SEISS 5 – are clients ready for the ‘turnover test’?

The Government’s fifth Self-Employment Income Support (SEISS) grant will be open for applicants from late July to cover the period between May and September 2021.

As with previous SEISS grants, claims will be limited to self-employed people or members of a partnership. They also need to have traded either between 2019/2020 and 2020/2021 with completed tax returns on or before 2 March 2021.

However, there is a significant change this time.

The value of the grant will be determined by a ‘turnover test’ which looks at the reduction in total sales between April 2020 and April 2021. The onus is, therefore, now on the applicant to calculate the financial impact the pandemic has had on their business.

HMRC says it will provide more information and guidance by the end of this month (June) to help applicants calculate this.

According to official government guidance, trading profits must not exceed £50,000 and be at least equal to non-trading income.

• Applicants with reduced turnover of 30% or more are entitled to 80% of three months’ average trading profits. Maximum grant allowance: £7,500.
• Applicants with reduced turnover of less than 30% are entitled to 30% of three months’ average trading profits. Maximum grant allowance: £2,850.
• Applicants must provide documentary evidence demonstrating the financial impact the pandemic has had on their business.

We asked accountants for their views on the changes to the fifth SEISS grant and what eligible businesses and self-employed traders should do to make applying easier for themselves.

Ensure record-keeping is up-to-scratch to make calculations easier

Ercan Demiralay, partner, Wellers

The fifth SEISS grant eligibility is based upon turnover reduction, whereas previously, it was based on profits. This was a more objective way of determining how a business has been affected because the whole position is accounted for instead of just turnover. Earlier calculations for SEISS grants were based on historic information held by HMRC on submitted tax returns, but businesses still had to declare if they were eligible for each grant.

However, calculations needed this time around shouldn’t be too difficult for VAT-registered as they will already have calculated their turnover quarterly for their VAT records. It may prove more challenging for smaller businesses where accounting records are not up to date.

Next steps: Eligible businesses should see this as an opportunity to improve record keeping which will improve the financial efficiency of the business in the long run. It’s also important to note that SEISS grants are subject to tax and National Insurance, so businesses must ensure that money is retained to make these payments.

Verdict: Ensure record-keeping is up-to-date to make it easier when calculating turnover reduction.

Only claim what you’re entitled to

Rashid Khan, senior accountant, Shenward

The eligibility criteria for the fifth SEISS is either that the business has seen reduced demand or has ceased trading as a result of the virus. Some businesses which continued to trade but experienced reduced demand had to increase prices to make up for the lower demand.  This makes the turnover test a fairer system as these businesses would have had time to control overheads.

In the beginning of the pandemic, business overheads would have still been high, so basing the testing on profits was a more meaningful way of assessing performance and impact that the coronavirus had.

This time around, clients themselves are having to make a claim. Possibly the threshold should have been raised beyond £50,000 in line with VAT threshold to make calculations easier.

Next steps: We always advise that clients only claim what they are entitled to and for those that have a genuine reason and meet the eligibility criteria.

Verdict: Claim if you have a genuine reason and you meet the eligibility criteria.

Turnover calculations are an unwelcome distraction for struggling businesses

Rich Pilmore, AAT licensed accountant, RLTP Accountants

The turnover test isn’t necessarily fair. A lot of businesses have seen a rise in raw material costs over the past 12 months which could potentially make turnover seem higher than it is. Profits are key in making sure that the self-employed are supported sufficiently.

Quite a lot of sole traders will only review their accounts annually when completing their self-assessment and as many individuals use an accountant to complete the return, they may not have enough understanding to complete their own calculations. I would urge businesses/sole traders to check any calculations with their accountant.

Next steps: It’s important that records are up-to-date to make an accurate claim. HMRC will no doubt put resources back into investigations once restrictions are lifted & SEISS and furlough grants are finished. They will expect businesses to have the relevant information to hand for their grant claims. I would urge businesses to speak with their accountants if they are unsure about the claim.

Verdict: HMRC may carry out investigations post-Covid so keep records up-to-date to make an accurate claim.

Set enough time aside to make accurate calculations

Andy Vessey, head of tax, Kingsbridge Contractor Insurance

The grant will only be calculated based on 80% of three months’ average profits, leading to criticism that the fifth grant is missing two months. At a time when business owners should be able to concentrate solely on keeping their businesses alive, asking them to perform turnover calculations to access state aid is unfair.

Regardless, it is imperative that individuals keep evidence to support their claim in the event that they are challenged by HMRC. The Government has invested over £100M in establishing a Covid taskforce of 1,265 HMRC staff to tackle the estimated £3.5bn fraudulent claims of Covid support packages and the Revenue will be looking at SEISS claims very closely.

Next steps: Claimants will need to set aside time to undertake their turnover calculations and demonstrate that turnover has been reduced by more or less than 30 %. 

Verdict: Set time aside to make the calculations and ensure they accurately reflect the impact pandemic has had on the business.

Applicants need to keep evidence in case of investigation

Lisa Dickson, founder, Caseron Accounting

The claim criteria for the fifth SEISS grant is different to the earlier grants in that the amount you are eligible to claim is dependant on the reduction in turnover in the 12 months to April 2021.

It is imperative that claimants do their best to make sure their data is as accurate as reasonably possible, so they can maximise the claim if they have suffered during the pandemic, but also to minimise the risk of falling foul of HMRC.

Next steps: To claim this grant – you must know your numbers! You must keep evidence of your calculations – a good accountant can help with that if you get stuck. HMRC is expecting claimants to make an ‘honest’ assessment of losses and will be prosecuting people who fraudulently claim grants that they may not be entitled to.

Verdict: Know your numbers: keep evidence of calculations and ensure you make an honest assessment of losses.

Accountants should be the go-to financial resource to provide extra support

Archie Balls, Abbeygate Accountancy

While it seems a relatively straightforward test (providing there are accurate records of income and expenditure), business models vary tremendously. It should also be noted that this test completely ignores profits, so it’s ineffective for individuals that have been adversely affected by increased expenses. For example, an individual may have been able to maintain their revenue but had their profit margins squeezed through increased expenditure on staying open throughout the pandemic.

Additional challenges the new system creates include:

• Time: applicants will need to spend time working out the difference in turnover over the two time periods, something that they do not specialise in. 
• Risk: Many sole traders are concerned that an incorrect calculation could cause challenges in the future, therefore they should delegate this to a professional.

Next steps: Business owners should see their accountants as the go-to resource for all financial matters and not just basic compliance, so it’s important to reach out.

Verdict: The new system may create challenges so businesses should reach out to accountants for additional support.

Annie Makoff is a freelance journalist and editor.