Does furlough income for a business count as turnover when looking at VAT registration threshold

Retired_Minky

Was having an interesting (for me) conversation with someone yesterday regarding this scenario:
Theoretical figures:
Say a business has a turnover of £80,000 per annum which is below the VAT registration threshold (currently £85,000). The business is not currently registered for VAT.
Let's say the business takes £10,000 in furlough payments from the government to cover salaries staff during the pandemic. As I understand it this is shown as taxable income on the P&L which you've got to pay your normal tax on. This bit is fine and makes sense.
However as the overall business turnover now exceeds the £85,000 threshold (£80,000 regular turnover plus £10,000 furlough payments) do they need to register for VAT?
If so furlough payments may take a number of businesses over the VAT threshold and potentially be liable for a VAT bill at the end of the year.

hopon

No, it's not turnover and there's no supply. Although it's taxable the normal treatment would be to offset it against the salaries paid.

Retired_Minky

Thanks hopon.
So on the P&L it should be posted to the salaries paid expense account rather than a separate furlough income account.

Pennywise

Retired_Minky said:

Thanks hopon.
So on the P&L it should be posted to the salaries paid expense account rather than a separate furlough income account.

No, Under UK GAAP (FRS: 101, 102 and 105) this should be recorded as other income received.

Jeremy535897

"While businesses are focused on managing their cash flow and taking the steps needed to operate in the Coronavirus world, the last thing on their mind will be the accounting treatment of the furlough grants that more than 800,000 employers have been claiming.

However, as some of our clients have been asking us the question, below is our analysis of the accounting rules applicable to furlough grants.

These payments received from the government for furloughed employees are in the form of a grant and the accounting for these are covered in:

• Section 24 of FRS 102, The Financial Reporting Standard for the UK and Republic of Ireland for entities reporting under UK GAAP, or
• IAS 20, Government Grants for entities reporting under IFRS.

As the grant is intended to cover costs, it should be recognised in profit or loss in the same period in which the related expense is incurred.

UK GAAP reporters, under FRS 102 (or FRS 101 or FRS 105) should record this as other income received.

Under IAS 20, there is an option to net the income off against the related expenses, but this is not permitted under UK GAAP.

Payments received from government under the Coronavirus statutory sick pay rebate scheme are treated in the same way as the furlough grants described above."

From https://mooreks.co.uk/insights/accounting-for-furlough-payments/

This does not change the fact that such receipts are outside the scope of VAT and therefore do not count towards the VAT registration limit. The same applies to the small business grant, RHL grants and SEISS.

Grumpy_chap

Others have answered this in strict accountancy terms, i.e. to report the CJRS grant as "other income" and that the CJRS grant falls outside the scope of VAT.

I, however, ask a different question as I want to understand what value the employee(s) that were furloughed bring to the business.
Please could the OP could outline whether this is a genuine situation they are faced with (and how), or is a made-up hypothetical consideration?

The eligibility for CJRS grant is that the business operations have been affected by coronavirus and employees cannot work for the business while on furlough.  In the OP's situation as described:

1. Business turns over £80k in a normal year (£6,666 per month)
2. CJRS grant received £10k is resulting in additional income to the business, potentially moving above the £85k VAT-threshold.
3. (2) implies the business was not adversely impacted by coronavirus as the normal level of turnover would need to have been maintained in addition to receiving the CJRS grant.
4. Details of the employee salaries have not been shared but, let us assume the business furloughed one employee at a normal monthly salary of £3,125, so furlough paid at £2,500 for four months to make the £10k furlough payment.  
5. If the business is a type that is providing services and business costs other than staff are very low, then it may just be possible to have 2 employees at salary of £3,125 and cover that within the £6,666 monthly turnover rate.  This will be extremely tight because of costs to employ such as employer's NI.
6. The annual turnover £80k is probably not sufficient to support more than two employees, but there must be at least two employees if the business has maintained turnover at normal levels while one employee has been furloughed.  If there was only one employee, the business would have ceased operations and turnover in this period reduced to nil because the furloughed employee cannot work for the business while furloughed.
7. So, the business has one employee less for 4 months, but maintained turnover at normal rate so the CJRS is additional to normal income.  
8. What on earth does that furloughed employee add to the business please?

