HMRC is consulting on draft legislation that would clarify the tax position of COVID-19 support payments made by the Government, and the circumstances in which recipients of payments could be taxed where payments were not due or misapplied. In our view, the detail may change but the broad principles will remain the same.
HMRC's starting point is that businesses paid Coronavirus Job Retention Scheme (CJRS) payments to pay furloughed staff, the self-employed in receipt of Self-employment Income Support Scheme (SEISS) payments and grant recipients were provided with income ("Replacement Income") to replace income that, had it been received, would have been taxable. So on that basis, the Replacement Income should be taxable.
In addition, it provides for businesses not entitled to Government support to be liable to tax to repay that "unjustified support" (e.g. where CJRS receipts were not passed on to furloughed staff at all or within a reasonable time). In certain insolvency situations, but only where conditions are met, directors may be jointly and severally liable with the insolvent company for the unjustified support.
What support payments are in scope?
These include CJRS; SEISS; grants under the Small Business Grant Fund (SBGF), Retail, Hospitality and Leisure Grant Fund (RHLG), the Discretionary Grant Fund (DGF) and similar schemes in Scotland, Wales and Northern Ireland; and any other support arrangements to be listed in regulations. You can find guidance on this here.
Does this mean I pay more tax ?
In general, if a business or self-employed person had received income (including grants from Government) it would have been taxable on those amounts, but reduced by tax deductible payments such as wages. So to the extent that the Replacement Income is used to pay those types of costs and the business continues, in many cases the outcome should be the same.
Does the type of business make a difference?
Not particularly. Trading businesses, property rental businesses or investment businesses are subject to broadly similar rules. And for businesses which don't survive, the new rules provide that the payments are potentially taxable as "post cessation receipts".
I'm worried my business may not survive - will I have to repay the Replacement Income?
Normally the liability to repay (and/or meet penalties) will fall on the claimant. So for instance in the case of the CJRS normally, the employer would have to repay CJRS received where payments were not due (e.g. the money was not paid to furloughed employees or the original "no work during the minimum three week furlough period" condition broken). Penalties may be imposed for not notifying HMRC of an obligation to pay tax (i.e. in effect to repay unjustified support).
HMRC will only be able to make a director jointly and severally liable with a company which is, or at risk of becoming, insolvent where all the following conditions are met. The director was both responsible for management of the company at the time (that the circumstances giving rise to pay tax in respect unjustified support arose), and knew that the company was not entitled to it. There is a serious risk that the tax to collect the unjustified support will not be paid by the company and it is, or there is a serious risk that the company will be, subject to an insolvency procedure.