This morning I received a letter that was forwarded to me by a client. The letter was dated 7th August 2020 and was from HMRC with the head-line “Information on your Self-Employment Income Support Grant”. The letter opens:

“I am writing to tell you that we did not take into account all relevant information when we originally determined your eligibility and invited you to claim for the Self-Employed Income Support Scheme (SEISS) grant. When we included this additional information, the grant amount we should have paid is less than the amount we calculated and paid you. This means that you have been overpaid. We are sorry for this error.”

It seems that the ‘relevant information’ that was not taken into account was because HMRC’s computer has forgotten to take include losses in one (or more) of the previous three tax years for a number of tax payers.

By way of an example, supposing you were in business as a self-employed person and had made a loss of £8,000 in 2016/17, a profit of £14,000 in 2017/18 and a profit of £40,000 in 2018/19. To keep the figures simple, assuming that there is no other taxable income, the total income and losses over the three years is £46,000. This is divided over the number of months of self-employment (again assume all three years) so that is 36 months, or £1,277.78 per month. You are entitled to 80% of this in the first tranche for 3-months, so that is £1,277.78 x 80% (£1,022.22) x 3 months claim = £3,066.67

HMRC’s error was to ignore the loss in 2016/17 and divide the resulting profit over the two profitable years. So using the same figures as before, HMRC’s calculation would make the total income £54,000 over two years (24 months) and so produce an average monthly profit of £2,250. 80% of this over three months is £5,400 resulting in an overpayment of a whopping £2,333.33!

For those self-employed people worried that they would need to repay this overpayment, thankfully, the HMRC letter continues:

“You do not need to repay this money and HMRC will not be taking any steps to recover it,  but you must include the SEISS grant that you received as taxable income on your self-assessment tax return for 2020/2021”

The SEISS grant was always going to be included as taxable income, however HMRC are clearly now aware of their mistake, so the second tranche, which is 70% of the average monthly profits, is likely to be correct. You should check though (or ask your accountant or tax adviser to do so).

This is likely to be a windfall for some self-employed individuals, however a costly mistake for HMRC.