Last updated 19 May 2020
On 26 March 2020, the Government announced a new support package for those who are self-employed or a member of a partnership and have lost income due to the COVID-19 crisis.
Our main article on The Self-Employed Income Support Scheme (the ‘scheme’) sets out who is (and isn’t) eligible for this scheme, how HMRC will calculate the amounts due and the claims process. The purpose of this article is to further define some of the terms used by HMRC in respect of the scheme, as well as covering some other frequently asked questions.
What are my ‘trading profits’?
The level of an individual’s trading profits affects both their eligibility for the scheme, and the amount they may receive.
HMRC guidance indicates that, in calculating trading profits, they will deduct:
- Allowable business expenses (e.g. deductible costs of travel, premises, staff stock etc.).
- The £1,000 trading allowance (where claimed instead of actual expenses)
- Capital allowances
- Flat rate expenses
However, they will not take into account:
- The personal allowance
- Any losses carried forward from previous years.
Effectively, this means that trading profits should:
- For the self-employed, be the amount shown on your tax return as ‘total taxable profits from this business’, after adding back any losses brought forward from previous years.
- For partners, be the amount shown on your tax return as ‘your share of the total taxable profits from the partnership’s business’, after adding back any losses brought forward from previous years (see below for more on how the scheme operates for partners).
- For paper short returns, be the figure shown as ‘profit’.
Other points to note:
- If you had more than one trade in the same tax year, HMRC will add together profits and losses of all those trades when calculating your trading profit.
- If you claim averaging relief as a farmer, market gardener, creative author or artist, HMRC will use the amount of profit before the impact of averaging claims to work out eligibility and how much you will receive.
How will HMRC calculate my ‘average trading profits’?
The level of an individual’s average trading profits affects both their eligibility for the scheme, and the amount they may receive.
To work out average trading profits, HMRC will add together all profits and losses for all tax years in which you’ve had a continuous trade.
This means that exactly how average trading profits are calculated will depend upon which of the tax years 2016-17, 2017-18 and 2018-19 you traded in:
- If you traded in all three tax years, it will be the average trading profits for all three years.
- If you did not trade in 2016-17, it will be the average trading profits for the tax years 2017-18 and 2018-19
- If you did not trade in 2017-18, HMRC will use the trading profits for 2018-19 only
When looking at average trading profits, HMRC will not take into account the fact that you may have only traded for part of a tax year. For example, if you started trading part-way through a tax year – so on 1 September 2017, say, - then although you only traded for seven months in 2017/18, the average will be calculated assuming that you traded throughout 2017/18. HMRC say that they do not have the ability to pro-rate claims for individuals who started trading mid-year.
Different rules apply for those subject to the loan charge (effectively, these ignore the trading profits in the tax year 2018-19). The examples below assume that the taxpayer is not subject to the loan charge.
A taxpayer traded in all three tax years 2016-17, 2017-18 and 2018-19 and had the following profits and losses:
- 2016-17: £60,000 profit
- 2017-18: £60,000 profit
- 2018-19: £30,000 loss
Their average profit = (£60,000 + £60,000 - £30,000)/3 = £30,000
A taxpayer did not trade in 2016-17, but traded in 2017-18 and 2018-19 and had the following profits and losses:
- 2016-17: Did not trade
- 2017-18: £25,000 profit
- 2018-19: £45,000 profit
Their average profit = (£25,000 + £45,000)/2 = £35,000
What is my non-trading income?
The level of an individual’s non-trading income is taken into account when determining their eligibility for the scheme.
When calculating your non-trading income, HMRC will take the figure for total income received on your tax return and deduct your trading income. Non-trading income will therefore include:
- Property income
- Savings income
- Overseas income
- Miscellaneous income (including taxable social security income).
I only traded for part of a tax year - will HMRC take this into account?
No - when considering eligibility for the scheme, and the amount eligible individuals receive, HMRC will only look at the overall figures declared on submitted tax returns. They will not pro rata or annualise any of these figures to take into account the fact an individual only started to trade part way through a tax year.
What is meant by ‘adversely affected’?
In order to be eligible for the scheme, an individual has to carry on a trade which has been adversely affected by COVID-19.
When looking at whether a trade has been adversely affected, there is no specific monetary threshold, and no requirement for income or profits to have fallen by a certain amount.
Instead, HMRC gives the following examples of how a business could be adversely affected by COVID-19:
you’re unable to work because you:
- are shielding
- are self-isolating
- are on sick leave because of coronavirus
- have caring responsibilities because of coronavirus
you’ve had to scale down or temporarily stop trading because:
- your supply chain has been interrupted
- you have fewer or no customers or clients
- your staff are unable to come in to work
Those claiming under the scheme should evidence how and why their business has been adversely affected by COVID-19 and keep a record of this.
I am a company director – am I eligible?
We have received a number of queries about company directors – particularly those running family businesses and those with personal service companies (PSCs) – and asking if they can claim under the scheme.
These individuals often receive a modest salary and take the rest of their income as dividends. While some may consider themselves effectively self-employed, they are not actually self-employed from a legal perspective, and are not eligible for the self-employed scheme, but there is guidance on the Job Retention Scheme regarding whether they can furlough themselves and claim some relief under that scheme.
Can non-resident and non-domiciled individuals claim under the scheme?
