More SEISS doubts

Grumpy_chap

lisastevo said:

So are we now thinking that being up on profits including the grants makes us ineligible even though actual trading profits are down?

There is a logic in this.  That impact on profits is assessed over the basis period (business accounting year).  It is an assessment of what the profits are this period versus what they would have been without coronavirus.  That means simple reference to last year may not be correct.  Also, although SEISS 3 requires an impact in the period Nov - Dec - Jan, I assume that HMRC will only have the means to assess retrospectively against the full-year as sole-traders are not required to report more frequently.

SEISS 1 & 2 were claimable and did not assess profits, but simply "impacted by coronavirus".  In the extreme circumstance, a business could have barely a bounce in a business, but spent £100 on face masks and therefore qualified for two grants at £7.5k each.  It is clear that is not the intention of the scheme.

As I understand it, trading income will be entered into box 9 on SA103s and the SEISS grants into box 10 (unless HMRC add a special box).  Those two figures then add together, cascade down through the form and after expenses all roll out at box 28 then 31 for taxable profits.  By this point, there is no difference in treatment of trading income or SEISS grants.  It is reasonable, therefore, that the assessment for SEISS 3 considers earlier SEISS grants in the "reasonable belief of significant reduction in trading profits for the tax year (basis period)".

I have an example to outline my understanding.  Sole trader operating in professional services, for example translation services.  Limited business costs to operate (low cost trader) and no capital allowances to consider.  Accounting year aligned with tax year.  Normal annual profits £24k, spread roughly equally across the year (£2k profits per month, but an adjustment at Christmas Dec & Jan).  Consider the following profile for profits for 2020 - 21:

• April = £500 profits (order book from pre-lock-down completed)
• May = £zero (lockdown)
• June = £zero (lockdown)
• First SEISS = £2k * 3 * 0.8 = £4.8k profits
• Running total normal trading profits £6k, actual profits trading + SEISS £5.3k
• July = £250 (minimal recovery from lockdown)
• August = £1k (starting to pick up after lockdown)
• Sept =  £2k
• Second SEISS = £4.8k
• Running total normal trading profits £12k, actual profits trading + SEISS £13.35k
• Oct = £2k
• Nov = £1.5k (impacted by lockdown 2, but less severely as lockdown 1 as there is more resilience in the market)
  
• Dec = £1k (normal trading but reduced flow because of 1/2 month for Christmas)
• Running total normal trading profits £17k, actual profits trading + SEISS £17.85k
• Jan = £3k (normal January plus delivered the work from December that was not completed because of Christmas close)
• Feb = £2k (forecast normal trading)
• Mar = £2k (forecast normal trading)
• Annual profits normal trading £24k, actual profits trading + SEISS £24.85k

Obvisouly, the above assumes that the SEISS value has not been reduced by business costs that continued to be incurred even though no work.  This could be so for working under professional services contract, less likely for a cafe (but may have then had premises grants to off-set those costs).
NOTE: The example has a reduction in December but that is because of Christmas, not because of coronavirus.

So, we have a business that has been impacted reduced activity, capacity, demand due to coronavirus and during the period Nov-Dec-Jan, but making the "reasonable belief" assessment of profits impacted over the full year shows no negative outcome.  This assessment of profits has to include the earlier SEISS grants, which in effect over-compensated for the business impact at the early stages.  

justwhat

Grumpy_chap said:

Obvisouly, the above assumes that the SEISS value has not been reduced by business costs that continued to be incurred even though no work.  This could be so for working under professional services contract, less likely for a cafe (but may have then had premises grants to off-set those costs).
NOTE: The example has a reduction in December but that is because of Christmas, not because of coronavirus.

So, we have a business that has been impacted reduced activity, capacity, demand due to coronavirus and during the period Nov-Dec-Jan, but making the "reasonable belief" assessment of profits impacted over the full year shows no negative outcome.  This assessment of profits has to include the earlier SEISS grants, which in effect over-compensated for the business impact at the early stages.  

