SEISS grants are taxed in the tax year they are received, which may not be the same tax year in which the profits they are designed to replace would have been taxed. This can lead to a bunching of taxable income in 2020/21 and a corresponding low taxable income in 2021/22.
Selina is self-employed with an accounting year end of 30 April. Her actual profits are:
- Year to 30 April 2020: £36,000 taxed in 2020/21
- Year to 30 April 2021: £5,000 taxed in 2021/22
She received SEISS grants totalling £16,500 in 2020/21 which are taxable in that year. This means her taxable income before allowances for 2020/21 is £52,500, which pushes her into higher rate tax and potentially make her subject to the high income child benefit charge.
In 2021/22 Selina claimed an SEISS-4 grant of £2400. She will not be eligible for the SEISS-5 grant as her business is now fully open. Her taxable income for 2021/22 will be £7,400, which is covered by her personal allowance, and indeed wastes some of her allowance.
One solution could be to change Selina’s accounting date to lengthen the accounting period so it ends on say 30 June 2020. This longer period will take in some losses realised in the shut-down period in May and June 2020. The next accounting period would then run from 1 July 2020 to 30 June 2021, absorbing more profits after business opened fully again in 2021.
It’s too late to change the accounting period that ended in 2019/20, as HMRC had to be notified of that change by 31 January 2021.
When changing an accounting date, it is important to take into account the level of any other taxable income, any overlap relief available from the commencement of the trade, and the projected profits.
A change in accounting date will also affect when the business will be mandated into MTD ITSA reporting, which will be compulsory for accounting periods starting on or after 6 April 2023.
Our business tax experts are happy to help with these tricky calculations.
Written by the Tax Advice Network