Working Tax Credits - Repaying

Deepmistrust

leveller2911 wrote: »

Yep, I couldn't agree more.His ideas of Anarchism are spot on,shame those in power don't agree but I guess they wouldnt be in power if they did..:D

Haha, totally, I guess that is why so much effort is spent in making anarchism out to be synonymous with chaos.

Much like your signature says, they wouldn't want to do themselves out of a nice little earner.

leveller2911

Deepmistrust wrote: »

if he is using any loophole, it's the one that means his entitlement NOW is based on his lower income of £11k last year.

To be fair, that could happen to anyone who takes a massive rise in earnings this year. Their entitlement is still based upon last years figures.

The difference is the OP hasn't taken a massive fall in earnings in any year, he's just used it for investing in his business which in tern should make it even more profitable.

Jowo_2

Deepmistrust wrote: »

Isn't self-employed different though. I thought Self Employed persons (i.e. sole trader) was defined that they and the business is one entity.

Whereas a limited company is a seperate entity (in it's own right) from it's directors. So the income of a sole trader is their profit or loss, but the income in this case is the drawings or wages paid to the directors?

Edit: Though I have no idea what figures HMRC use from income purposes for limited companies. I'm assuming as your money is capital and tied up in the business it falls under the normal rules as applies to anyone - that only interest earned on capital is considered. So unless you pay yourself dividends, I doubt they would consider it. But I'm just guessing to be honest.

Yes, your observations on the difference between sole trading and limited companies are sound but what I'm seeking is the criteria that HMRC use to calculate tax credits for the self-employed, particularly those using a limited company.

A company director can set their own salary and choose to withdraw dividends which also means that they can set a low salary and not withdraw dividends for any reason.

So do HMRC just examine the salary and dividends to calculate tax credits or do they drill down into the business bank account to examine the balance or review the accounts to determine actual income and expenses rather than estimated ones?

pierrelejohn

Sole traders when they get profits can spend them how and when they like, they pay national insurance and tax
as a ltd company you can earn a wage or no wage so dont pay national insurance or tax but when the company profits you can withdraw that as a dividend.
Any profits in the company are subjected to corperation tax (@ 21%)

when we set up the company
year 1 & year 2 we never made any profit - or had any wages, and as the wife worked full time we muddled through
year 3 we managed to make a 40K profit which we saved most of (wife was working with me then) we never received any tax credits year 1,2,3
year 4 we invested in the money and drew out a small wage of £5750 each - and lived off the savings from year 3 - we couldn't claim because we had no idea what the company would earn
year 5 now hmrc have said that we are allowed a lump sum of £4500, because our income was so low year 4
year 5 again we don't know what we will earn, it may be nothing, if we have a good year then we will repay any overpayment.

I really can't see what the problem is here

If i had a job and was earning 40k per year1, 2, 3, year 4 I lost my job, so I got a part time job & some free training to better my prospects, then year 5 I land a fab job of £60k a year, by the logic imposed, I shouldnt have claimed anything year 4, because tax payers shouldn't pay for people to better themselves, and therefore earn more in the future.

Deepmistrust

leveller2911 wrote: »

Deepmistrust wrote: »

if he is using any loophole, it's the one that means his entitlement NOW is based on his lower income of £11k last year.

To be fair, that could happen to anyone who takes a massive rise in earnings this year. Their entitlement is still based upon last years figures.

The difference is the OP hasn't taken a massive fall in earnings in any year, he's just used it for investing in his business which in tern should make it even more profitable.

I think it makes a mockery of the system, that a person can have huge assets and still be entitled to WTC. But in that respect he's not doing anything wrong legally, he is perfectly entitled to his claim.

Imagine this scenario (this is loosely based on the OP's scenario - so please don't take offence OP).

OP re-invests most of his profit every year into the business, only drawing a small wage maximising his WTC entitlement.
In 5 years, his balance sheet will record huge capital assets.
Effectively he owns a huge asset base and a business worth a lot of money. Which in theory he could sell at anytime. And in the mean time it's the WTC system that has supported him to accumulate such high value of assets.

But, on the plus side, anytime he intended to liquidate or sell his share of the business, he would be liable for tax on his sale. (But no doubt will employ a creative accountant to reduce any liability).

I'm just not convinced that ignoring capital is fair. Not just for company directors, but even in the example with the million-pound house.

Wee_Willy_Harris

pierrelejohn wrote: »

(Post clipped)

yes - I still pay their NI, but at least im employing people, at least they are not claiming the dole, or other benefits that they arent entitled to.

Oh, I love this one. Number 12 on the list of "Things to say when you get caught".

I have no idea what your business does, but whatever it does, I'll bet that somebody elses business does it too. It's called competition and whatever you don't do, they will. And to do so, they will need staff. So, if you decide to bin it all tomorrow, your competition will fill the gap and use your staff to do it.

You just employ them because they make money for you. If you don't exploit them, someone else will. But to try and suggest that their employment is based on your goodwill is, frankly, laughable.

Deepmistrust

Jowo wrote: »

Yes, your observations on the difference between sole trading and limited companies are sound but what I'm seeking is the criteria that HMRC use to calculate tax credits for the self-employed, particularly those using a limited company.

A company director can set their own salary and choose to withdraw dividends which also means that they can set a low salary and not withdraw dividends for any reason.

So do HMRC just examine the salary and dividends to calculate tax credits or do they drill down into the business bank account to examine the balance or review the accounts to determine actual income and expenses rather than estimated ones?

I think because the distinction is that the business (in this case) is a seperate entity means they cannot use the capital tied in the business as his income, when assessing his eligibility? Obviously I'm only using logic and my knowledge, I dont know this for fact. Hopefully someone can clarify (which I think would be a help on this thread).

Deepmistrust

pierrelejohn wrote: »

Sole traders when they get profits can spend them how and when they like, they pay national insurance and tax
as a ltd company you can earn a wage or no wage so dont pay national insurance or tax but when the company profits you can withdraw that as a dividend.
Any profits in the company are subjected to corperation tax (@ 21%)

when we set up the company
year 1 & year 2 we never made any profit - or had any wages, and as the wife worked full time we muddled through
year 3 we managed to make a 40K profit which we saved most of (wife was working with me then) we never received any tax credits year 1,2,3
year 4 we invested in the money and drew out a small wage of £5750 each - and lived off the savings from year 3 - we couldn't claim because we had no idea what the company would earn
year 5 now hmrc have said that we are allowed a lump sum of £4500, because our income was so low year 4
year 5 again we don't know what we will earn, it may be nothing, if we have a good year then we will repay any overpayment.

I really can't see what the problem is here

If i had a job and was earning 40k per year1, 2, 3, year 4 I lost my job, so I got a part time job & some free training to better my prospects, then year 5 I land a fab job of £60k a year, by the logic imposed, I shouldnt have claimed anything year 4, because tax payers shouldn't pay for people to better themselves, and therefore earn more in the future.

The analogy doesn't really work, because (from my argument anyway), I'm not disputing that you are assessed on your previous years earnings, but rather that your capital assets (which HMRC ignore for WTC purposes) could be huge, yet because you draw only the minimum from the business, your entitlement to WTC is high.

I'm not blaming you for that loophole either, i'm just making a point that this is a perfect example why there is a case for looking at capital when assessing claims.

I just don't think the system had company directors accumulating large net assets and building up their businesses, behind the idea of helping working families, when it was set up.

Jowo_2

I still think this thread needs input from someone who works in a professional capacity in the Tax Credits system. Any takers?