So the person in your example is not entitled to seiss 3 unless he goes out and incurs a couple of grand in deductible costs. lol  

Jeremy535897

Forget 2019/20. You are trying to establish whether the reduction in activity due to coronavirus in the period 1 November 2020 to 29 January 2021 will cause a significant reduction in your profits for the year to 31 March 2021 (if that is your year end). Say you were closed for 4 weeks in lockdown and your profits normally arise evenly over the year at the rate of £500 a week. You will still have some costs in lockdown, so instead of making £500 profit a week, you lose £200 a week. You clearly have a reduction in activity (the shop was shut). Is it significant? Profits are £2,800 down. Normally you make £26,000 a year. This year you expect to make only £14,800 because your shop has been shut for 16 weeks over the year, costing you £700 x 16 = £11,200. However, you have received grants totalling £16,000, so actually you will make £27,200 in the year to 31 March 2021, more than you made last year (£26,000). Your reduction in activity is £2,800, and that is more than 10% of £27,200, so it is definitely significant in my opinion. (If it turns out that you don't include the grants, then the reduction is obviously significant, being £2,800 compared to £14,800.)

Grumpy_chap

I agree with Jeremy's example.  Perhaps, in the case of a shop, cafe, instructed to be closed, the establishment of "significant" impact is easy.  Any shop / cafe will have been closed 12 weeks first lockdown, 4 weeks second lockdown and, depending, upon tiers may be closed, or forced to take away only / click-and-collect for a longer period.  The shop / cafe may have received premises-related grants which off-set the losses during the closed period. 

In assessing the "significant impact" I do think that all grants received should also be considered.

• The impact has been reduced profits because of coronavirus
• Grants received are only because of coronavirus and provided to mitigate the impact (SEISS plus premises-related grants SBG & / or RHLG)

If the grants were ignored in determining the impact to profits for the SEISS 3, then the impacts would be compensated twice.

One way of assessing the reduction in profits over the basis period would be by reference to CJRS (furlough):

• An employee on furlough will receive a grant (via employer) of 80% normal salary.  That establishes a level of reduction in personal income which the Government have determined as "tolerable" and therefore not "significant".
• SEISS is meant to be the sole-trader equivalent of CJRS, and the payment is calculated from the profits which are considered to be the equivalent of "normal salary" for the sole trader.
• It could therefore be inferred that a reduction of profits up to 20% is not "signifcant"

I accept many people will comment that a 20% reduction in personal income is "impossible", but I am simply proposing the 20% reduction as the level that employees have been determined capable of getting by on and the equality that the same threshold could be used for sole-traders.

Jeremy is also absolutely correct, that the impact because of coronavirus in the period Nov-Dec-Jan is to assess the impact because of coronavirus compared to the business plan for this current basis period (current tax year if the business accounting year is so aligned).  This can work both ways, so:

• Beachfront cafe normally closes after the October half-term and re-opens at Easter.  No impact in Nov-Dec-Jan because of coronavirus
• Swimwear shop that planned to shut for complete refurbishment in November, and did so.  The fact the shop was then instructed to close under lockdown is not an impact because of coronavirus.
• Shopfitter had a bad year, but then really busy in November as loads of shops wanted fitting out while forced closed, the bad year up to end October is not an impact in Nov-Dec-Jan, so no SEISS 3.  
• Sole trader operating professional services business that always planned to purchase a new electric car in March 2021 (thus receiving the capital allowance) is still able to do so, but that impact to profits is not because of coronavirus.

Obviously, many sole-traders do not work with such robust and documented business plans but work on a more casual "we'll do the same as before" plan.  So, the assessment is based upon the original business plan for this basis period and whether that has been impacted because of coronavirus, but if the past profits were something like the following:

• 2019-20 = profits £24k
• 2018-19 = profits £22k
• 2017-18 = profits £26k
• 2016-17 = profits £24k

If the profits for 2020-21 are actual anything near £mid-20k (including grants) it might be difficult to demonstrate that the actual profits for this year would have been £40k but for coronavirus and therefore SEISS 3 is available.

Back to Jeremy's example, a sole-trader operating from premises instructed to close 12 weeks (lockdown 1) and 4 weeks (lockdown 2) is closed for 16/52 weeks or 4/13 weeks (Nov-Dec-Jan), so around 30% of the time and demonstrating "significant" impact is fairly straightforward.  Almost, in this case, the profits being impacted is likely a secondary consideration as it may be considered self-evident.  Even if there is a busier than usual Dec-Jan as people do "catch-up" shopping, the impact to profits is likely to be at the 20% level aligned with CJRS reduction in personal income.

