Accounting for government grants: What your accountant needs to know

Across the industry, accountants are beginning to prepare year-end financial statements for clients whose accounting periods end on or after 31 March 2020.

Resulting from the various government support made available due to the COVID-19 pandemic, businesses are likely to have received grants, whether from the local authority/self-employed grants and/or in respect of furlough claims. 

The accounting and tax treatment of such receipts may become an afterthought, but it is worth considering at the earliest opportunity in case budgeting needs to reflect increased tax liabilities. 

We’ve prepared some useful tips that will help sole traders, partnerships and limited companies understand the accounting and tax treatment when preparing financial statements.

Local Authority Grants

Like thousands of people across the UK, you may have received local authority grants, whether that be a Small Business Grant, a Retail Leisure & Hospitality Grant or a Discretionary Grants. 

Whichever grant you received; accountants will need to report this in your financial statements, ordinarily as other income which would then be taxed in the year in which received. 

However a fundamental accounting concept is the matching basis therefore it is possible, if your year-end was shortly after the grant receipt in your bank account, that you have not yet had the opportunity to reflect how the funds will be utilised in your business.

 It would therefore prudent to report the grant in your statement of financial position as a deferred income/long term liability. This means that the grant has been reported in the financial statements but as it has not yet been spent, it is deferred to the next accounting period. It then enables the grant receipt and the related costs to be matched thus having a negligible/nil tax impact, smoothing cash flow requirements during the ongoing pandemic.

For your accountant to correctly account for the grant, you’ll need to provide evidence of what the additional funding was used for. If you use a cloud-based accounting system such as KashFlow, this should be a smoother process. But if not, preparing a list to send to your accountant will help them offset the expenses against the grant.

Self Employed Income Support Grant

As at today, 3 August, accountants have not yet received confirmation from HMRC as to when the SEIS grants will be taxable. However, here at Shenward, we fully expect any SEIS grant received to be taxable during the 2020/21 financial year.

If you were in receipt of the SEIS grant, you’ll need to provide your accountant with exactly how much was received, bearing in mind that there are 2 grants, the second window opening from Monday 17 August 2020.

Job Retention Scheme (CJRS) Grants

The coronavirus job retention scheme is one of the most complex schemes within the government support packages provided throughout the COVID-19 pandemic. With flexible furlough and short-term furlough being part of the equation, payroll records will look a lot different to the ones you provided to your accountant in the last financial year.

No matter how complex they are, one thing is for sure; any furlough claims will need to be reported as other income within your financial statements and will be subject to tax and national insurance (for sole traders and partners). 

Eat Out to Help Out Grants

Eat Out to Help Out will operate on Mondays to Wednesdays through the month of August 2020. Its purpose is to incentivise customers to eat in restaurants or other eating establishments by giving them a discount which businesses can then claim back from the government. 

The scheme is UK wide and customers will be able to see who is taking part on GOV.UK. The scheme will drum up custom on quieter days of the week.

HMRC has issued extensive guidance on various examples how to calculate the 50% voucher, capped at £10 per head. However, we draw registered businesses of the scheme to the following accounting and tax points:

  1. Claims made will form part of sales and ultimately profit and will be subject to tax and national insurance (for sole traders and partners) as normal
  2. Where restaurants or other eating establishments are registered for VAT, this will be payable on the undiscounted bill, albeit at 5% for food and non-alcoholic drinks

Example

A group of six diners (4 adults and 2 children) spend £90, including £18 on alcoholic beverages. 

Bill before discount £90

Amount spent on alcohol £18

Amount discount can be applied to £72

Discount (50%, capped at £10 per head) £36

Bill after discount is applied £54

Total amount the business can claim £36

VAT will be due at 20% of the alcohol amount of £18, being £3. 

VAT will be due at 5% on the full undiscounted amount of £72 for the rest of the meal, being £3.43.

Total VAT due being £6.43. As a comparison, if VAT was maintained at 20%, the VAT due would have been £15.

Businesses will be required to retain sufficient evidence to support any claims made e.g. daily gross takings reports (e.g. Z reads and individual meal receipts). 

Further information is available below: https://www.gov.uk/government/publications/get-more-information-about-the-eat-out-to-help-out-scheme/get-more-information-about-the-eat-out-to-help-out-scheme

We appreciate the complexity of this year’s financial statement preparation, so please do get in touch with one of our friendly experts if you’d like to discuss your businesses’ position.

How will the furlough scheme change from July?

Since the Coronavirus Job Retention Scheme (CJRS) officially launched on 20 April it has enabled businesses to keep valued employees whilst facing the financial challenges brought about by the pandemic.

Chancellor Rishi Sunak has been clear about the fact that the government has always intended to review the scheme over the coming months, which has led to many rumours within business communities about how the scheme will change.

