Universal Credits - Self Employed

Pedent

Royza wrote: »

Ok, can anyone fill me in on this as I've not followed the UC debate. We run a small business as a partnership (equal shares) and we both work over 30 hours per week. We both claim full WTC (but not HB or any other benefit) - profit has normally been reasonable but below the threshold to reduce eligibility. How will we be affected by Universal Credit?

Sorry, just to clarify: WTC is reduced if you earn over £6420. Are you saying that your profit is less than that, but you consider that reasonable for working more than 30 hours/week?

Royza

Pedent, many small business people, especially tradesmen, live on low incomes for periods of time, especially when market conditions are as bad as they have been in recent years. This year has been the best one in six years but I haven't yet compiled tax return figures. So yes what you state has been the case over the years, but for all I know this year WTC eligibility may be reduced. Fair enough.

My point would be that running a small business is not like being employed. It often involves a few years of hard slog to build up and during this time many unpaid hours are spent. This needs to be encouraged. If you have run a business you will know this to be true. We now have an established customer base and things are building, but I still don't support the extra bureaucracy and disincentive to save built into universal credit. Small businesses largely need to be left alone and supported through their growth phase. WTC did this.

Pedent

Royza wrote: »

Pedent, many small business people, especially tradesmen, live on low incomes for periods of time, especially when market conditions are as bad as they have been in recent years. This year has been the best one in six years but I haven't yet compiled tax return figures. So yes what you state has been the case over the years, but for all I know this year WTC eligibility may be reduced. Fair enough.

I know. I've been there, done that. Just wanted to clarify because I think that most people would be reluctant to call that a "reasonable" income.

Royza wrote: »

My point would be that running a small business is not like being employed. It often involves a few years of hard slog to build up and during this time many unpaid hours are spent. This needs to be encouraged. If you have run a business you will know this to be true. We now have an established customer base and things are building, but I still don't support the extra bureaucracy and disincentive to save built into universal credit. Small businesses largely need to be left alone and supported through their growth phase. WTC did this.

I agree with you that there are problems with the treatment of capital under Universal Credit. While I think that some benefits should be a safety net, only for those who need it, and not generous enough for recipients to build up substantial savings, I don't think that about all benefits. Universal Credit lumps them all together, ignoring important differences in claimants' circumstances, meaning that some of those who I think should get something will get nothing because of their savings.

One thing that you haven't mentioned but may well affect you under Universal Credit is the Minimum Income Floor. Self-employed claimants earning less than the minimum wage will have their award reduced to what they would receive if they were earning the minimum wage. This is to discourage people from remaining in low-paid self-employment when they could earn more from employment. This may affect your plans.

leveller2911

Royza wrote: »

Small businesses largely need to be left alone and supported through their growth phase. WTC did this.

WTC were never intended to subsidise growth for small businesses, how do you think small businesses coped before WTC?.

leveller2911

dktreesea wrote: »

1) Use the money to retire any debt you may have. Having £16k in the bank and more than £16k in loans, particularly high interest ones of the unsecured variety, like credit cards, is a road to ruin. From memory using capital to retire debt isn't regarded as depriving yourself of capital for things like housing benefit. Likewise for UC.

2) Invest some or all of it in the business. E.g. increase or improve levels of stock. By the time UC comes in, this will no longer be business expansion but business maintenance. So the asset by then will be a business asset and outside the scope of the UC.

3) Consider improving the quality of what you get for your money on the overheads side of the equation. For example, getting a business lease for a new vehicle. Yes, it will reduce your profit, but it will probably save you costs in petrol and repairs and maintenance, plus you will have the pleasure of driving a brand new vehicle.

If you use a computer consider upgrading it and/or your broadband connection. Skimping on these two is probably a significant cause of loss of productivity for any business that trades on, or relies on the internet for all or part of its revenue producing activites.

Lower income at any time of the year, under the present proposals, is likely to increase what you get on UC if the current system, of basing benefits entitilements on a year's profit, would be sufficient profit to reduce your entitlement across the whole year under the current system.

Some good advice not so sure about 3.You should add that this advice is dependant on the amount of profit they make in each financial year.

To make leasing viable you need to know that you have a good run of work in front of you or a decent contract or 2 and the business runs at a decent profit to take advantage of the tax rules so £6k ish profit for the year wouldn't make it viable.Low profit means they would pay next to no tax anyway.

Royza

Thanks all. Pedent I don't think we are very far apart on this. I just think this is going to cause problems for many self employed people rightly or wrongly and will become a big issue. I know about the Minimum Income Floor too - not too sure how this will all work in practice, but in any case my eligibility will be blown altogether because of the savings test.

Leveller2911, the fact is that there have been various support systems for small businesses - in the eighties it used to be called Enterprise Allowance until that was abolished. Working Tax Credit to me seemed to give poor people who want to work for themselves just a little bit of breathing space, a bit of help until profit increases. The alternative is often subsidising them in low paid jobs or even worse on the dole. This will in fact continue under Universal Credit with stricter surveillance and more bureaucratic burdens on the small business owner, together with a savings limit.The country is getting a tiny bit too mean spirited in my humble opinion.