Jeremy535897

Grumpy_chap said:

I agree with Jeremy's example.  Perhaps, in the case of a shop, cafe, instructed to be closed, the establishment of "significant" impact is easy.  Any shop / cafe will have been closed 12 weeks first lockdown, 4 weeks second lockdown and, depending, upon tiers may be closed, or forced to take away only / click-and-collect for a longer period.  The shop / cafe may have received premises-related grants which off-set the losses during the closed period. 

In assessing the "significant impact" I do think that all grants received should also be considered.

• The impact has been reduced profits because of coronavirus
• Grants received are only because of coronavirus and provided to mitigate the impact (SEISS plus premises-related grants SBG & / or RHLG)

If the grants were ignored in determining the impact to profits for the SEISS 3, then the impacts would be compensated twice.

One way of assessing the reduction in profits over the basis period would be by reference to CJRS (furlough):

• An employee on furlough will receive a grant (via employer) of 80% normal salary.  That establishes a level of reduction in personal income which the Government have determined as "tolerable" and therefore not "significant".
• SEISS is meant to be the sole-trader equivalent of CJRS, and the payment is calculated from the profits which are considered to be the equivalent of "normal salary" for the sole trader.
• It could therefore be inferred that a reduction of profits up to 20% is not "signifcant"

I accept many people will comment that a 20% reduction in personal income is "impossible", but I am simply proposing the 20% reduction as the level that employees have been determined capable of getting by on and the equality that the same threshold could be used for sole-traders.

Jeremy is also absolutely correct, that the impact because of coronavirus in the period Nov-Dec-Jan is to assess the impact because of coronavirus compared to the business plan for this current basis period (current tax year if the business accounting year is so aligned).  This can work both ways, so:

• Beachfront cafe normally closes after the October half-term and re-opens at Easter.  No impact in Nov-Dec-Jan because of coronavirus
• Swimwear shop that planned to shut for complete refurbishment in November, and did so.  The fact the shop was then instructed to close under lockdown is not an impact because of coronavirus.
• Shopfitter had a bad year, but then really busy in November as loads of shops wanted fitting out while forced closed, the bad year up to end October is not an impact in Nov-Dec-Jan, so no SEISS 3.  
• Sole trader operating professional services business that always planned to purchase a new electric car in March 2021 (thus receiving the capital allowance) is still able to do so, but that impact to profits is not because of coronavirus.

Obviously, many sole-traders do not work with such robust and documented business plans but work on a more casual "we'll do the same as before" plan.  So, the assessment is based upon the original business plan for this basis period and whether that has been impacted because of coronavirus, but if the past profits were something like the following:

• 2019-20 = profits £24k
• 2018-19 = profits £22k
• 2017-18 = profits £26k
• 2016-17 = profits £24k

If the profits for 2020-21 are actual anything near £mid-20k (including grants) it might be difficult to demonstrate that the actual profits for this year would have been £40k but for coronavirus and therefore SEISS 3 is available.

Back to Jeremy's example, a sole-trader operating from premises instructed to close 12 weeks (lockdown 1) and 4 weeks (lockdown 2) is closed for 16/52 weeks or 4/13 weeks (Nov-Dec-Jan), so around 30% of the time and demonstrating "significant" impact is fairly straightforward.  Almost, in this case, the profits being impacted is likely a secondary consideration as it may be considered self-evident.  Even if there is a busier than usual Dec-Jan as people do "catch-up" shopping, the impact to profits is likely to be at the 20% level aligned with CJRS reduction in personal income.

That is a lot of comprehensive thought! I had not considered the CJRS example. Somewhat naively, I think the government expected most employees to make wages up from 80%, so I would not necessarily read too much into that. Remember the builder:
"A builder has developed coronavirus symptoms and self isolates for 5 days before receiving a negative test result. During those 5 days he was unable to work from home but was able to rearrange his contracts. He does not believe there will be a significant reduction in his trading profits. He is not eligible to claim the third grant."

If 5 days was not significant full stop, why mention the point about rearranging contracts? Just delete the phrase. If you work 5 days a week and take 28 days of holiday, you work 233 days a year or so. 5/233 is much less than 20% (it is about 2%). (The hairdresser example tells us 2 days is not significant.)

