From the time that the Chancellor first announced economic support packages it was made clear that in many cases the funds received would be taxable in the hands of the recipient. With the cost of these packages alone now expected to be around £132.5bn (according to the OBR) it is perhaps no surprise that the Government is now putting legislation in place to collect the tax on it and clawback funds claimed in error or fraudulently. The legislation is being rushed through by including it in the current Finance Bill which is expected to become law by the end of June 2020.
The current proposals include very tight deadlines to report and correct the payments received in error or through wrongful claims. There are significant penalty implications for those who do not comply.
As there are now numerous support packages offered to individuals and businesses it is unsurprising that they are not all treated the same in the draft legislation that has now been published. The legislation makes a distinction between earnings support payments - the Coronavirus Job Retention Scheme (CJRS) and Self-employed income support scheme (SEISS) – and the other grants available to businesses, namely:
- Small business grant fund
- The retail, hospitality & leisure grant fund
- Local authority discretionary grants fund
- The equivalent schemes in all regions of the United Kingdom.
It should be noted that while the various loan arrangements available to businesses can have a tax impact in EU state aid terms (read more), they are not affected by this new legislation.
Income support payments (CJRS and SEISS) are to be taxed as a business income for the recipient and taxed at corporation tax rates for companies and income tax rates for individuals. However, there is a practical problem with the SEISS payment. Although the scheme started in March 2020, all SEISS grant income is to be taxable in the 2020/21 tax year (expected to be achieved by making it taxable on the receipts/cash basis – regardless of whether or not the individual accounts on a cash or accruals basis). This will mean it is recorded in the 2020/21 tax return.
In contrast, the other grant payments are added to the normal trading profits of businesses and individuals that receive them, and even where the business has ceased trading, they are to be treated as a post cessation receipt. This means that individuals and businesses will only pay tax on these grants if they have made a profit.
With the support payments added to business income, tax on the payments is payable on the normal due dates for individuals and companies. For individuals this means that the liability will be reported and paid for the 2020/21 tax year so must be paid by 31 January 2022. As the payment is treated as business income, NIC will be payable on it where appropriate.
For companies, tax payment dates will follow the usual cycle and be due 9 months and one day after the end of the accounting period in which the support payment is received. However, for large companies making quarterly instalment payments, theoretically, depending on the company’s accounting date, tax on the support payments may need to be reflect on payments falling due before the legislation has even been enacted. It is expected that HMRC will provide guidance on payment dates in such cases and take an even handed approach to the application of interest on ‘late’ payments.
However, as you would expect, support payments are exempt from tax in some situations involving charities, mutual trading, community amateur sports clubs etc.
Clawback rules and disclosure deadline
The draft legislation facilitates the clawback of CJRS & SEISS payments that the recipient was not entitled to by converting each £ of excess or wrongly claimed support payment into a £ of income tax liability – i.e. 100% clawback. By deeming it to be a tax liability, the Government can then use HMRC’s established legal and practical machinery for tax collection to clawback the funds. HMRC is also introducing a new power to assess this income tax liability which will be available to it as soon as the draft legislation completes its passage through Parliament.
For the CJRS there is also an additional rule that, as well as being entitled to the furlough related payment, the employer must have paid the funds to furloughed staff within “a reasonable period” (not yet defined). Failure to do so can result in the funds being clawed back – ie the 100% tax rate is applied rather than the usual corporation tax or income tax due on the receipts.
Where a business or individual is aware that they received or retained any government support payment in error, this must be notified to HMRC. The proposed deadline for notifying HMRC is the earlier of:
- 30 days from Royal Assent to the Finance Bill
- 30 days from the receipt of the payment (with special rules for CJRS payments).
Given that support payments have been made for several months now the proposed deadline seems short. There could be particular problems with the CJRS as the claims calculation is complex and until 5 June, it was not possible to correct errors in claims for one furlough pay period by adjusting a claim for a subsequent period. Read more.
As the clawback amounts are treated as tax, they are due on the usual dates (as explained above). Therefore, depending on their accounting date, large companies who have made incorrect claims for support payments could face clawback charges that will need be paid soon through quarterly instalment payments. It is not currently clear whether such clawback liabilities will affect individual taxpayer’s payments on account for 2020/21 but it does appear that they will not trigger an NIC charge.
Where a company becomes insolvent but a clawback of a support payment is identified as necessary by HMRC, the former officers/directors of the business will have joint and several liability for the amount to be clawed back.
While the draft legislation contains no specific penalties for taxpayers who have made a mistake/error in any claim for support from the Government, it does contain rules to penalise those who do not notify HMRC of their error within the time limit explained above. The ‘failure to notify’ penalty has been used by HMRC in other tax enforcement campaigns.
Where the taxpayer knew that they were not entitled to receive/retain the support payment when the tax was due and failed to notify then HMRC will automatically apply its penalty rate for “deliberate and concealed” actions. This means that individuals and businesses face penalties of 30-100% (for voluntary disclosure after the deadline) or 50-100% (for prompted disclosure after the deadline). If mistakes are made in tax returns then HMRC can consider imposing error penalties of up to 100% of the tax depending on the reason why the errors are made. But perhaps worse, where a 50-100% penalty is charged, companies and individuals may be treated as “deliberate defaulters” and be publicly named on HMRC’s website.
It is understood that HMRC had received around 1,900 reports of fraudulent claims under CJRS to the end of May 2020 so it is clear that it will want to be seen to take action on these cases urgently once the legislation is in place.
While it is possible that the notification deadline for errors made with support claims will extended (beyond 30 days) as the legislation goes through Parliament, it is clear that businesses and individuals should check carefully that they were indeed eligible for the Government support payment that they received and have not over claimed. It makes sense to be ready to notify HMRC about such errors as soon as the notification mechanism becomes available.
For help and advice on calculating CJRS claims please contact Geraldine Browne. For help and advice on tax disputes and correcting failures to notify HMRC of mistakes in claims please contact Maybeth Shaw or Claire McGuigan.