When I was born, my father had been a self-employed taxi-driver for some time. But he gave it up when I was 7 and took a job with a motor parts manufacturer, so that he could get a mortgage and buy our first home. At the time, getting any kind of credit or benefit was virtually impossible if you were-self-employed.
Supposedly, in this era of widespread self-employment and enlightened(?) thinking, proving your financial viability (and eligibility for benefits) if you’re self-employed isn’t such an issue.
Or is it?
Passing the Self-Employed Eligibility Test
Although he has now seen the decision successfully overturned in court, a sole trader was told by the HMRC last year that he wasn’t eligible for tax credits. This was despite completing HMRC’s questionnaire and submitting:
- certificates documenting his skills
- ‘preliminary accounts’ (hand-written, dated and costed records of his jobs and outgoings)
- Printed leaflets advertising his business
An HMRC official told him:
“I’ve decided that you’re not entitled to Working Tax Credit. This is because the information you’ve given me does not show: ‘“[your] trade, profession or vocation is regular and organised; [your] trade, profession or vocation is commercial; [your] trade, profession or vocation is carried out with a view to profit.’
“As a result of not meeting our definition of a self-employed person you are not treated as being engaged in qualifying remunerative work.”
“My decision does not affect any other action we may take if we suspect that you have committed a criminal offence. For example, we may take criminal proceedings against you.”
Proving You’re Organised, Commercial and Working for a Profit
The sole trader had explained to HMRC that that he was keeping his business simple “to keep cost down.” In answer to a question about how he was advertising his business, he stated “taken out an advert on gumtree. Going door to door handing out leaflets.”
His initial response to HMRC’s refusal of his WTC application, which is quoted in the court case notes in its entirety, addressed each of HMRC’s criteria. Here’s the gist:
- Organised: The sole trader pointed out that his business “is still in very early stages… I’ve only been trading for about 2 months. I’m taking bookings well into next month, building up a customer base and getting my business in the public eye.” How much more organised, he asked, could he be? “My business is a simple idea, there is no need for complex and expensive business plans.”
- Commercial: “I’m offering a service that can be bought by the public, that is making a profit. what exactly is your definition of commercial?”
- A view to profit: “Why would I even bother with any of this if I didn’t intend to make a profit? Do you think I’m doing this for fun? After being on Job Seekers allowance with no sight of a job, I decided to try and make a success of something instead of waiting for other people to give me a chance. I want to do it for myself. I’m in this for the long haul with the intention of being successful and making a profit.”
“To summarize, I thought working tax credits was supposed to help people on low incomes. It’s difficult to forecast what my earning will be, come the end of the tax year, but I would greatly appreciate help in trying to make my business a success.”
It’s a story – and the outline of an early-stage, one-man business – that will be familiar to many people and evoke their sympathy. But there are lessons us self-employed folk can learn.
A Proper Paper Trail
Although the decision was eventually overturned by a higher tribunal, with the judge urging HMRC to be more realistic in their expectations of new sole traders, the first-tier tribunal – who upheld HMRC’s decision – made some points worth consideration by anyone self-employed.
They claimed the sole trader “was unable to provide sufficient evidence to show that his self-employment was commercial, profitable, regular and organised.” While he had supplied evidence. They felt it was “lacking”. There were no receipts, expenses, sales records, purchase invoices or financial projections.
If you were called upon to prove your business or freelance work is organised, commercial and carried out with a view to making a profit, could you do so adequately? Judge Nicholas Wikeley has made it clear in his ruling that you don’t need a complex business plan or an accountant to prove the viability of your business – and that the hours you spend setting up a business and handling administration, unpaid though they may be, still count as working hours.
However, to ensure that you don’t find yourself battling HMRC in a tribunal to claim what you’re rightly owed, it’s worth checking that you:
- Keep an accurate record of the hours you work and what you’re doing in those hours – are you dog-grooming/writing/plastering or doing admin/business tasks (book-keeping, blogging, designing an advert)?
- Keep receipts and invoices for ALL your work and ALL your expenses
- Have evidence of your efforts to advertise and promote your services
- Have some idea of your expected earnings in your current tax year and at least a rough plan for how you might continue and/or grow your business in the future
The tribunal notes are interesting, accessible and well-worth a read for anyone elf-employed.
Also be sure to check out our Self Employed Advice Guide