Universal Credit is set to replace tax credits, income support, income-based jobseeker’s allowance, income-based income and support allowance and housing benefit.
Omagh based accountant Seamus Mc Caffrey
The advantages to the new credit are that it is a single working age benefit and no complex working hours rules as there are in working tax credit.
However, there are many disadvantages, particularly the way in which self-employed earnings are calculated and reported. The new benefit was introduced from April 2013 on a pilot basis only focused on single unemployed people with no children. Self-employed people are not eligible to claim until April 2016.
Tax credits have been reasonably simple to operate. Entitlement is assessed on the basis of the tax year; so a self-employed person completing a tax credit form transfers the figure for his trading profit from his tax return to the tax credit application or renewal form.
Trading losses are calculated similarly for income tax and tax credits but relief is given differently. For income tax purposes losses can be carried back and forward but for tax credits losses are set-off in the current year only.
However, Universal Credit is totally different. The basis periods, known as ‘assessment periods’ are one month from the first date of entitlement and each subsequent period of one month. Self-employed earnings are calculated for each assessment period on a cash-in cash-out basis. The method in its current form has no facility for giving relief for any losses created by deductible expenses in any one month exceeding actual receipts. Where a person is self-employed running a business he will be subject to a ‘minimum income floor’ which means that if the claimant’s earned income, employed and self-employed, falls below the minimum income floor in any month, the Universal Credit will be calculated as if he had earned that minimum.
Exceptions include the first year of trading. The minimum income floor is broadly equivalent to the national minimum wage, currently £6.50 per hour for aged 21 years and over, for the number of hours the person is
expected to work. An allowance for tax and national insurance paid is included in the minimum income floor, but not for pension contributions.
Unearned income is deductible pound for pound from the Universal Credit award and, capital in excess of £16,000 disqualifies all claims; capital of £6,000 or less is ignored. If the business is run as a limited company, Universal Credit looks through the company to the claimant. The income of the company is treated as the person’s self-employed earnings and subject to the minimum income floor.
Self-employed claimants are required to report their profits online within 14 days after the end of each assessment period.
The proposed Universal Credit application rules are very confusing for the self-employed. The concept of a ‘minimum income floor’ is difficult to understand and the suggested requirement to report this figure so frequently means that self-employed people must keep records very up to date and be in regular contact with their accountants.
(Source – Impartial Reporter – 14/05/2015)