Universal Credit – know the rules

Universal Credit – a word for warning for anyone who runs an Owner Managed Business

By: Anne Wilson

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Anyone who runs an Owner Managed Business (OMB) and is currently claiming either child tax credits or working tax credits, will have to master the complexities of claims to universal credit which will replace various welfare benefits for claimants who are employed, self-employed or unemployed. Universal credit will start for some claimants in 2016 but will be rolled out to all claimants by 2019.  Claimants may be able to elect to continue with tax credits until 2019 if that is more beneficial.

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A guide to Universal Credit for the self-employed can be found at

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https://www.moneyadviceservice.org.uk/en/articles/universal-credit-for-the-self-employed

The recent announcement about the new digital tax account and the ability for the self-employed to link their accounts package into the digital tax account is obviously intended to dovetail with the rules concerning universal credit and the self-employed.  However this assumes that the self-employed claimant can afford both online access and accounts software, which seems unlikely if their income is so low that they are able to claim universal credit.

The purpose of the article is not to take a claimant through the various stages of a claim but to highlight some of the major differences compared with the current system.  Given the complexity and the need to make monthly claims it would not be surprising if the number of self–employed claimants reduces dramatically despite assertions that the impact of universal credit will be neutral.

 

Current rules

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  • Claims to benefit are made annually and follow the tax year and so it is only necessary for the claimant to transfer the details from their tax return to their benefit claim.
  • The claimant may carry forward surplus tax losses to the following benefit claim period.
  • The net taxable result is the same figure as used in the benefit claim.
  • Claimants trading through a company are assessed to benefit entitlement on the income they draw from the company as salary and dividend and not on the company’s trading results.
  • Capital is not means tested.

 

Universal credit rules

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  • Claimed by reference to a monthly assessment period on a cash-in cash-out basis.
  • No relief is given for business expenditure that is incurred “unreasonably” this is not defined in legislation!
  • Relief for interest on a business loan is restricted to £41 in the assessment period.
  • There is no deduction for expenditure on the purchase of a car but a fixed deduction is allowed for mileage.
  • No relief is given for expenditure on non-depreciating assets e.g. property.
  • Relief for carry forward of business losses is limited.
  • Income in excess of the threshold for a claim will be carried forward to later period to restrict future claims to benefit.
  • A minimum level of income will be assumed for claimants based on the national minimum wage and an assumed number of hours worked.
  • A claimant trading through a company in a similar way to a sole trader or partner will treated as if the income of the company is their personal income (this will prevent shareholders leaving cash in the company to increase their benefit entitlement).

 

Although 2019 seems a long way off some claimants may be affected as early as 2016 so planning ahead is advisable and keep a look for further guidance as matters develop.