I take your point about past years, and have mentioned it myself, but have strayed away from doing so because people seem to read just that, when all it can be is a rough guide to what you might believe baseline annual profits are. You do not compare 2020/21 with 2019/20 (March year end) and say SEISS 3 is ruled out just because 2020/21 exceeds 2019/20. You might have been on sabbatical in 2019/20, or bought a new van, or have small profits for any number of reasons.

Regarding your final paragraph, I am afraid that while the earlier 12 week lockdown period will reduce 2020/21 profits (March year end) overall, making it easier for a reduction in the period 1 November 2020 to 29 January 2021 to be "significant", you can't count it as part of the reduction because it wasn't in the period 1 November 2020 to 29 January 2021.

Grumpy_chap

SEISS 3 requires that the claimant has reasonable belief that there is a significant reduction in profits because of reduced activity, capacity, demand or inability to trade because of coronavirus.  Two main questions arose:

• Does the consideration of reduction in profits include the value of earlier SEISS grants?  It now seems to be the consensus that the profits can only be assessed over the full basis period and therefore include the value of previous grants (assuming these fall in the same basis period as SEISS 3 Nov-Dec-Jan).
• What level of reduction is a "significant reduction in profits"?  It seems as though the brains of this forum cannot determine this and there is a clear need for guidance from the Government.  Hopefully such guidance will be forthcoming.

Goodness only knows how the "significant reduction in profits" is assessed for a sole-trader that has December 31st business year-end???

I am going to pick-up on one other part of the previous note:
I think the examples need to be read with some caution, and the haste with which they will have been prepared.  It is quite possible that the examples of the hairdresser (2 days) and the builder (5 days) are more to show why there is no claim to SEISS 3 because no reasonable belief, not the focus on the duration.  Sole-traders inherently have greater variability in "personal income" (profits) year-to-year than an employee.  An impact of 5 days from 220-230 or so, is 2% and less than the level of typical year-to-year variance for sole-traders.

Jeremy535897

Grumpy_chap said:

SEISS 3 requires that the claimant has reasonable belief that there is a significant reduction in profits because of reduced activity, capacity, demand or inability to trade because of coronavirus.  Two main questions arose:

• Does the consideration of reduction in profits include the value of earlier SEISS grants?  It now seems to be the consensus that the profits can only be assessed over the full basis period and therefore include the value of previous grants (assuming these fall in the same basis period as SEISS 3 Nov-Dec-Jan).
• What level of reduction is a "significant reduction in profits"?  It seems as though the brains of this forum cannot determine this and there is a clear need for guidance from the Government.  Hopefully such guidance will be forthcoming.

Goodness only knows how the "significant reduction in profits" is assessed for a sole-trader that has December 31st business year-end???

I am going to pick-up on one other part of the previous note:
I think the examples need to be read with some caution, and the haste with which they will have been prepared.  It is quite possible that the examples of the hairdresser (2 days) and the builder (5 days) are more to show why there is no claim to SEISS 3 because no reasonable belief, not the focus on the duration.  Sole-traders inherently have greater variability in "personal income" (profits) year-to-year than an employee.  An impact of 5 days from 220-230 or so, is 2% and less than the level of typical year-to-year variance for sole-traders.

Let us hope some more guidance comes out in time. I am not hopeful.

stulaunch

If you two are confused, spare a thought for us Self-Employed in the building trade! 

Jeremy535897

I don't feel confused, but I do feel that the legislation has not been thought through properly. I sympathise with you, and anyone running a small business. Trying to predict whether a 3 month period which is only 1 month in is going to show a reduction in activity, and then trying to predict whether that reduction is significant in the context of a trading profit for a year that is only 8 months in (at best), is nigh on impossible for people in trades where work comes and goes, often at short notice.

Grumpy_chap

As well as my previous thought about the comparison with CJRS, here is another reason why I think 20% might be a reasonable point at which the impact on profits is assessed as "significant".  It is in the way the SEISS is calculated itself. 

SEISS 3 is a grant ("all-or-nothing") calculated as 80% of three-month of past year's average turnover and is intended to compensate for the negative impact on profits of coronavirus.  Three-months equals 25% of the year and 80% of 25% equals 20% of annual turnover.  There are challenges to this, not least the reference to past years and the averaging, but if the "reasonable belief" is that profits are impacted by less than 20%, then receipt of SEISS 3 would put the sole-trader in a better position that if coronavirus had never happened.