SEISS 5th grant – tricky sales test now revealed

To apply for the 5th Self Employed Income Support Scheme grant, you will need 2 different turnover figures.

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As in the past, we as agents are not permitted to prepare the claim on your behalf, but we wanted to warn you that you may need to call us, as homework will be required if you are not to fall at the first hurdle.

Qualifying conditions

When applying for the first two SEISS grants you had to make a declaration that your business had been adversely affected’ by the Covid restrictions, which is a term open to much interpretation.

To qualify for the third and fourth SEISS grants you also had to declare that your sales had reduced in the qualifying period due to the pandemic, compared to what would reasonably be expected for that period. However, you were not specifically asked to supply any figures to back up this assertion that sales were less than expected.

We were warned back in June that HMRC was tightening up the turnover test for the fifth SEISS grant and that you would have to prove that your sales had reduced in order to qualify. HMRC has now released guidance on how to work out turnover for this test, but we don’t consider it the most logical calculation.

There are four steps to achieve the two figures necessary for the application:

Step 1: 2020/21 turnover

Forget basis periods and accounting periods, what HMRC wants here is the turnover that fits almost exactly into the tax year 2020/21. This is the gross sales received in a 12-month period that started from 1 April 2020 to 5 April 2020 - essentially the sales recorded in that year.

Where you make up your accounts for any period other than the tax year, this turnover figure will not be the taxable turnover for the tax year 2020/21. However, the HMRC guidance seems deliberately designed to confuse, as it tells you to refer to your 2020/21 self-assessment tax return to find out your turnover figure!

The fifth bullet point under “where to find your turnover figure” does advise the taxpayer to ask their accountant for help.

Step 2: Adjustments for grants

HMRC suggests that checking the business bank account for money received for customers is a good way to determine the turnover figure for the required 12-month period(!).

Where the taxpayer has treated ‘money in’ as turnover they must then deduct any amounts of Covid-related business support grants received from that figure. This includes SEISS and Eat Out to Help Out grants, and any local authority grants. Although these grants are all taxable and must be included in the taxable profit reported on the trader’s tax return, they are not part of the turnover figure for this exercise.

Partnerships

The directions for partners had us scratching our heads!

Partners who have no other business are told to use the partnership’s total turnover figure for the year to April 2020, with no adjustment for the proportion relating to the particular partner’s profit share.

Partners who also have another concurrent business, or who joined the partnership in 2020/21, must include only the proportion of the partnership turnover that relates to their profit share in their reference year (see step 3).

Step 3: Reference year

The reference year is used to determine the turnover figure used as the base comparison to the 2020/21 turnover (result of step 2). 

For most taxpayers, the reference year is the turnover reported on the 2019/20 tax return, but for new partners it will be turnover/ profit share for 2020/21. If 2019/20 was an unusually low year, the reference year turnover is that reported on the 2018/19 tax return. 

Note the guidance has now switched to looking at turnover for an accounting period not the turnover received in the tax year. For a business that makes up accounts to 30 April, it will compare the sales booked in:

  • Reference year: 1 May 2018 to 30 April 2019; to
  • 2020/21: 6 April 2020 to 5 April 2021

Step 4: Compare the figures

Only where the reference year turnover is higher than the 2020/21 turnover (result of Step 2) will the taxpayer qualify for the SEISS-5 grant. 

If the 2020/21 turnover has reduced by 30% or more compared to the turnover in the reference period, the grant will be 80% of three months average profits capped at £7,500. In other cases where the reduction in turnover is less than 30%, the grant is 30% of three months average profits capped at £2,850.

Remember in all cases the comparison is of turnover (sales) not profits of the business.

We really hope that this guidance is clarified in the near future, as currently it includes so many misleading and confusing statements that even the most diligent and honest of taxpayers will have difficulty in following the instructions.