reduce the amount to which 80% is applied to determine how much the grant would be.

The examples below, based on the gov.uk website, illustrate this.

HMRC say that to determine trading profits “We will use the figures on your tax returns for your total trading income (turnover), then deduct any allowable business expenses and capital expenditure.

Allowable expenses include:

• office costs, for example stationery or phone bills
• travel costs, for example fuel, parking, train or bus fares
• clothing expenses, for example uniforms
• staff costs, for example salaries or subcontractor costs
• things you buy to sell on, for example stock or raw materials
• financial costs, for example insurance or bank charges
• costs of your business premises, for example heating, lighting, business rates
• advertising or marketing, for example website costs
• training courses related to your business, for example refresher courses

It also includes:

• any business expenses deducted through the trading allowance
• capital allowances, used to buy assets used in your business
• qualifying care relief
• flat rate expenses

We will not deduct from your trading profits:

• any losses carried forward from previous years
• your personal allowance”

Example 1

If your total trading income (turnover) in each of the tax years 2016 to 2017, 2017 to 2018 and 2018 to 2019 was £20,000, and you claimed the £1,000 trading allowance each year.

This is worked out as:

1. £20,000 deduct the trading allowance of £1,000 = £19,000
2. Multiply £19,000 by 3 = £57,000
3. Divide £57,000 by 3 = £19,000

Your average trading profit would be £19,000.

If you have more than one trade in the same tax year

We will add together all profits and losses for all these trades to work out your trading profit.

Example 2

If you only traded in the tax year 2018 to 2019, and made a £60,000 profit for your first trade, and then a £20,000 loss for your second trade, your trading profit for that year would be:

Trade 1 £60,000 profit deduct trade 2 £20,000 loss = £40,000

If you traded for more than one year

To work out your average trading profit we will add together all profits and losses for all tax years you’ve had continuous trade.

Example 3

If you made:

• £60,000 profit in tax year 2016 to 2017
• £60,000 profit in tax year 2017 to 2018
• £30,000 loss in tax year 2018 to 2019

1. Add £60,000 and £60,000 then deduct £30,000 loss = £90,000
2. Then divide £90,000 by 3

Your average trading profit for the 3 tax years would be £30,000.