Unsurprisingly, HMRC has announced how they will be cracking down on incorrect self-employed Covid grant claims. Due to the speed and urgency that claims were made and issued, there are likely to be a number of innocently miscalculated grants.  Claims were made by individuals, often without any involvement from their accountants, or with little up to date financial information.

HMRC is requesting that businesses double-check their calculations and repay HMRC within 90 days of receiving any grants if they were claimed in error.  Keeping a grant that you knew at the time you should not have had, could result in a 100% penalty (ie repaying the full grant – and the same again in fines!)  However, if when you do your 20-21 tax return you then determine that you were not eligible for a grant, as long as the amount is repaid by 31 Jan 2022, no penalty should be due.

If you are self employed, then by now you could potentially have claimed 4 SEISS grants.  The amounts you received have to be separately identified on your tax return, and are included in the tax year in which the grant was received.

To claim the first 2 grants your business had to have been “adversely affected” by Covid in the relevant period.

It may be the case that your business was adversely affected earlier on, but then your trading patterns resumed as normal, so although you claimed the first or second grant you might not have been eligible for the third or fourth grant.

The third grant covered the period 1 November 2020 to 29 January 2021 and for this grant the conditions were different.

To qualify, your business had to have suffered reduced activity, capacity or demand AND as a result, you must have reasonably believed that you would have suffered a “significant reduction” in trading profits for the relevant basis period (this is generally your full financial year, not just this 3 month period.)

There was no requirement for trading profits to be reduced by a certain fixed amount or percentage, but the reduction must be ‘significant’. HMRC say you need to consider your individual and wider business circumstances to determine what is significant!

The conditions for the fourth grant are the same, but cover the period 1 February to 30 April 2021.

So if claimed a grant and then on review, you don’t think you should have – what should you do?

You need to let HMRC know and repay the grant within 90 days of receiving it.  You can do this online.

If you do not do this and you knew that you should have not received the grant at the time of receipt, then HMRC may charge you a penalty, potentially of 100% of the grant received.  However, if you did not realise until later that you should not have received the grant, as long as the grant is repaid by 31 Jan 2022, there should be no additionally penalty incurred.

In any situation it is always better to tell HMRC that you have made an error and the grant needs to be repaid, than let HMRC discover that you were not eligible and raise the assessment themselves.  In this situation, penalties will almost certainly be higher.  Find out more about potential penalties here.

For more information, please contact Rosie Forsyth at Wilkins & Co.

Tax doesn’t have to be taxing – remember HMRC telling you that?

That’s all well and good if you know what you are doing, but tax is pretty daunting when you are setting up on your own or running a small business and would much rather just be getting on with running your business!

However, you do need to at least have an understanding of what tax you will pay and when, so it doesn’t come as a total surprise when you or your accountant come to submit your tax return.

As a self employed person operating as a sole trader then you have to think about both income tax and National Insurance (NIC).

Most people know they have to pay tax at 20% (of something!)  but often the NIC comes as a bit of a shock when they realize this is due as well.

So what is due when you are self-employed?

Income Tax

Income tax is due at 20% of your profit for the year.  Profit is essentially your sales less your costs.  Everyone has a personal allowance of £12,570 in this tax year, so you will not pay tax on the first £12,570 of your income, but after that you pay tax at 20%, up to the basic rate tax threshold (this year £50,270.)  If your income goes over this amount, then your income tax rate goes up to 40%.

National Insurance

Being self employed you pay 2 types of NIC – class 2 and class 4.

Class 2 is a flat rate per week of £3.05 per week (£158.60 per year.)  Although this is calculated as a weekly amount, it is actually paid once a year along with your self-assessment tax bill.  Class 2 NIC gives you an entitlement to state benefits and a state pension when you retire.

If your profits are low (under £6,515 this year), you are exempt from paying class 2 NIC, but you have the option to pay it voluntarily.  This is often a good idea to do, given the entitlement to benefits that it gives you, for a relatively low cost.

Class 4 NIC is based on your profits for the year.  The rate is 9% and you pay this on your profits over £9,569 and up to £50,270.  If your profits are more than this, the rate then falls to 2% on the higher profits.

Class 4 NIC is the one that tends to be forgotten, but at 9% of profit, it can add up.  You could be in a position where you have class 4 NIC due, but not any income tax, if your profits are between £9,569 and £12,500)

SEISS Grants

Just a reminder as well that any SEISS grants received are taxable, and NICable (love that word!) and do need to be included on your tax returns.  The grants are taxable when they are received, so the 4^th grant due to be paid shortly will go on your 21/22 tax return, even though it related to Feb, March and April 21 (most of which is in the 20/21 tax year!)

There is a separate box on your tax return for 20/21 where you put the details of any SEISS grants received – presumably making it easier for HMRC to check your entitlement to it in the first place!

If you would like any further information or help with your tax return for 20/21, then please get in touch with Rosie Forsyth.