As companies get ready to utilize numerous business grants announced by the UK government to ensure their business survival in light of the COID-19 situation, one question remains largely unaddressed – particularly regarding the recognition, treatment and presentation of these grants in the financial statements of corporations.
In order to remove the ambiguity surrounding the accounting treatment of these grants and complying with the law, accountancy practices can benefit by understanding the correct way to treat these grants in their annual accounts.
But before we move on to these advanced concepts, let us first discuss the basics.
What is a Grant?
A grant is essentially money received by business for which it does not need to provide or do anything in return.
While there may be some restrictions in terms of what that money can be spent on and its subsequent reporting, however, as long as the business does not need to provide anything in return, it will be classified as a grant.
It is important to understand that mere labelling of a payment as a grant does not necessarily make it one and the above conditions need to be fulfilled.
How should companies account for Grant Income?
The correct accounting treatment of a grant income depends on what it is used for.
For instance, if the expenditure is accounted for in the Income Statement, then the grant income should be reflected there too.
If the business has yet to spend the grant, it will be recorded on the Balance Sheet as deferred and only moved to the Profit & Loss (P&L) account once that grant is spent.
In case the grant is used to purchase any equipment or some other fixed asset, the grant income will be recorded on the balance sheet as deferred and distributed to the P&L account over time to match the depreciation of the item purchased.
Do businesses have to pay any Corporation or Income Tax on Grant Income?
Generally, grants are seen as taxable in the same way as any other income.
However, if the grant is for an expenditure accounted for in the P&L account and you can defer the grant income, then the income can be matched to its intended expenditure.
In this way, the income and expenditure cancel each other out and there would be no tax liability along with zero impact on company profit or tax.
It may also be important to note that if the grant income is spent on equipment or fixed assets, then the grant will not be taxable. Additionally, there will also be no capital allowance available on the expenditure.
Does any VAT need to be paid on the Grant Income?
No. Since grant income is outside the scope of VAT, companies do not need to pay any VAT once they receive a grant.
What is the right Accounting and Tax treatment of Business Rates Grant?
It is recommended that this income is recorded as ‘other income’ or ‘grant income’ for accounting purposes. It is also advised that businesses create a new code in their accounting software to facilitate this.
Additionally, companies should use the date of the remittance for the posting date while recording this income.
The grant income is taxable. As a result, it is subject to Corporation Tax. However, businesses can claim tax relief on the expenditure supported by the grant.
In case the business wishes to offset trade losses against the grant income brought forward for Corporation Tax, it can only be used against profits of the same trade if the loss happened before 1 April 2017.
In case the business wishes to offset trade losses against the grant income brought forward for Corporation Tax, it can be used against total profits if the loss happened on or before after 1 April 2017.
To illustrate, imagine a client has brought forward Corporation Tax losses which related to its first two accounting years for the year ended 31 March 2018 and 31 March 2019. In this case, it can be offset against the grant income.
However, in case the clients’ losses related to the year ended 31 March 2017, this loss can only be offset against future profits of the same trade and, hence, cannot be offset against the grant income.
How should businesses report Coronavirus Job Retention Scheme (CJRS) – Furlough Grant on their accounts?
It is expected that a business recognizes this grant based on accruals models or performance models. However, the method selected does not impact the accounting treatment for the job retention scheme.
This is because under both these methods, the salary expense should be recognized as paid and the amount received from the government should be recognized in the P&L account over the same period to which the costs relate.
Certain allocation questions may arise, as to be eligible for payment the worker must have been furloughed for three consecutive weeks. As a result, careful allocation is needed.
For example, when a worker has been furloughed for one week in March 2020 and two weeks in April 2020, the income should be allocated between the accounting periods systematically.
Also, note that the amount received from the government should be shown separately in the P&L account.
The grant income should be treated as taxable in the company accounts.
However, as the scheme is designed to offset the allowable expenses of keeping staff on the books (who could not be paid otherwise), the net effect should be that there is no profit on which to pay any tax has to be paid.
With that said, businesses can deduct employment costs as normal when calculating taxable profits for Income Tax and Corporation Tax purposes.
How to report Self-Employment Income Support Scheme (SEISS) Grant on your tax return?
The grants are subject to income tax and self-employment national insurance contributions as HMRC policy intent (subject to legislation being enacted) is that the grants are taxable when received in 2020-21.
Additionally, HMRC is expected to provide a specific section in the 2020-21 self-assessment tax return for the reporting of SEISS grants.
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As always, you can reach out to us anytime to discuss any financial issues you may have in this coronavirus pandemic.