Hi,

Is there any guidance on what can be and cannot be costs incurred as a self employed person? My client is self employed but does not have auidited accounts and so the LA are not allowing things that i know they have allowed with clients who have had audited accounts. Or is it a case of arguing the clients side as he cannot afford to have his accounts auidted.

Thanks in advance.

Fri 26-Jun-09 10:06 AM by Kevin D

Most self-employed earners are not legally required to have audited accounts. LA's cannot insist upon them either - the LA should provide clmts with alternative options for evidence (R(H) 01/09).

If an expense is allowable, there is nothing in the HB/CTB regs that allows LAs to treat the expense differently simply because there are no audited accounts. If the expense is allowable, it is allowable.

Apart from specified non-allowable expenses, any expenses reasonably incurred "wholly and exclusively" in the business are allowable. Note the test is "reasonable"; not "necessary".

Examples of non-allowable expenses include depreciation, setting-up / expansion costs, business entertainment - there are others.

Further, clarification of "wholly and exclusively". Some LAs WRONGLY argue that expenses covering BOTH business and personal use are not allowable. However, so long as the business element can be identified, the apportioned cost is allowable - see R(FC) 1/91; R(IS) 13/91; R(H) 5/07. For info, the opposite was found in CH/4042/2007. However, none of the reported authorities appear to have been raised in the latter decision, and reported decisions "trump" non-reported decisions. In short, it can properly be argued that, on that particular point, CH/4042/2007 was wrongly decided.

NB: The onus is on the clmt to show expenses are allowable.

Hope the above helps.

Kevin thats great. The LA WBC have not allowed his costs for hardly any of the equipment needed and used this as his profit meaning reduced award of HB. The swines.

"Equipment" *may* be an issue. The question is whether or not the equipment is "capital" expenditure and/or whether or not it was funded by way of a loan and/or whether or not the "equipment" was replacement or additional (i.e. to expand the business) and/or whether or not any insurance was paid to cover the cost(s). I've *tried* to summarise it, but it ain't easy....

1) Expansion: If the equipment was for the purpose of expansion (including size and/or scope) of the business, the cost will not be allowable.

2) Capital expenditure (NOT paid for by a loan) is not allowable.

3) Capital expenditure (loan) - interest element is always allowable

4) Capital expenditure (loan) - capital element is only allowable if the cost is for repairs, or replacements, of EXISTING assets.

5) Cost of repairs / replacements covered by insurance: amounts covered by insurance are not allowable. Any remaining balance IS allowable (subject to the "reasonable" test).


HB Regs 37, 38 & 39 are primarily at issue (particulary 38).

There ya go; free training .

Thanks again.

I see that it might get messy. I wonder if Tax Aid would help with his accounts that might be the easiest.

Many thanks.

presumably he keeps accounts for the purposes of making income tax returns (or he is in dead trouble)? The expenses allowed for benefit purposes are generally identical with those allowed for tax purposes.

He cannot just not produce accounts - if he can't substantiate his income and expenditure, I'm not surprised that he is disbelieved.

Is he paying his natioal insurance contributions too?

If the term "accounts" is intended to include reference to books / other records, I entirely agree with ariadne. But, there is no requirement to keep formal accounts. Any submission to HMRC can lawfully be made by way of a completed self-assessment form.

However, there are significant differences in the treatment of expenses for HB/CTB when compared to tax. The most obvious example is depreciation - a perfectly lawful and allowable expense for tax purposes, but explicitly disallowed for HB/CTB. The difference was noted in CH/3607/2007 where, at para 38, it was found:
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I accept that the information given to the Inland Revenue and in particular the tax assessment received from the Inland Revenue may not provide all the information the local authority requires and so, in a case where the claimant does not have a professional accountant to prepare detailed business accounts, it may be reasonable to require completion of a form such as the local authority’s self-employment form without reference to the date on which the tax return is completed and the net profit for tax purposes assessed.
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In summary, LAs should not (normally) rely on documents prepared for tax purposes UNLESS the information in any case happens to provide what is required for HB/CTB purposes. For example, a tax assessment should never be accepted by a LA as evidence of s/e earnings (because of differences in how net profit may be reached). However, a copy of a self-assessment form submitted to HMRC *may* be sufficient for HB/CTB purposes.

As to whether the clmt is paying NI contributions (or tax), that is only relevant as evidence to the extent of whether or not the clmt is self-employed (but it is not determinative). Any amounts ACTUALLY being paid for tax/NI by the clmt, are not allowable expenses. HBR 39 directs that LAs must calculate tax/NI with reference to "chargeable income" (i.e net profit). Chargeable income is assessed by the LA (not HMRC), so any actual tax/NI payments are irrelevant for HB/CTB purposes (other than indicating s/e status).

As an aside, HMRC's view as to whether someone is self-employed is not binding on a LA for the purposes of HB/CTB.