From October 2013 Income Support, Jobseeker’s Allowance, Employment and Support Allowance, Housing Benefit, Child Tax Credit and Working Tax Credit will be replaced with a Universal Credit. This means that UC will be paid to people in and out of work.
In this article We will focus on the implications of being self-employed on UC, the minimum income floor and the income reporting.
The intention is to limit the amount of UC a self-employed claimant can receive. The stated purpose of this is “to limit the extent to which Universal Credit subsidizes underemployment and long-term low-earning businesses”.
The onus will be on the claimant to demonstrate that they are carrying out a business with an expectation of profit and that they are dedicating sufficient time to the business. The type of evidence which DWP could ask for includes diaries of appointments, lists of customers and suppliers, proof of tax registration with HMRC, marketing materials to secure new business, a business plan, receipts for stock purchased, order and sales records and bank statements. Accountants may need to assist clients in gathering this evidence.
2. MINIMUM INCOME FLOOR – MIF
For self-employed claimants there will be a floor of assumed income. The effect of this would be to limit the amount of UC a claimant can receive while declaring they are self-employed. There is a start- up period which gives a one year period of grace but an individual is only allowed one such period in their lifetime. There is no relaxation of the MIF when a business experiences a genuine dip in profits or where there is expenditure for the purposes of growing the business such as taking on a new employee or investing in large items of expenditure.
3. INCOME REPORTING
Self-employed claimants will have to report their income on a monthly basis. This monthly assessment period will run from the date the claimant first becomes entitled to UC. The earnings will have to be reported online within seven days of the end of the assessment period. For most businesses this is a tight deadline and many will struggle to get the required information together in time. Failure to meet this seven day deadline will result in the UC payments being suspended. If the report is not made with four weeks the UC will be terminated.
The self-employed earnings for UC purposes will need to be calculated on an adjusted cash basis. However this cash basis is not the same as the simplified cash basis HMRC are proposing for small business from6 April 2013. Also it is in conflict with the GAAP-based assessment of trading profit currently used for tax purposes. The system used for this monthly reporting is also independent from existing HMRC systems so the usual information will need to be provided separately to HMRC for tax purposes.
Under this proposed stand-alone system claimants will report income received from self- employment (cash in) and payments made for the self-employment (cash out) in the assessment period. The cash out is divided into seven categories but any business expenses must be incurred wholly and exclusively for the purposes of the self- employed activity and must be reasonable.
The categories are:
- regular business costs (e.g. rent, wages, operating leases);
- stock purchased for business;
- Expenses (e.g. electricity, phone, business travel);
- Allowable one-off costs (e.g. capital expenditure, finance leases);
- Income tax payments;
- National Insurance contributions;
- Personal pension contributions (100% of these will be counted as “cash out”).
Any adjustments of the use of home or car for business purposes will follow the proposed simplified cash basis. However interest on a bank loan will be a nondeductible expense while hire purchase payments are fully deductible. This type of distortion will have a direct impact on business decisions.
If you want to discuss this topic in detail please contact us