What CIS Contractors Need to Know About the SEISS
The introduction of the Self-employment Income Support Scheme (SEISS) was widely welcomed by CIS contractors last year, many of whom had found work hard to come by when Coronavirus hit in early 2020.
How does the SEISS grant work?
This unprecedented government support provides up to five lump sums to self-employed people whose business has been affected by the pandemic. The grants, which are available to sole traders with profits up to £50,000 a year, offer the equivalent of 80% of average profits up to £7,500, equalling £2,500 per month.
Are you eligible for the SEISS?
Along with the £50,000 profit threshold, to be eligible for the SEISS you need to have submitted your 2019/2020 and 2020/21 tax returns, earn most of your income through self-employment and have experienced a significant reduction in demand for your services throughout the pandemic.
Like the furlough scheme, the SEISS is due to stop in September 2021 as the government eases lockdown measures. Having paid out nearly £20bn since its introduction last year, it’s handed 2.6million self-employed people a financial lifeline when they’ve needed it most.
One key thing to bear in mind about the SEISS is that these grants are taxable. This is nothing to worry about, of course, but it’s definitely something everyone should be aware of – particularly if you’re paid through the Construction Industry Scheme (CIS).
How does SEISS affect your tax bill?
Any money paid to you under the SEISS is subject to tax, meaning you have to report it on a self-assessment tax return. Explained differently, income tax and national insurance payments haven’t been deducted from the grant and must therefore be reported.
So you need to keep some money back for the self-assessment tax bill, which is due on 31st January 2022. Putting aside at least 20% of any money received via the SEISS is a sensible start, but it depends on how much you’ve earned during the course of the tax year.
We’ll give you an example. Let’s say you earn £20,000 under the CIS and get £10,000 from the SEISS. Unless you are registered to receive gross payment of your invoices, the payments made to you under the CIS scheme will be subject to flat rate deductions of withholding taxes by the contractor, usually of 20%. This lump sum will be paid to HMRC to offset against your tax liability at the end of the year and in usual circumstances, CIS traders may not need to pay further tax (and quite often will be eligible for a tax rebate). This is not the case for the SEISS grant which is paid to you Gross, without any deductions for tax or national insurance. You will need to pay tax and national insurance on the £10,000 received through the SEISS.
How could SEISS impact your tax rebate?
Many CIS contractors find they can claim a tax rebate every year. This is because the CIS doesn’t take into account expenses you might incur (which reduce your tax bill) or any personal allowances. It means the full amount of your invoice, excluding any VAT, is subject to deductions of withholding taxes at 20% or 30%, rather than from £12,570 and above. This is why CIS contractors are often due a tax debate.
In a ‘normal’ year (before the pandemic) you might have earned £30,000 under the CIS. During the pandemic, you might still have an income of £30,000, but only £20,000 of which is earned under the CIS and £10,000 from the SEISS. As a result, your income earned under the CIS is reduced, meaning your tax rebate may also be smaller or could mean a tax bill when you submit your self-assessment tax return.
What’s the solution?
Firstly, make sure you know where you stand with regards to your tax liabilities, which you can do by organising and even filing your self-assessment tax return as soon as possible.
Secondly, you’ll need to make sure you have enough set aside to pay any tax owed to HMRC on money received through the SEISS. Don’t worry though, a sole trader accountant can help take care of your tax return if it’s something you need a hand with.
Finally, because you’re likely to be faced with a tax bill after benefitting from the SEISS, it has become even more important to claim tax relief on any legitimate business expenses incurred whilst you have been working. Tax that has been withheld whilst working on CIS contracts will be offset against any tax liability that arises from SEISS grants.