The scheme is open to non-residents, and those claiming the remittance basis.
However, they will be required to certify that their trading profits are at least equal to their other worldwide income (including overseas income) for any relevant tax years.
How does the scheme work for partnerships?
If you are a member of a partnership, eligibility will be worked out based on your share of the partnership’s trading profits.
As a partner, trading profits will effectively be the amount shown on your tax return as ‘your share of the total taxable profits from the partnership’s business’, after adding back any losses brought forward from previous years.
Depending on partnership profit share ratios, this could result in some partners in a partnership being eligible for the scheme, whereas others are not.
For example, let’s imagine a partnership only traded in 2018/19, and neither of the partners nor the partnership had any other income. The partnership made £100,000 of trading profits in tax year 2018-19 and distributed these between their two partners as follows:
- Partner A - £25,000
- Partner B - £75,000
Partner A would be eligible for the scheme, as their trading profits do not exceed £50,000. However, Partner B would not be.
If the partnership rules required the grant to be paid into the partnership pot, the partnership must give the full grant back to Partner A.
Can my tax agent help me claim?
Agents can use HMRC’s online eligibility checker to see if their clients are eligible for the scheme.
However, the actual claim cannot be made by an agent – the taxpayer has to make the claim personally. Tax agents may however help or support the taxpayer in doing so. HMRC are encouraging tax agents to support their clients by helping them to determine whether or not they are eligible for the scheme. As set out further below (under 'What if I disagree with HMRC?'), agents can also request reviews of eligibility and grant amounts on behalf of their clients.
All claims are made online, and the process is relatively straightforward. In order to make a claim you will need all of the following information:
- Your self-assessment Unique Taxpayer Reference (UTR) number;
- Your National Insurance number;
- Your Government Gateway user ID and password; and
- Details of the bank account you want the grant to be paid into.
When claiming you will also be asked to confirm that your business has been adversely affected by coronavirus, that you traded in tax year 2019-20 and intend to continue to trade in tax year 2020/21.
We have been informed by HMRC that some agents are using their client’s Government Gateway credentials to make claims on their behalf. Agents should not do this – as well as having PCRT implications it will trigger a fraud alert and result in delays in receiving payment.
If an agent has claimed on a client’s behalf already, their payment may be delayed. If clients are affected, they will have to contact HMRC separately to resolve the issue.
What happens when I’ve submitted a claim?
You should be told straight away if your claim is approved, and payment should then follow within six working days. Payment will be by way of a single instalment directly into your bank account. Once your claim has ben approved you can check the status of your payment online.
You must keep a record of the amount claimed, your claim reference number and evidence that your business has been adversely affected by coronavirus.
What records do I need to keep?
You should, in line with normal self-employment record keeping requirements, keep a record of:
- the amount claimed; and
- the claim reference number.
You should also keep any evidence that your business has been adversely affected by coronavirus. HMRC's guidance indicates that this could include:
- business accounts showing a reduction in turnover
- confirmation of any coronavirus-related business loans you have received
- dates your business has to close due to lockdown restrictions
- dates your staff were unable to work due to coronavirus symptoms, shielding or caring responsibilities due to school closures.
What if I disagree with HMRC?
If you believe you are eligible for the scheme, but HMRC’s eligibility checker service indicates you are not, you can ask HMRC to review their decision by following the link from the decision screen. Agents can also use this route to request a review on their client's behalf - the first question on clicking the link should ask 'are you an agent?'
When the eligibility checker was first launched, there were reports of such ‘false negatives’ being given, mainly in cases where the 2018/19 tax return had been filed after 31 January 2020 (but before the 23 April 2020 cut off point) or a return had been filed on paper. We understand that these issues have now been resolved, but if you do fall into one of these cases it may be worth rerunning the eligibility checker before contacting HMRC.
If HMRC agree you are eligible, but you disagree with their calculation of the amount you are entitled to, you should complete your claim anyway to ensure that you receive a payment. You can then ask HMRC to review their decision.
Agents can also request a review of their client's grant amount here. Agents should use their own government gateway log in details, and then complete the online form on behalf of their client. They will need:
- the client's claim reference;
- the client's NI number;
- the client's UTR;
- details as to why they think the amount is wrong.
Can I keep working if I make a claim?
If you receive a grant under the scheme you can continue to work in your existing trade, start a new trade, take on employment (including voluntary work) or perform duties as an armed forces reservist.
There is therefore no need to ‘down tools’ just because you have made a claim under the scheme. However, as set out above, your business does need to have been adversely affected by COVID-19, and you will be asked to confirm this when making a claim.
How do I account for any payments received?
The grant will be paid directly into your bank account in one instalment.
The amount received will be subject to income tax and National Insurance contributions, but does not have to be repaid. You will need to report the grant on your self-assessment tax return.
Although a single payment will be received, this will be in respect of the months March, April and May 2020, and it will therefore span two tax years. However, we understand that the SEISS grant is taxable in the year of receipt, meaning that there will be no apportionment back to the tax year 2019/20 and that this will be confirmed shortly by HMRC.
If you claim Universal Credit, any amounts received need to be reported as part of your self-employment income and may affect the amount of Universal Credit you get. If you claim tax credits, you will need to report the grant as self-employment income and that you’re working 16 hours a week. The grant should be treated as income received on the day it's paid for any Universal Credit claims or tax credit changes.