IGA News

Coronavirus Corporation Tax and VAT

Coronavirus Corporation Tax and VAT

30 June 2020

“I have received a grant from the government to help with the Coronavirus pandemic but now I’m being told that I have to pay tax on it, is that correct?

In order to assist business through the current crisis the government has introduced a number of measures designed to ease cash flow and make funds available to businesses. With many businesses starting to get back to normal a number of members find themselves in a position where they are evaluating their businesses financial health, including their tax liabilities.

The government has supported business with a number of different grants, the most common within the motor industry has been the Small Business Grant Fund, Rural Rates Relief and Retail, Hospitality and Leisure Grant where members have received either a £10,000 or £25,000 grant depending on their business rate liabilities.

Government guidance for the grants has confirmed that these grants should be treated as an income for the purposes of taxation generally.

Corporation Tax

Corporation tax is a tax on the profits from doing business as a limited company (or certain other clubs and co-operatives).

As any grant received will be defined as an income for the business, it will be considered for the purposes of Corporation Tax. However corporation tax will only apply in the event an entity is profitable.

The current corporation tax on profits is 19% (with some exceptions). However there are capital allowances and other reliefs available which can reduce a company’s tax liability. It is likely that there will be tax reliefs on the expenditure supported by the grants and as such this is something that should be raised with your accountant well in advance of preparing your accounts.

VAT

The government and HMRC have not provided any guidance as to the VAT status of any of the various Coronavirus grants. It is therefore unclear as to whether the grants will be subject to VAT or count towards turnover for VAT registration limits.

That said under normal principles grant income is not given in return for the supply of a service and generally falls outside the scope of VAT. It is therefore likely that any grants received would be outside the scope of VAT and no output VAT should be accounted for. It is also likely that any grant income should be disregarded for VAT registration and deregistration limits.

The applicability of VAT and its calculation is a very complicated area. HMRC have provided further guidance on Grant income which can be found here.

VAT Deferrals

As we are discussing VAT, it should be noted that in order to support business cash flow the government has allowed business to defer VAT payments due between 20 March 2020 and 30 June 2020.

Under the scheme businesses can defer:

  • Quarterly and monthly VAT returns’ payments for the periods ending in February, March and April
  • Payments on account due between 20 March 2020 and 30 June 2020
  • Annual accounting advance payments due between 20 March 2020 and 30 June 2020

However VAT returns must continue to be submitted and any payments due after 30 June must be paid as normal.

If a business chooses to defer any payments these must be made on or before 31 March 2021

You can only defer:

  • Quarterly and monthly VAT returns’ payments for the periods ending in February, March and April
  • Payments on account due between 20 March 2020 and 30 June 2020
  • Annual accounting advance payments due between 20 March 2020 and 30 June 2020

Further guidance on the deferral of VAT can be found here.
In Conclusion

Any grants and income received will have to be accounted for when the dust settles. What if any tax becomes due will depend on how your business has bene able to trade but will only be a percentage of any profits. The precise tax liability of any business is a complicated matter and can only be ascertained by a suitably qualified professional with intimate knowledge of a business’s trading. We strongly advise that any members seek advice from their accountants early to be able to ensure that they accurately accounts or any income in order to reduce any liabilities and ensure they obtain any tax relief to which they are entitled.

This advice is general in nature and will need to be tailored to any one particular situation. Should you find yourself in the situation above, contact the IGA direct member helpline or 0845 305 4230 at any stage for advice and assistance as appropriate.