Universal Credit Part 3: The Self-Employed

In continuation from Part 2 of this article we will now explore the specific areas of concern that may be of importance to the Self-Employed. You will remember in Part 2 we closed with the following paragraph:

“HMRC is currently consulting on a “cash basis” for those running low income businesses, but the UC regulations, administered by the DWP, have created a standalone system separate from that which HMRC is currently consulting on. This creates additional concerns for us as accountants which we will explore in Part 3, the final instalment of this article on Universal Credit”.    

Concern 1: Mixed Use

The draft regulations only allow the deduction of expenses which have been incurred “wholly and exclusively” for business purposes. This may at first seem to be similar to current tax legislation but on closer inspection we will realise that the tax legislation [ITTOIA 2005, s34 (2)] allows for the deduction of business expenses in instances where it only forms part of the whole expenses. The draft regulation is silent in this regard.

The next issue, concerns the use of the home for business purposes. The Universal Credit regulations in proposing a flat rate for particular deductions as business expenses seem to have excluded the general business administration and storage at home.

Finally, it should be noted that “cash accounting” will be optional for tax purposes but appears to be mandatory for Universal Credit (UC).

Concern 2: Unreasonable Expenses

Under the UC regulation, it will not be possible to get a deduction for expenses which are considered to be unreasonable. There is no definition of unreasonable in the draft regulations and past tax cases tended to define unreasonable expenses as those that have an element of personal choice.

At this stage we are not sure how this issue will be dealt with but it is quite strange that a public servant at the DWP may have the power to dictate to business owners the reasonableness of their business expenses.

Concern 3: Carry Forward

Of the three, this in our opinion is the most serious issue. Cash accounting for tax purposes is based on accounts over the period of a year and allows the carry forward of negative balances to be set of against future positive balances.

In stark contrast the draft UC regulation looks at accounts on a month by month basis and further proposes that negative balances should be treated as zero and therefore disallowing the option for a carry forward to future periods.   The problem with this approach is illustrated in the example below.

Therefore under UC, expenses which are incurred for a whole year will be treated as being wholly applicable to the month in which they arise.

Illustration

James and Wendy were both seasonal retailers of children summer clothing and worked on their separate business ventures during the months of June, July & August. They were both self-employed and each sold £5000 of stock during each month at a gross profit margin of 50%.

Assume for the purposes of this illustration that they have no other expenses and James bought all his stock in June while Wendy bought hers as she needed to in each month.

Calculating their income as required by the draft UC Regulation gives the following results:

	James	Wendy
June
Sales	5,000	5,000
Less Stock Purchased	7,500	2,500
Total	-2,500	-2,500
Reportable for UC		-2,500
July
Sales	5,000	5,000
Less Stock Purchased	-	2,500
Total	5,000	2,500
Reportable for UC	5,000	2,500
August
Sales	5,000	5,000
Less Stock Purchased	-	2,500
Total	5,000	2,500
Reportable for UC	5,000	2,500
Total Income Reportable for UC	10,0000	7,500