Significant New Test Affecting Self-Employment Grants

Significantly Reduced Profits

A significantly reduced profits test has been introduced for the third self-employment grant. Before making your claim you must ensure you still qualify.

Below are the frequently asked questions on this new requirement.

Who can now claim the third Self-Employment Grant?


Those that didn’t qualify previously for the earlier self-employment grants, still don’t qualify.

However, if you did qualify you will now need to consider the additional significant reduced profits test.

What is the significantly reduced profits test?


The new test states ‘you must reasonably believe that you will suffer a significant reduction in trading profits’.

The reduction in profits must be caused by either reduced demand or unable to trade.

How much do my profits need to reduce by to qualify?


There are no specific figures by how much profits must reduce by. Instead, HMRC have provided some examples of reduced demand and unable to trade.

We summarise those examples below.

Examples of reduced demand


The following examples are provided by HMRC as reasons, which can lead to a significant reduction in trading profits:

Café owner has fewer customers due to Government restrictions on household mixing. This leads to a reduction in takings and an expected significant reduction in trading profits.

Subcontractor is unable to obtain materials. This is due to supply chain issues caused by Coronavirus. This leads to a reduction in work which can be completed and an expected significant reduction in trading profits.

The above individuals would be able to claim the third self-employment grant.

Examples where reduced demand does not qualify


The following examples are provided by HMRC as reasons why reduced demand may not always lead to a significant reduction in trading profits.

The café owner above due to reduced customers decides to increase their prices. As a result profits aren’t significantly reduced.

The subcontractor above finds a new supplier and does not expect profits to be significantly reduced.

The above individuals would not be able to claim the third self-employment grant.

Examples of unable to trade


The following examples are provided by HMRC as reasons, which can lead to a significant reduction in trading profits:

A business, such as a hairdresser or pub must close due to the Government restrictions. As a result of the closure the business is expecting a significant reduction in trading profits.

A subcontractor has been identified by the NHS as clinically vulnerable and is asked to stay at home. Being unable to work from home there is the reasonably belief that there will be a significant reduction in trading profits.

The above individuals would be able to claim the third self-employment grant.

Examples where unable to trade does not qualify


The examples provided by HMRC relate to when the inability to trade is only temporary.

A business premises has a positive coronavirus case and is required to shut for a few days for a deep clean. The temporary closure is not expected to significantly reduce profits.

An individual has to self-isolate for a few days until a negative coronavirus test is received. The temporary halt in work is not expected to significantly reduce profits.

The above individuals would not be able to claim the third self-employment grant.

Does an increase in costs qualify?


No. HMRC specify that increased costs such as requiring to buy PPE, screens, face masks, cleaning materials, etc are not qualifying reasons.

To qualify for the third self-employment grant the significant reduction in profits must be caused by either reduced demand or unable to trade.

Significantly reduced profits and the tax period


The significant reduction test applies for the whole of the tax year you report them in.

Most taxpayers have accounting dates ending 31 March or 5 April. They will need to make a judgement on their expected profits for the 2020/21 tax return.

Later accounting dates such as 30 April will report their figures on the 2021/22 tax return.

As a result taxpayers are required to forecast future profits before they can determine if they are eligible.

Keep records


Any taxpayer which intends to claim the third self-employment grant must keep adequate records.

This must now include why they reasonably believe they will suffer a significant reduction in trading profits, which is caused by either a reduction in demand or unable to trade.

Use the examples provided by HMRC to support your claim and speak with your accountant or tax advisor.

Summary of the HMRC requirements

To qualify for the third grant, HMRC have highlighted the following conditions:

  • Self-Employment is still trading but with reduced demand or would be trading but is unable to do so due to coronavirus.
  • The intention is to continue to trade.
  • Reasonably believe that you will suffer a significant reduction in trading profits, which is caused by either reduction in demand or unable to trade.

Further Information

DISCLAIMER – Please note that the content contained in this article is for general information only and is not a substitute for professional advice – read our full disclaimer

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