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Monthly income tax payments for self-employed
Normally a self-employed person pays income tax in one or two instalments each year, which is calculated to produce a lumpy result if they also claim UC, where self-employed income and expenses are accounted for on a cash basis for the most part.
Presumably if a self-employed UC recipient tries to avoid this problem by opting for a “budget payment plan”, which HMRC offer to allow or weekly monthly payments towards your income tax bill, such payments would be equally allowable as expenses as the more common yearly or twice-yearly tax payments?
In other words, is there any chance that the monthly or weekly payments would be treated as mere deposits, and so not deductible when calculating net profits until the dates when the self-employed person’s tax liability has to be ultimately settled?
Please tell me that I’m being over-cautious!
I can’t find it right now, but DWP have definitely said that payment plans with HMRC are fine, and the claimant is expected to simply report the actual amounts of any payments in any AP.
That’s been my understanding from the outset and is consistent with the terms of step 3 of the calculation in reg.57 of the UC Regs 2013, requiring deduction of the amount of any payment made to HMRC by way of NIC or income tax in the particular assessment period in question.
Yes. It certainly seems much looser than the normal “wholly and exclusively” rule for business expenses of Reg. 58.
But it does raise the question: what if someone overpays? Someone could even deliberately do it if they expect to be off UC anyway by the time HMRC refund them the money.
I would imagine a payment plan based on a reasonable expectation of profits is all that would be allowable.
There’s an interesting condition in Reg. 57: “income tax in respect of [the] trade”. However, income tax is never really paid in respect of a particular segment of income. That is, the liability is calculated based on overall income, not individual components. I know LITRG have grappled with this issue in the past.
1. On Charles’s first point about overpaying HMRC above what was required by a payment plan, I think it’s really difficult to produce a general answer rather than one dependant on the circumstances of particular cases. Certainly, if a claimant overpaid in the expectation that they would be off UC by the time that HMRC made any refund, there would be an argument that the element of overpayment would not have been “by way of income tax in respect of” a trade etc But even then, if HMRC had accepted the overpayment and credited it to the claimant’s tax account, could it not be argued that it was by way income tax? And if there was evidence that because of an upturn in business or taking up a new trade the amount of the existing payment plan would be inadequate to cover the tax liability in the current tax year, might that make the latter case much stronger? It would help if I had more than minimal knowledge about how the HMRC payment plans work, e.g. whether they are based on liability in the previous tax year or expected liability in the current year and whether they can be altered by agreement to cover an anticipated increased liability in the current year (rather than the person unilaterally overpaying in those circumstances).
2. On Charles’s second point, where there is more than one trade etc, I don’t think there is a real problem. Step 1 in reg.57(2) requires the calculation of profit or loss in an AP for “each” particular trade etc. Then step 2 requires, where there is more than one trade etc, the adding together of those calculations, so that, for example, losses in one trade are offset against profits in another. Then step 3 requires the deduction from the amount resulting from step 1, and step 2 if applicable, any payments made by way of income tax or NIC in respect of “any” trade etc. In the context of the preceding steps, I would say that that must mean all the trades etc that have been combined in step 2, so that there is no question of trying to apportion a payment of income tax between the various trades involved. I think that the reference to “in respect of any trade etc” should be regarded as mainly to clarify that payments of income tax or NICs in respect of other forms of earnings cannot be deducted in the calculation of self-employed earnings.
1. The ‘budget payment plans’ we’re discussing here are very flexible, and are not like the payment plans you can (sometimes) set up if you are in difficulty (usually known as ‘Time to Pay’ arrangements). With a budget payment plan, HMRC will allow you to do pretty much what you like, as it is all payments in advance anyway.
2. I agree in the case of multiple trades that it shouldn’t be too difficult. I think the issue is perhaps not as clear when there is other income liable to income tax (pension income, trust income etc).
LITRG state:
“Any payments or repayments of income tax, National Insurance contributions (NIC) (Class 2 and Class 4) and VAT must be included in the month in which you make or receive them. The tax and National Insurance should, strictly speaking, relate to your self-employment, however in practice it is not possible to separate tax out in this way.”
And the Revenuebenefits website states:
“According to DWP guidance (Chapter H4123), the income tax that can be deducted is the actual amount paid to HMRC in the UC assessment period in respect of the trade, profession or vocation. This is based on a strict reading of the Regulations means that only tax due on income from that particular trade, profession or vocation can be deducted. In practice this will be impossible to calculate for claimants who have more than one source of income that is dealt with through self-assessment without further guidance from DWP.”
2. On Charles’s second point, where there is more than one trade etc, I don’t think there is a real problem. Step 1 in reg.57(2) requires the calculation of profit or loss in an AP for “each” particular trade etc. Then step 2 requires, where there is more than one trade etc, the adding together of those calculations, so that, for example, losses in one trade are offset against profits in another. Then step 3 requires the deduction from the amount resulting from step 1, and step 2 if applicable, any payments made by way of income tax or NIC in respect of “any” trade etc. In the context of the preceding steps, I would say that that must mean all the trades etc that have been combined in step 2, so that there is no question of trying to apportion a payment of income tax between the various trades involved. I think that the reference to “in respect of any trade etc” should be regarded as mainly to clarify that payments of income tax or NICs in respect of other forms of earnings cannot be deducted in the calculation of self-employed earnings.
As Charles notes we have raised this wording on a number of occasions, going back to when the legislation was in draft. Both Reg 55 and 57 have similar wording - that only tax in respect of the employment or trade can be deducted. But it is impossible to apply that in practice in many cases. Our understanding is that the DWP intention was originally as set out in your last sentence, but in practice they now seem to accept this isn’t possible. For example, if an employee has a tax debt coded out, that will result in them paying more tax and a reduction in net pay. UC will increase as a result because the RTI feed shows the amount of tax paid - there is no way to break it down. DWP don’t break it down, they accept the full figure.
Similarly, if a self-employed person is also in receipt of some other taxable income, they will in practice deduct the whole amount of their tax bill against their self-employed earnings as there is no way to separate it out between the two income sources. There is no mechanism or guidance about how you would go about it - which income source would have the personal allowance set against it? Tax doesn’t operate like that and so DWP would need some legislation that introduced some rules about how you would do it for UC I think.
I think that was the point Charles was making - but i’m sure he will correct me if i’ve misunderstood!
I think that was the point Charles was making - but i’m sure he will correct me if i’ve misunderstood!
Yes, it is. And you’ve made the point much clearer than I did!
By the way, did you ever get any clarity about whether Corporation Tax is allowable?
Anecdotally, I’m told DWP tell claimants to include it as an expense in the AP in which they pay it. I did try a FOI request, but didn’t get anywhere.
I think that was the point Charles was making - but i’m sure he will correct me if i’ve misunderstood!
Yes, it is. And you’ve made the point much clearer than I did!
By the way, did you ever get any clarity about whether Corporation Tax is allowable?
Anecdotally, I’m told DWP tell claimants to include it as an expense in the AP in which they pay it. I did try a FOI request, but didn’t get anywhere.
No, we haven’t had a concrete answer on this. We have a growing list of issues we need to try and pick up, especially around Reg 77.