Many businesses affected by the current crisis have received financial help from the Small Business Grant Fund (SBGF) and Retail, Hospitality and Leisure Grant Fund (RHLGF). If your business has received such a grant, do you have to pay tax on it?
Taxable or non-taxable income?
Many business owners have been confused by the commentary in the public domain on the tax treatment of these grants. Some of the guidance refers to the grants being “potentially taxable” while others say that they are taxable.
What’s the right treatment? SBGF and RHLGF grants are classed as business income and should be recorded in your accounts as such. Whether you record them as sales or other income in your accounts, the grants are taxable income – the tax treatment of such payments is well established, so the Government isn’t being unfair in any way by classing such payments as taxable.
Whether you’ll end up paying tax on the grant income will depend on whether your business makes a profit in the year of receipt or the grant just reduces a business loss.
Example
Liam runs a barbers shop. He had to close his business when the lockdown was introduced in March 2020. He doesn’t re-open the shop until September 2020. Liam’s financial year runs from 1 October to 30 September. In April 2020, Liam receives a grant of £10,000.
Due to the loss of business, Liam’s accounts for the year to 30 September 2020 show a loss of £15,000. This loss would have been £25,000 had he not received the £10,000 grant. While the grant is taxable business income, it has only reduced a business loss, therefore, there is no tax to pay on the grant.
Had Liam’s accounts to 30 September 2020 shown a profit of £15,000 and this included the £10,000 grant income, Liam would pay tax on the grant income as his business has generated a profit.
VAT treatment
VAT only applies to payments received in return for the supply of goods or services.
Grant income doesn’t require the receiver to provide anything for it, therefore, the income is outside the scope of VAT. Note that this “outside the scope of VAT” treatment is different from being classed as “exempt” income.
If you need advice on this or any other accountancy, tax and business issue, get in touch for a no-obligation, free discussion – see our Contact Us page for how to reach us.
Keeping you compliant | Saving you tax | Helping you grow
Information in this publication is intended to provide only a general outline of the subjects covered. It should neither be regarded as comprehensive nor sufficient for making decisions, nor should it be used in place of professional advice. Whyatt Accountancy and the writer accept no responsibility for any loss arising from any action taken or not taken by anyone using this material.