Tax treatment of local authority grants

Under the coronavirus special measures, local authority grants can help businesses. Support available includes the Small Business Grant Fund (SBGF) and Retail, Hospitality and Leisure Grant Fund (RHLGF) payments. If your business receives such a grant must it pay tax on it?

Qualifying for a local authority grant

One of the first business sectors to be hit by the lockdown was the leisure industry, quickly followed by retail. They were offered help through a central government-funded scheme administered by local authorities. It is known as the Retail, Hospitality and Leisure Grant Fund (RHLGF). For small businesses not qualifying for the RHLGF an alternative local authority grant is available, the Small Business Grant Fund (SBGF). There are few conditions that need to be met to qualify for either. But businesses receiving them need to understand the tax consequences.

Are Local Authority grants taxable or potentially taxable?

Many business owners have been confused by the language that’s been used to explain the tax treatment of local authority grants. The phrase “potentially taxable” has been bandied about in official and other guidance; while some information simply says that payments are taxable. So which is correct? The answer is both, but the position is simpler than this answer suggests.  HMRC give clear guidance in their manuals.

Capital and income

Some types of lump sum payments can count as “capital” and may or may not be taxable, depending on why they are paid. Local Authority grants (RHLGF and SBGF) are “business income” for tax purposes. You have to record them as business income in your business records. The effect of this is to treat them in the same way as sales income.  This isn’t a plan by the government to claw back some of the grant payments through the tax system. The tax position for similar types of payment is well established and HMRC’s Business Income Manual contains examples of court rulings going back many years.  The confusing phrase “potentially taxable” appears because although the grant payments are taxable, the overall picture might not result in a tax bill.

Example. Jane owns a hair salon and nail bar. She shut the doors on her business in mid March 2020 and doesn’t reopen them again until September. Her financial year runs from 1 April to 31 March. In April 2020 she received a grant of £10,000. Because of the loss of trade her accounts for the year to 31 March 2021 show a loss of £15,000. It would have been £25,000 but for the grant. While the grant is taxable income it does no more than reduce her losses. Therefore there is no tax to pay on the grant income.

VAT issues

Unlike direct tax, there’s no specific HMRC guidance on how businesses should treat the Local Authority grant payments for VAT purposes. However, the general rules for VAT say that it only applies if a payment is in return for a supply of goods or services. Therefore, grant income, which doesn’t require the recipient to do anything to receive it, is outside the scope of VAT.

Make sure you record the grant income as “outside the scope of VAT” and not as “exempt”. As the latter can adversely affect the amount of VAT your business can reclaim for purchases.

Summary

You must record Local Authority Grant payments under the SBGF and RHLGF as taxable and they must be shown as business income in your records. You will pay tax on the grants if your business accounts for the period in which the grant is received show a profit.  If your accounts show a loss or your profits are covered by tax reliefs, tax is not payable.