There are other scenarios, but they suggest fraud in the context of the business claim for CJRS and the requirement that the business cannot maintain the workforce because the operations have been affected by coronavirus:

1. There is only one employee, owner Director, who furloughed themselves but carried on working for the business ?
2. Seasonal business, such as Santa Clause, so the whole £80k turnover is usually earned in November and December, but then there would have been no impact to the business from coronavirus impacts from March through October when the CJRS scheme is in operation ?

I am very keen to understand this situation, why this is not a fraudulent CJRS claim and why the OP does not dismiss the employee that brings no value to the business.

ceh209

Grumpy_chap said:

Others have answered this in strict accountancy terms, i.e. to report the CJRS grant as "other income" and that the CJRS grant falls outside the scope of VAT.

I, however, ask a different question as I want to understand what value the employee(s) that were furloughed bring to the business.
Please could the OP could outline whether this is a genuine situation they are faced with (and how), or is a made-up hypothetical consideration?

The eligibility for CJRS grant is that the business operations have been affected by coronavirus and employees cannot work for the business while on furlough.  In the OP's situation as described:

1. Business turns over £80k in a normal year (£6,666 per month)
2. CJRS grant received £10k is resulting in additional income to the business, potentially moving above the £85k VAT-threshold.
3. (2) implies the business was not adversely impacted by coronavirus as the normal level of turnover would need to have been maintained in addition to receiving the CJRS grant.
4. Details of the employee salaries have not been shared but, let us assume the business furloughed one employee at a normal monthly salary of £3,125, so furlough paid at £2,500 for four months to make the £10k furlough payment.  
5. If the business is a type that is providing services and business costs other than staff are very low, then it may just be possible to have 2 employees at salary of £3,125 and cover that within the £6,666 monthly turnover rate.  This will be extremely tight because of costs to employ such as employer's NI.
6. The annual turnover £80k is probably not sufficient to support more than two employees, but there must be at least two employees if the business has maintained turnover at normal levels while one employee has been furloughed.  If there was only one employee, the business would have ceased operations and turnover in this period reduced to nil because the furloughed employee cannot work for the business while furloughed.
7. So, the business has one employee less for 4 months, but maintained turnover at normal rate so the CJRS is additional to normal income.  
8. What on earth does that furloughed employee add to the business please?

There are other scenarios, but they suggest fraud in the context of the business claim for CJRS and the requirement that the business cannot maintain the workforce because the operations have been affected by coronavirus:

1. There is only one employee, owner Director, who furloughed themselves but carried on working for the business ?
2. Seasonal business, such as Santa Clause, so the whole £80k turnover is usually earned in November and December, but then there would have been no impact to the business from coronavirus impacts from March through October when the CJRS scheme is in operation ?

I am very keen to understand this situation, why this is not a fraudulent CJRS claim and why the OP does not dismiss the employee that brings no value to the business.

Perhaps the business normally makes mostly exempt supplies, and the £80k turnover quoted is only the taxable supplies figure?

Grumpy_chap

Thank you @ceh209 - that is a possibility but it is not how I read the OP. 
It states "a business has a turnover of £80,000 per annum", not "a business has a VAT-taxable turnover of £80,000 per annum"

Jeremy535897

I think the question was hypothetical, and as Grumpy Chap has explained, it is very unlikely to happen, because it would be unlikely that furlough income would exceed turnover lost. Not that it matters anyway, as furlough receipts are outside the scope of VAT.

 It is also worth remembering that one needs to look at whether turnover meets the registration limit on a rolling basis, not just once a year or even once a month, so I suppose a situation could arise where the business fully recovers in September, and turnover goes back up again, and exceeds the past turnover.

se2020

May it depend on when the year end books are made up to?
My year end is start of april so if I had maintained normal work levels/income until the start of march, carried on receiving income from previously issued invoices throughout march and also applied for/received government help during march then this could have shown an increase turnover compared to a previous year although no work had been done since the first day of lockdown?

Jeremy535897

As I said above, the date your books are made up to is irrelevant for VAT registration purposes, although it does provide rather obvious evidence that you may have exceeded the VAT registration limit if turnover exceeds £85,000 in your accounts and your supplies are VATable. Guidance says:
"You must register for VAT with HM Revenue and Customs (HMRC) if it goes over the current registration threshold in a rolling 12-month period. This is not a fixed period like the tax year or the calendar year - it could be any period, for example the start of June to the end of May."

So I was overcautious in my previous post, but it is a monthly, rather than yearly, test.