Coronavirus: tax treatment of post-cessation grant money

Coronavirus support

The general rule for coronavirus support payments (CSPs) is that they count as income for the purpose of calculating profits or losses. Generally accepted accounting principles (GAAP) should be used when including CSPs as income in the business accounts unless tax rules override them or the business doesn’t follow GAAP when preparing accounts. However, there are two exceptions to this.

The first exception is for payments under the Self-Employment Income Support Scheme (SEISS), which are taxable in 2020/21, irrespective of where accountancy principles would attribute them.

The second exception is where the business has ceased, but a payment under one of the support schemes has been made subsequently.

Post-cessation receipts

The legislation says any part of a CSP that isn’t “referable” to the carrying on of the business is taxable as a “post-cessation receipt”. Fortunately, as it stands, the effect of both the special post-cessation and the SEISS rules produce the same outcome, i.e. they both cause the payment to be taxable for 2020/21. However, our understanding is that the post-cessation rule trumps that for the SEISS. This might be important when working out the tax on it.

Choose the tax year

Where the post-cessation receipts rule applies to a CSP (SEISS or otherwise) it’s taxable for the tax year in which it is received. So, because most if not all CSPs were paid in 2020/21 they are wholly taxable for that year. However, the general rules for post-cessation receipts, not just those in respect of CSPs, allow a business to elect for the payment to be treated as if it had been received on the last day that the business traded. Expenses incurred in obtaining the post-cessation amount are tax deductible from it. In practice, it seems unlikely that there would be any such expenses for a CSP.

Example. John’s business ceased trading at the end of May 2020. His final accounts cover the period from 1 November 2019 to 31 May 2020. They show a profit for tax purposes of £3,000. John received a coronavirus grant of £4,000 in July 2020. It’s taxable for 2020/21 under the post-cessation receipts rule. However, John can elect to treat it as if it was received on 31 May 2020. The effect of this is that the profit is increased to £7,000 (£3,000 +£4,000). £5,000 of this is taxable in 2019/20 and £2,000 in 2020/21.

In this example, John should review his tax position for 2019/20 and 2020/21 and check whether an election to carry back the post-cessation receipt will reduce or increase his tax bill. As 2020/21 doesn’t end until 5 April 2021 he can wait until after that date to make his review which will mean he can properly assess the effect of an election. He has up to six years in which to make an election.

Companies that receive a CSP for a business which has ceased and which counts as a post-cessation receipt can also make an election to treat it as income received on the last day of trading.