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Client on UC with loss making limited company

Rebecca O
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Core advice service - Citizens Advice Cornwall

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The client was moved on to UC following birth of a first child. He and his wife are the shareholders and directors of the Ltd company.
I understand income is treated as analogous to partnership. The wife is now not working and no requirement to work due to age of child. The husband works in the business (running since 2017). He has been reporting net zero profit (income - expenses made up to equal income through director’s wage) and reporting director’s wage as income, usually only £100 to £300 per month.

In the last AP his accountant reported a much higher wage £1000+ (to make more use of his personal allowance) and corresponding net loss in the business and this has reduced his UC payment by quite a lot.

If business income and wages are both counted as income for the period, why would it make a difference to the UC payment what amount the directors wage is set to if it always means the net amount is the same? Eg loss: 120 wage 120 net=0 or loss: 1200, wage 1200, net still = 0

And why would you bother taking a wage at all?

Edit:  Most pressing question, when client reports, should they leave out director’s wage and let the RTI from company payroll send this information to avoid doubling the wages? Any light shed on this is gratefully received.

[ Edited: 7 Mar 2020 at 01:14 am by Rebecca O ]
Ianb
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Macmillan benefits team, Citizens Advice Bristol

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My understanding is that someone in this position is treated as self employed. They are supposed to report all company income and expenditure to DWP on a cash accounting monthly basis. The difference is the company profit for the month. That profit is then divided according to ownership to arrive at the claimants income. In this case as the company is wholly owned by the couple the cash profit will be taken as the earnings. But as they have been in business for more than 12 months this is then subject to the Minimum Income Floor (applied for one person only as wife has no work requirements due to baby).

It should make no difference what the accountant is doing in respect of wages, dividends etc. which will affect tax liability but not UC entitlement.

https://www.gov.uk/self-employment-and-universal-credit
“Providing information about your earnings
Everyone claiming Universal Credit needs to report their self-employed earnings at the end of each monthly assessment period. This includes company directors, even those paying themselves by PAYE.

You’ll need to report payments into and out of your business in the assessment period. This includes:

total amount your business received
how much your business spent on different types of expenses, such as travel costs, stock, equipment and tools, clothing and office costs
how much tax and National Insurance you paid
any money you paid into a pension”

DWP should not be using RTI information in this situation. He should also not be reporting the wage as income (nor as a business expense).  UC earnings = money in - money out (excluding the net wage).
[EDIT: this paragraph corrected by Charles below. Wages should be taken from RTI but are an expense reducing the SE earnings from the business.]

(Out of interest were they claiming anything before the birth?)

[ Edited: 8 Mar 2020 at 07:41 am by Ianb ]
Rebecca O
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Core advice service - Citizens Advice Cornwall

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Ianb - 07 March 2020 07:14 AM

... as they have been in business for more than 12 months this is then subject to the Minimum Income Floor (applied for one person only as wife has no work requirements due to baby).

It should make no difference what the accountant is doing in respect of wages, dividends etc. which will affect tax liability but not UC entitlement.

Thanks Ianb.  It was natural migration as new baby meant a claim for CTC on top of existing WTC claim. Wife was working SE.

Client believes he has a six month grace period from MiF due to moving from other benefits. Can this be right? All I can find is reference to the new regulation coming into force Sept 2020 to allow no MiF for 12m for all UC claimants subject to the other conditions apart from age of business.

Ianb - 07 March 2020 07:14 AM

https://www.gov.uk/self-employment-and-universal-credit
“Providing information about your earnings
Everyone claiming Universal Credit needs to report their self-employed earnings at the end of each monthly assessment period. This includes company directors, even those paying themselves by PAYE.

You’ll need to report payments into and out of your business in the assessment period. This includes:

total amount your business received
how much your business spent on different types of expenses, such as travel costs, stock, equipment and tools, clothing and office costs
how much tax and National Insurance you paid
any money you paid into a pension”

DWP should not be using RTI information in this situation. He should also not be reporting the wage as income (nor as a business expense).  UC earnings = money in - money out (excluding the net wage).

This is because essentially it makes no net difference as the whole business profit is treated as his income for the period? Would this be the same even if mif did not apply?

Finally, is it possible that DWP mistakenly took his RTI into account in the last period? He is not actually taking the wage anyway but leaving it in the directors loan account as obviously the business cannot afford to pay him, but the wage maintains his annual NI calculations for year end payment.

 

Ianb
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Macmillan benefits team, Citizens Advice Bristol

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If they were already getting Working Tax Credits they could have added Child Tax Credits to the existing claim. Tax Credits are one benefit made up of two elements. Unfortunately having claimed UC there will be no going back.

I am not aware of any grace period for MIF just because of transfer from legacy benefit. As you say rules change later this year but that is of no use to your client.

The business profit will be taken as their joint income if it is more than the MIF, if it less than the MIF then the MIF will apply.

You need to look at the UC statement to see how entitlement has been calculated.

[ Edited: 7 Mar 2020 at 06:51 pm by Ianb ]
Charles
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Accountant, Haffner Hoff Ltd, Manchester

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His wages as a director are employed earnings, and will be taken from RTI.
As shareholder, he will also be considered to be self-employed, but the wages will count as an expense when calculating the profit.

This means he should deduct any wages paid to himself as an expense when reporting his profit.

The reason his accountant will have paid him a higher wage will be to use up more of his tax-free personal allowance. The money will sit in his DLA to be withdrawn whenever the company can afford it.
EDIT: And of course to hit the NI LEL for the year.

As you have seen, this means his income for UC is greater than the actual profit made that month. However, he will be able to carry forward the loss.

In general, people in this situation with the MIF being applied should pay themselves through RTI in order to create losses which can be used up when the company starts making more money.

[ Edited: 8 Mar 2020 at 10:02 am by Charles ]
Ianb
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Thanks Charles. I’ve added a note correcting my previous post (perhaps I shouldn’t post on a Saturday evening!).

Your last paragraph is not something I had thought of. You are saying that if UC is going to have MIF applied then it makes sense to take a salary with net equivalent to MIF. Are there are any legal accounting issues around taking the salary if the company is loss making?

[ Edited: 8 Mar 2020 at 10:04 am by Ianb ]
Charles
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Accountant, Haffner Hoff Ltd, Manchester

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I can’t think of any problem there. The only issue I can think of is if it looked like the company was heading for liquidation and there were creditors to worry about. Even then, I wouldn’t be concerned about paying yourself minimum wage, especially as the money was going to stay in DLA (usually unsecured) anyway.

I wouldn’t advise people to pay themselves the full MIF, as you will be creating a liability for tax/NI at a time when the company can least afford it, and who can be confident that the business will succeed?
The maximum I think you should do is the level of the NI primary threshold (£8,632 this year).

Ianb
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Thanks, Charles - that makes sense.

Rebecca O
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Thank you Charles, you summed up how the client’s accountant had explained the rationale for paying the higher wage.  UC agreed on the phone today with client that he should continue with RTI and post wage as expense to the business and have allowed resubmission for previous few months where he was reporting the very low wage. He’ll continue to pay himself wages to meet LEL for NI.