Paying Tax on Covid-19 Grants

By Anita Jaynes on 21 September, 2021

Post sponsored by Purple Lime

For thousands of businesses in the UK, government grants have been a lifeline over the last 18 months. With income being unstable, and for some disappearing completely during lockdowns, Covid-19 relief grants have provided some essential cashflow and allowed many businesses to keep running through some of the most trying times. But as things start to pick back up and many industries are well on the road to recovery, they are being hit with a nasty surprise. A tax bill for all of that generous government help they received. 

What Support was Offered?

Over the course of the pandemic there has been a lot of different financial support provided, both from the higher government and from local authorities. This included grants, loans, deferrals, and rates relief, all designed to cover as many businesses as possible and provide a much-needed safety net as we went through lockdown after lockdown. Businesses have been able to choose the support that was right for them from a long list, which includes:

  • The job retention scheme
  • Claiming back statutory sick pay paid to employees due to Covid-19
  • Deferring VAT due to Covid-19
  • Business rates relief
  • Discretionary grant funds
  • Kickstart scheme
  • Restart grant scheme
  • Self-employment income support grants
  • Recovery loans for businesses of any size
  • Additional restrictions grants
  • Small business grant fund

And many more besides. Some of these financial supports were temporary, with businesses expected to pay them back after a certain time. And many of those are now already being repaid. But some were given as grants, which were not intended to be repaid, and were provided as a way to give particularly vulnerable businesses a lifeline. Each type of financial support was different, and businesses were expected to read and understand all terms before they agreed to receive it. However, it seems that many businesses who received grants were unaware of one important thing.

Grant Income is Taxable

That’s right, with most grants given out, there would be a tax bill to go with it. This is the thing that seems to have caught a lot of businesses out – not in the grants themselves, but in the accounting for them. Specifically, the fact that government grants from both main government and local authorities are considered taxable income. Most of the grants available were announced in the Budget in March 2020, with funding coming from local councils 2020/21 budgets. This meant that most businesses will not have received their grants until after April 5th 2020 (unless they were very quick off the mark!). This means that they did not need to declare it or pay tax on it until April 2021. That date has of course since come and gone, and businesses should have had plenty of time to restart and establish recovering cash flow. But businesses, and self-employed business owners in particular are being hit with the surprise news that they need to pay tax on the grants they received. Not only that, but self-employed business owners are required to pay Class 4 National Insurance payments on them too, with both tax and NI contributions payable by 31st January 2022.

While this has come as a nasty surprise to many businesses, it really should not have. Because grants are generally considered taxable income by HMRC, regardless of where they come from. And since the Covid-19 grants did not specifically state they were not taxable, they should have been assumed to be taxable. Specifically, the government have confirmed that the grants subject to income and corporation tax are:

  • Self-employment income support scheme
  • Coronavirus job retention scheme
  • Discretionary grant fund
  • Small business grant fund
  • Retail, hospitality, and leisure grant fund
  • Other payments made by public authorities to businesses in response to Covid-19, and any other Covid-19 support scheme specified or described in regulations made or to be made by the treasury.

Whether or not any tax is actually due will depend on the business profits of the recipient and any other taxable income or tax allowances the company or individual might have. 

The confusion, we think, has come from the draft legislation by the government called the Finance Bill 2020. In this legislation, the government states that grant payments are not subject to VAT, as they have not been made in return for the supply of goods or services, and that grants do not need to be included in VAT returns, nor count towards the VAT registration threshold. Which is fantastic news – but it does not mean they are exempt from tax.If you are not sure if your grant will be taxable, or you need some advice on how to handle an unexpected tax bill from a grant, we would love to help. At Purple Lime we are all about proactive solutions, and can work with you to understand your business, provide the best short-term solution for your tax issues, and create a long-term strategy that saves you money and improves your business. If you would like to know more, please get in touch by emailing hello@purplelime.uk.com, or calling us on 01249 691360.

To find out more about Purple Lime visit: www.purplelime.uk.com