Welfare Reform Bill

Memorandum submitted by the Marsland Nash Associates (WR 13)

1. I am a director of an accountancy and tax practice that is registered with the Chartered Institute of Taxation and based in South Devon that has since 2003 offered a Tax Credit Service to clients.

2. When tax credits were introduced in April 2003, the accountancy press at the time were very much undecided as to whether accountants should offer advice to their clients regarding tax credits and as a result overwhelmingly the vast majority of accountants decided against offering any advice. Instead their engagement letters included a paragraph specifically stating that they would not offer any advice on tax credits.

3. My own personal view at the time was that this was incorrect as tax credits had the potential to help a vast number of businesses, particularly those that were just starting out and those that got into difficulty where profits reduced or in some cases losses were generated.

4. In 2008 my firm set up a joint venture business with another organisation and we created the Tax Credits Team, the sole purpose of which was to provide accountants across the UK with training on tax credits, systems and software so they could offer this service to their clients.

5. I have to say that since 2003, where it comes to the self employed, I have yet to see any client that completes their own tax credits annual declaration form, complete it correctly. In most cases client’s end up receiving less that they should have done. In some of these cases the amounts lost can run into many thousands of pounds with little prospect of them being able to go back and have the claim revised. This is because of the measures in the tax credits legislation that only allows appeals to be made within 30 days of receiving an award notice, although there is scope for this appeal to be up to 13 months later, I have yet to see one of these appeals succeed.

6. The tax credits legislation is very complex and from what our experience tells us from the clients we deal with, those individuals within the tax credits system do not understand how the calculations work and also how you arrive at the figures that need to be declared to the tax credit office each year.

7. Whilst I agree that there needs to be reform of the system and the principals surrounding the Universal Credit are admirable, the current bill makes very little reference to the self employed and therefore, the purpose of this submission is to make those members aware of the current position of those that are self employed in the tax credits system and perhaps consider some of these points as being introduced into the Bill.

8. Some of those relevant issues are as follows.

Number of hours worked

9. For a self employed person to obtain working tax credits they have to meet four conditions.

· They must be working at the date of the claim.

· The work must last for at least 7 days.

· The must meet the hourly test (see below).

· The work must be done in expectation of receiving a payment.

10. The hourly test is either 16 hours or 30 hours and to arrive at this HMRC allow not only the time spent on chargeable work but also the time spent on visiting customers and suppliers, travelling to the bank, time spent on marketing the business, cleaning the business the business vehicle and other activities relating to the trade they carry out. Therefore it is very easy for the self employed, even those newly self employed to meet the test. The Universal Credit makes very little reference to how much time spent on a new business venture would be acceptable without the trader undergoing the conditionality requirements.

11. Furthermore, the new proposals refer to claimants declaring the number of hours they engage in their business but makes no reference to the hours that should be included. Under the tax credits system the number of hours that can be included in the eligibility for working tax credits can include a great deal of time that is not directly linked to earnings (see above paragraph).

12. I can see a situation where a claimant will report the wrong hours and on the basis that national minimum wage will be applied to those hours the incorrect Universal Credit will be paid out. This will become even more of an issue as weekly hours change as is the case with most self employed individuals. In addition to this for those businesses that are struggling with low profits or losses, by taking the reported hours and multiplying that by national minimum wage, this will have a detrimental impact on the amount of Universal Credit paid.

13. As a result of the above, there could be situations where the claimant has to change their reported hours on a weekly basis because in one week they may be very busy and the following week they are not so busy.

Profits and losses

14. To qualify for working tax credits those individuals that are self employed have to be carrying out an activity with a view to making a profit. In our experience anyone starting a business always has the intention of making a profit from the activity, however, there are many circumstances where losses are generated in the first year of trading.

15. Where a profit is not earned and instead losses are generated, and please bear in mind that the results that are shown in the trader’s business accounts are in most cases not the results that they pay tax on, those losses for tax credit purposes only can be offset in a number of ways.

· Against other income of the individual making the loss

· Against income of a joint claimant (wife, partner, civil partner)

· Carried forward to be offset against the trader’s first available profits of the same trade.

16. It is crucial that the committee members understand this when looking at the provisions for how profits and losses will be taken into account in the proposed Welfare Reform Bill as if losses are not taken into account in full as a deduction from household income, many families may end up losing significant amounts of Universal Credit.

17. This is best explained using an example of a husband and wife with 2 children and there tax credits entitlement in 2010/11.

18. Husband is self employed at makes a loss in the tax year 2010/11 of £30,000

Wife is employed and received a salary of £20,000

19. In the above case the household income for tax credit purposes would be Nil as the husband’s losses exceed the wife’s salary and as such the family would receive full entitlement to tax credits in 2010/11 which is this case would be £9,760.10.

20. Furthermore, as only £20,000 of the losses out of a total of £30,000 have been offset, the remaining £10,000 would be carried forward to be offset against any profits the husband makes in future years.

21. In the current tax credits system the vast majority of those individuals that are self employed and complete their own tax credits annual declaration form do not understand the treatment here trading losses are incurred. In fact, the annual declaration form TC600D in box 2.4 states that ‘if you made a loss enter 0.00’. See the notes. Our experience tells us that individuals do not go searching through the notes provided or online to find the working sheet ‘tax credit relief for gift aid donations, pension contributions and trading losses’ (form TC825), but instead simply enter 0.00 and furthermore, they are unaware that they can offset the trading loss against a joint claimant’s income.

22. As a result of this and using the above as an example, the annual declaration would probably have been completed with the husbands self employed income as Nil and the wife’s employment income as £20,000. The result being that the Tax Credits awarded to them would be £4,463.90 a loss of tax credits of over £5,000.

23. The benefits of the existing tax credit system are that where losses are generated they are treated as reducing household income and thus increasing the award which ensures that an income is maintained to support the household by way of extra tax credits. The Universal Credit does not appear to follow this. Instead, the proposals set out would seem to indicate that a trader would be deemed to receive a set amount of income dependent upon the number of hours they operate which in our view would result in a loss of award particularly where losses are incurred or very low levels of profit are generated.

24. In the above example if the trader was assumed to have received the national minimum wage for the hours reported the amounts received under the new proposals and that received under the current tax credits regime are likely to be very different. It is not possible to quantify what the loss would be at this time as the elements of the Universal Credit award have not yet been set.

25. Capital allowances at present are available to the self employed and the effect of this is to reduce the profits subject to tax. It is hoped that the traders profit figures for Universal Credit will be the same as those which the trader is liable to income tax.

26. The proposals also refer to traders being expected to show a reasonable income from the business activity. It is unclear if this is referring to profit or turnover and I would ask the committee members to clarify this point as the bill passes through the committee stage.


27. As can be seen from the statement above, a lot is still to be resolved with regard to the self employed and how they will be treated within the Universal Credit. There is much uncertainty as to whether the self employed will actually benefit or lose their current entitlement following the introduction of the Universal Credit and I would ask that the committee members look very carefully at the proposals and the impact they have on the self employed.

March 2011