Tax credits and self-employment

This post will try and untangle various threads related to Tax Credits and low income self-employed, particularly around the qualifying remunerative work test, profitability, and hours worked.

Tax Credits  rules for the self-employed changed in April 2015.  The main difference between the previous regime for self-employed Tax Credits and the new regime appears to be the added emphasis on potential for profitability. In the past, the relevant question in regard to low income was whether the claimant was working in expectation of payment.

Three and a half years ago I was giving workshops  about Universal Credit and the imminent demise of Tax Credits for the self-employed. However, at the time of writing in November 2015, Universal Credit is still not ready to take claims from self-employed people. (Scroll down for more details). 

The new self-employment test in Working Tax Credit may be a  tacit acknowledgement of the Universal Credit delays and seems to echo some aspects of Universal Credit but is actually quite distinctive and different

This letter was recently sent out by HMRC

taxcredletter_reduced

The rules for claiming Working Tax Credit have changed for self-employed people. This letter explains how this may affect you.

Your tax credits claim is not affected at this stage. You don’t need to respond to this letter. We’ll write to you again if we need any more information.

Eligibility
To be eligible for Working Tax Credit you should be getting paid, or expect to get paid for the self-employed work you do in your trade, profession or vocation.

Your self-employment now also needs to be:
done on a commercial basis with a view to making a profit
done regularly and in an organised way

For example you may not qualify if you don’t:
make a profit or plan to make a profit
have good business records
work regularly
follow any regulations for your trade, profession or vocation, for example by not having the right insurance if you’re a driver

If we need to check your claim
We may ask you for more information so we can check if you are eligible for Working Tax Credit under these new rules

 

The GOV.UK page on Tax Credits was last updated on November 18th 2015

https://www.gov.uk/working-tax-credit/ 

Hours you work

You must work a certain number of hours a week to qualify.

Circumstance Hours a week
Aged 25 to 59 At least 30 hours
Aged 60 or over At least 16 hours
Disabled At least 16 hours
Single with 1 or more children At least 16 hours
Couple with 1 or more children Usually, at least 24 hours between you (with 1 of you working at least 16 hours)

If you’re self-employed

Some self-employed people are not eligible for Working Tax Credit. To qualify, your self-employed work must aim to make a profit. It must also be commercial, regular and organised.

This means you may not qualify if you don’t:

  • make a profit or have clear plans to make one
  • work regularly
  • keep business records, eg receipts and invoices
  • follow any regulations that apply to your work, eg having the right licence or insurance

If the average hourly profit from your self-employed work is less than the National Minimum Wage, the Tax Credit Office may ask you to provide:

business records

your business plan – find out how to write a business plan

details of the day-to-day running of your business

evidence that you’ve promoted your business, eg advertisements, flyers

HMRC Tax Credits manual has more information

http://www.hmrc.gov.uk/manuals/tctmanual/tctM02415.htm

TCTM02415 – Entitlement: WTC entitlement – qualifying remunerative work: self-employment person

For a person to satisfy the first condition as a “self-employed” person they must be engaged in carrying on a trade, profession or vocation on a commercial basis and with a view to the realisation of profits, either on one’s own account or as a member of a business partnership and the trade, profession or vocation is organised and regular.

Commercial basis

The self-employment must be carried on a commercial basis. To establish whether or not self-employment is carried out on a commercial basis it is more helpful to look at what constitutes ‘uncommercial’. Self-employment may be conducted in an uncommercial way for instance the hobby market-gardening enterprise where the prices of fruit and vegetables do not realistically reflect the overheads and variable cost of the enterprise.

Examine the facts and look for the presence or absence of common features or characteristics of what a genuine trade would do and whether the business is being conducted in an uncommercial way.

View to the realisation of profits

The self-employment must be carried on with a view to the realisation of profits. If at any time, the self-employment is carried on so as to afford a reasonable expectation of profit, it is carried on (at that time) with a view to the realisation of profits.

‘With a view to’ embraces a range of realistic possibilities, which indicate that the view is a reasonable one.

The criteria for ‘expectation of profit’ does not specify any period within which the self-employment must be expected to realise a profit. It is sufficient that there is some realistic possibility of profit being earned at some future date, however distant.

There are two possible ways of establishing whether or not if the person’s self-employment is carried on with an expectation of profit: either it is not a reasonable expectation, or there is another reason for carrying on the trade.

It is not a reasonable expectation

You may be able to show that there is no possibility of profit ever regardless of however long the self-employment is carried on, so the expectation of profit is unfounded, by closely examining any business plan, profits projection or whatever is provided as the basis for the person’s expectations of profit. You are justified in pointing to past results when considering whether the person’s expectation of profit is reasonable.

There is another reason for carrying on the self-employment

A person who makes losses with no realistic possibility of making a profit may have some other reason for carrying on the trade. For example, it may be that the trade is a hobby or gives the person personal enjoyment. It may also be the case that the person is simply seeking to offset personal expenditure.

Organised and regular

Self-employment should be structured in an organised way and it should be regular and ongoing.