Fortunately, business owners and employers can now make clear decisions about what actions to take next as the government has confirmed that it will continue to pay CJRS grants from 1 July but will introduce a number of changes.

 

How will the furlough scheme change for businesses?

 

You can bring furloughed employees back 

From 1 July, you will be able to bring furloughed employees back into work. This will be a relief for both employees and employers, who can start returning to some level of normality.

 

Employees can work part-time on a flexible basis

You can bring furloughed employees back for any amount of time and any shift pattern, which is known as a ‘flexible furlough’. This means that if you want an employee to come back but are concerned about affording full-time wages, then you can agree to a number of hours for them to work. For example, if an employee works 40 hours, 5 days a week, you could ask them to work for 2 days a week (16 hours).

 

You will pay for the hours they work 

If you do bring a fully furloughed employee back on a part-time basis, you will pay them their normal wage for these hours including NIC and minimum pension contributions.
For the hours they do not work, you will claim furlough pay at 80% of the normal wage. This may mean that you will need to carefully manage payroll if you do make this decision.

 

The government grants will gradually decrease

As part of its strategy to restart the economy, the government will start to decrease the levels of grants that it is paying in monthly stages.
While the government will still cover the same level of grant for July (80% of wages to a maximum of £2,500pm), it will gradually decrease the grant from August until it closes the scheme on 31 October 2020.

Throughout this period, furloughed employees will still receive 80% of their wages but employers will have to start contributing to this.

This is how each stage will look like this:

  • From 1 August, employers can no longer claim Employer NI and pension contributions, but the government will continue to pay 80% of wages.
  • From 1 Sept, employers will have to contribute 10% of wages, while the government will contribute 70%.
  • From 1 Oct, employers will have to contribute 20% of wages, while the government will contribute 60%.

The conditions for furloughing will also change 

From 1 July, the conditions for applying for the scheme will also change.

  • You will only be able to claim for furlough grants for employees that you have successfully claimed for before.
  • The employee must have been previously furloughed for at least 3 consecutive weeks between 1 March and 30 June. So, if you had furloughed an employee on the 10 June, they will be eligible, but not after this date as this will not meet the minimum of 3 consecutive weeks.
  • The cap for the number of employees that you can furlough in a single claim is based on your previous claims. So, if you submitted three monthly claims and the total number employees furloughed in each respective claim was 30, 20 and 50, the maximum number of employees you can furlough in one claim is 50.
  • Although flexible furlough agreements can last any amount of time, unless otherwise specified the period that you claim for must be a minimum of 7 days.

What does this mean to you as a business owner and employer?

 

You should support home working or make a safe workspace

If you have employees returning to work from being furloughed, then it is your responsibility to ensure that they are working in a safe work environment.

If possible, do your best to get your employees set up so they can work from home. If this is not possible, then ensure that your work environment is prepared so people can maintain social distancing and other measures.

The government provides in-depth guidance on safe working during the coronavirus which includes working in offices, factories, labs, shops and vehicles.

 

You should spend some time breaking down the calculations

If you have agreed to put your employees on a ‘flexible furlough’, rather than a full furlough then you will have to spend some time to ensure that they are being paid the correct amount.

You will have to calculate what they are owed in terms of full wages and 80% furlough payments.

If you have been making the claims since April you will probably be familiar with the full list of steps to take before making a claim.

The government has now included guidance on the steps to take to calculate your employees usual hours and furloughed hours.

There is also an example of how to make these calculations, which breaks down each stage including calculating usual hours, furloughed hours, NICs and pension contributions.

 

Be clear about your agreements with employees

It is advised to put your new flexible furlough agreement with your employees into writing, which must be done in accordance with pre-existing employment law.

 

Be clear about your criteria for selecting employees

Take care when selecting your criteria for selecting which furloughed workers will return part-time and defining their hours, make sure that you highlight these so that they are fair, reasonable and objective and be wary of discriminating.

 

Be wary of scams

It is important now, more than ever, as we all get used to working remotely to maintain due diligence when it comes to cyber security.

There have been many reported cases of businesses who have fallen foul of a scam by fraudsters exploiting the challenging situation that we are all facing.

One scam comes in the form of a phishing email scam pretending to be from HM Revenue and Customs. The intention is to trick business owners into providing personal and financial details.

If you suspect a potential scam, you can report it to Action Fraud.

 

Remember: support is always available from your family-run accountants and business advisors

These are difficult times and we are doing all that we can to support our clients and our community. 

If you need advice and support with managing the complexities around furlough and payroll, understanding what the law requires of you as an employer, or support to boost cashflow, don’t be afraid to talk to one of our specialists at hello@shenward.com