A new clause and schedule to the current Finance Bill sets out how coronavirus support payments will be taxed, how overpayments will be recovered, and the severe penalties chargeable where businesses have deliberately flouted the rules.
Although the payments made by government agencies to support employers and self-employed businesses through the coronavirus pandemic are described as ‘grants’, they are nevertheless taxable because they are intended to replace lost earnings and revenue. The detailed tax rules have only recently become available.
In this blog I look briefly at draft legislation that was issued on 29 May 2020 for consultation with a very short response deadline of 23:45 on 12 June, before being tabled as a new clause and schedule to the Finance Bill currently going through Parliament. The draft legislation is accompanied by a draft explanatory note and tax information and impact note.
The proposed legislation covers payments under the Coronavirus Job Retention Scheme (CJRS), the Self-Employed Income Support Scheme (SEISS), coronavirus business support schemes and any others that may be specified in directions or regulations issued by the government. Examples of coronavirus business support schemes (cited as at the date of the draft legislation) are:
- the small business grant fund (SBGF) first announced on 11 March and published on 1 April
- the retail, hospitality and leisure grant fund (RHLGF) announced on 17 March
- the local authority discretionary grant fund (DGF) announced on 13 May, and
- similar schemes used in the devolved administrations of Scotland, Wales and Northern Ireland.
All payments covered by the draft clause and schedule are collectively referred to therein as ‘coronavirus support payments’.
Where a person carries on a business alone or in partnership, any coronavirus support payment they receive that is ‘referable to the business’ must be brought into account as a revenue receipt in calculating the profits of the business for income tax or corporation tax purposes (para 1 of the draft Schedule).
The phrase ‘referable to the business’ is further refined by para 3. For example, a coronavirus support payment made under the CJRS is referable to the business of the person entitled to the payment as employer. A payment under the SEISS is referable to the business of the self-employed person to whom the payment relates, unless it is made to a partner in the business who retains it, when it is added to the partner’s share.
The whole of a SEISS payment that is referable to a business is brought into account for tax purposes in the year 2020/21 (para 3(3)), which could mean that someone with an accounting date other than 31 March or 5 April will find themselves paying tax on a SEISS payment a year earlier than it would have accrued under normal accounting principles.
Coronavirus support payments are also taxable if they are classified as post-cessation receipts (para 2), or if they are not brought into account as revenue receipts of a business because no business is being carried on (para 6).
A coronavirus support payment is, broadly, taxed in the same way as the revenue item it replaces so, for example, if received by a charity, it is likely to be exempt from income tax or corporation tax (para 4).
If a payment under the CJRS is made to person A, but it is person B who incurs the employment costs which the CJRS payment is intended to cover, the whole payment is taxable in the hands of person A (para 5).
Recovery of overpaid coronavirus support payment
Where a person receives a coronavirus support payment to which they are not entitled, HMRC can recover it not by requiring a simple repayment, but by making a 100% tax charge. The person is chargeable to income tax in an amount equal to 100% of the sum overpaid, less any amount repaid to HMRC, with no permitted deduction or offset for any ‘loss, deficit, expense or allowance’ (para 8). At present it is not entirely clear how a grant may be repaid to HMRC.
The same applies where the person was originally entitled to receive the payment but has since ceased to be entitled to it, or if the payment is not used for the purposes for which it was made or to defray the employment costs it was intended to reimburse.
The charge applies when the grant is first paid if the recipient was not entitled to it at the outset, or at the point where the recipient ceases to be so entitled.
If HMRC considers that a person has received a coronavirus support payment without being entitled to it, it can recover the tax charged under para 8 by way of assessment subject to the usual time limits (4, 6 or 20 years), and can use its information and inspection powers in FA 2008, Sch 36 to determine whether the recipients of payments were entitled to them (para 9). The taxpayer can dispute the assessment by appealing to the First-tier Tribunal.
Anyone who is chargeable to tax under para 8 because they have received a coronavirus payment to which they were not entitled is obliged to notify HMRC of the fact within 30 days of having become so liable (or within 30 days of Royal Assent to the Finance Act 2020 if earlier), and the Taxes Management Act 1970, section 7 is modified accordingly (para 12).
Penalties for deliberate default
Tax-geared penalties are chargeable for failure to notify if a person knowingly received a coronavirus support payment to which they were not entitled (para 13). In such cases, penalties are chargeable on the basis that the failure was ‘deliberate and concealed’ on the scale set out in para 6 of FA 2008, Sch 41.
Such penalties are charged at:
- a standard percentage of 100% of the potential lost revenue, rising in certain offshore cases to 150% (category 2) and 200% (category 3), or
- a minimum of 50% in cases of prompted disclosure, rising to 85% and 110% in offshore cases, or
- a minimum of 30% rising to 55% and 70% in offshore cases, for unprompted disclosure.
Where the recipient of a coronavirus support payment was a company which has gone into, or is about to go into, liquidation, the directors can be made jointly and severally liable to HMRC for any tax due from the company under para 8, where the directors knew at the time that the company was not entitled to the coronavirus support payment in question (para 15).
The Tax Information and Impact Note states drily: ‘The assessment and penalty provisions in this measure have no impact on compliant businesses’.
Most businesses would probably have expected coronavirus support payments to be taxable in the same way as the revenue they replace. They might even have expected that payments claimed by mistake would be fully recoverable. However, those who have knowingly claimed payments to which they were not entitled, or spent the money in an unauthorised manner, may not have expected to face a possible investigation and penalty of up to 100% of the grant, or even more.
It is unfortunate, though perhaps understandable given the speed at which the support schemes had to be set up, that the penalty rules are available only now. For example, one hears disquieting tales of employers claiming CJRS payments and furloughing their employees, then requiring the employees to work during their period of furlough. If they had known what the penalties were likely to be when making their claims, they might have thought twice – to that extent the deterrent effect has been lost.
However the crisis is far from over, and tax advisers would do well to take note of the new clause and schedule and accompanying materials in order to help not just any clients who have been deliberately non-compliant, but also those who have simply been confused by the complexity of the rules and mistakenly but innocently made the wrong claim. The soundness of any contemporaneous records kept by the business, and the speed with which they make any necessary disclosures, will be key in avoiding a penalty.