The GOV.UK website trailed this earlier in the year

March 2015 https://www.gov.uk/government/publications/revenue-and-customs-brief-7-2015-new-rules-for-the-self-employed-claiming-working-tax-credit/revenue-and-customs-brief-7-2015-new-rules-for-the-self-employed-claiming-working-tax-credit
“From 6 April 2015, all new claimants who are using self-employed work to meet the qualifying remunerative work test for WTC, must show that they are trading on a commercial basis and their business is done with a view to achieving profits. The self-employment should also be structured, regular and ongoing. For example, if their business activity is a hobby it is not likely to be considered commercial or have an expectation of realising a profit.”

“Self-employed claimants with earnings below a threshold (this will be based on working hours and the National Minimum Wage) will be asked by HMRC to provide evidence that they are in a regular and organised trade, profession or vocation on a commercial basis and with a view to achieving a profit. The information we ask for should be available as part of normal business activity for example receipts and expenses, records of sales and purchases. We may also ask for supporting documents such as a business plan, planned work, cash flow and profit projections.”

A prototype version of this appeared in the Autumn Statement 2014, making a general reference to 24 hours which has not appeared since. As noted above, the hours on GOV.UK for lone parents and disabled Tax Credit claimants as of November 2015 remain “at least 16.”

equivminwage

 

“From April 2015, self-employed Working Tax Credit (WTC) claimants … declaring income less than the equivalent of working 24 hours a week at the National Minimum Wage (NMW) will be required to provide evidence to HMRC that the work they are undertaking is genuine and effective.”
Paragraph 2.92 Autumn Statement 2014

Background: Universal Credit

Universal Credit has been in the news for 5 years, ever since the White Paper on Welfare Reform published in November 2010.

The Welfare Reform Act came into law at the end of 2012 bringing substantial changes with regard to in-work subsidy for self-employment under Universal Credit compared to Tax Credits.

My web page on welfare reforms and benefits – in common with my pages on exam reforms- been in more or less constant flux as new measures are announced, delayed, challenged, modified or reversed.

2013welfrefpage_reducedwelfrefoct2013_reducedwelfreffeb2015_reducedwelfrefmarch2015_reduced

Early pages had lots of details about new regulations but these were archived as Universal Credit is still only in operation in relatively few areas and does NOT include claimants who are self-employed.

https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/452149/uc-and-families-q-and-a-aug2015.pdf

dlauc_reduced

In most areas, Universal Credit is NOT being claimed by families but only by people without dependent children although the Government has gradually been adding to the list of JobCentres where families making new claims for out of work benefits will go through Universal Credit instead of Jobseeker’s Allowance.

This is limited to JobCentres where Universal Credit was ALREADY being tried out for single claimants AND where families meet additional eligibility conditions. Any NEW JobCentres starting with Universal Credit AFTER February 2015 will NOT take claims for families. “Families” include lone parent households.

https://edyourself.wordpress.com/2015/10/20/where-does-universal-credit-apply-to-families/

welfrefapril2015_reducednovember2015welfpage_reduced

https://edyourself.wordpress.com/2015/10/22/more-about-when-universal-credit-will-affect-your-family/

However, when Universal Credit does come in for the self-employed there will be a Minimum Income Floor applied after the first year of self-employment known as “the start-up period”.

http://edyourself.org/articles/welfarereform.php#universalcreditselfemployment 

http://www.legislation.gov.uk/uksi/2013/376/part/6/chapter/2/crossheading/gainful-selfemployment/made

The Minimum Income Floor means that low income self-employed claimants will be assessed for top-up as though they are already earning the Minimum Wage for the hours worked, and – crucially – where low-earning claimants declare fewer hours they  will have to apply for jobs alongside their self-employment, as a condition of receiving the Universal Credit top-up.

This is how Universal Credit will work for lone parents http://edyourself.org/articles/welfarereform.php#loneparentsuniversalcredit

In couples where the “lead carer” is employed or self-employed and claims the Universal Credit in-work subsidy because of low earnings, the parent who is not the “lead carer” will be expected to look for a job as one of the conditions for the household receiving Universal Credit. [More]. Details can be found here (pages 5-7).

When self-employed claimants on Tax Credits move over to Universal Credit the Minimum Income Floor will not apply  for the first 6 months

More on Universal Credit 

Summary

For self-employed people claiming Tax Credits the 2015 qualifying remunerative work test is NOT the same as the changes we have been anticipating under Universal Credit ever since 2012. 

This is what I think is now being asked of self-employed Tax Credits claimants who don’t earn much money – historically or currently  – from selling goods or services:

  1. what evidence are you able to provide that your business is not just a hobby
  2. can you show in some detail what is involved in your business
  3. if your business is not new but has never made a profit in the past, what does this indicate for the future eg were there specific circumstances in the past which you anticipate will not apply in the future, or are you looking to do things differently
  4. how have you tried to sell your goods/services so far
  5. have you tried different locations including online sales/increased promotional activity
  6. have you looked into diversifying in the same field eg offering related services or adding different goods/services
  7. are there other income streams you are considering for your business

 

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3 thoughts on “Tax credits and self-employment

  1. Pingback: Tax credits and self-employment | sideshowtog

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