I would add that profit for our business is actually a few grand higher than 6k but it is divided between two partners, each with their own personal allowance and WTC threshold. Doesn't make it fantastic I know, but still. Before the UC bomb shell hits we will have to do our best to increase profit levels - not too easy in this climate but hey. Maybe that's the idea in making UC a bigger pain to claim than WTC.

I hasten to add that I don't have kids (no drain on education system), pay council tax in full, VAT, lots of fuel duty, etc as do lots of other people. I've appreciated the help Gordon Brown has given me, which it seems will now be taken away in due course. I hope of course that I don't need it and business booms. Oh well, c'est la vie.

dktreesea

leveller2911 wrote: »

Some good advice not so sure about 3.You should add that this advice is dependant on the amount of profit they make in each financial year.

To make leasing viable you need to know that you have a good run of work in front of you or a decent contract or 2 and the business runs at a decent profit to take advantage of the tax rules so £6k ish profit for the year wouldn't make it viable.Low profit means they would pay next to no tax anyway.

I disagree. The point of this spending isn't to reduce income tax. As you point out, people on low incomes are unlikely to be paying income tax, or, if they are, very little. It's to maximise the subsidy, by way of benefits.

Here's the deal. You are SE, with £16k in the bank. The clawback at today's rates, assuming you get benefits, is £1 per week for each £250 of capital you have. Potentially £64 a week. Not sure if any of the capital is disregarded, in which case the clawback would be less, but the principal is still the same: if you want that £64 a week, then you have to somehow divest yourself of the capital. Paying off debts would be my preference. Not only would you get to keep your £64 a week subsidy, you would also reduce your outgoings at the same time, further boosting your income.

For SE people who earn sufficient income to have an impact on their benefits, there are a myriad of ways to prevent that from happening, by reducing their profits and at the same time enhancing the quality of their lives, e.g. by leasing a new van or car, of they need a vehicle for their business.

Do you need a good run in front of you to lease a vehicle? Maybe not if you are claiming subsidies/benefits. The considerations are different compared to SE people who don't draw down any subsidies/benefits from other taxpayers. In their case, the money for the lease would be coming straight out of their own pocket. For sure, they may well think twice and three times before taking on a new vehicle lease.

But for people working in heavily subsidised businesses, it's different. The subsidies provided to SE people to run their marginal business are often huge, way more than the profits those businesses make. You could have a family of 4 or 5, with parents both working in a small business earning profits of £5,000 a year. The benefits to that family could be as much as £400 to £500 per week.

A lot of SE people in that situation will do whatever is necessary to preserve that income stream because their business is too marginal to rely on. It doesn't mean the business doesn't have potential. But when you are doing everything yourself, and particularly if you have limited access to capital, it could take years and years to build the business beyond marginal profits.

A new car can cost as little as £100 a month to lease. If you are on UC, keeping in mind the clawback due to net profit (presumably over the applicable amount or some other such figure they will disregard) is currently expected to be 65%, you either keep the profit - and forgo £65 a month in benefits, or spend the profit, to benefit the business and therefore yourself and keep the subsidy.

So even though the actual cost of leasing is £100 a month, say, the net cost is only £35, because by leasing the vehicle you also preserve your benefit entitlement.

Immoral? Maybe, but it is equally so on the part of the government that allows such leases to flourish uncapped, not to mention allows subsidies to the SE to run on forever. If you leased a brand new Mercedes van, which could set you back as much as £500 a month, the equation, assuming your resulting profits are sufficiently low, is still the same - a subsidy of 65% of the £500 preserved, making the net cost to you of your new van £175 a month.

Royza

dktreesa, thanks - I've found your posts useful and thought provoking. I do actually agree with you about the morality of subsidised self-employment over long-ish periods of time. It seems UC will be addressing this by enforcing more "conditionality" on SE UC claimants - ie. many more will be classed as available to work and put throught the usual pressures that involves. For some who are deliberately using self-employment as a cover with very low turnovers that is probably justified. Many self-employed though would find it difficult to enter the labour market, and retraining takes time. I feel some subsidy in some cases is warranted, especially during recessionary times, if the alternative is supporting someone on Jobseekers Allowance or in low paid, dead-end jobs where there is no prospect of the subsidy ending. At least the self-employed have some prospect of lifting profit during better times and reducing the subsidy.

The Government is attacking the self-employed from both ends at the moment - sucking demand from the economy through spending cuts, with lots lots more of them to come yet, while toughening up on their subsidy requirements through UC, when it comes in. Sometimes I feel the self-employed aren't really liked by the Government- people in jobs are often more insecure (just having one boss to fire them - I have at least 30), and maybe that's the way the Govenment likes it. A balance has to be struck here, as in most areas of public policy.

BigAunty

Royza wrote: »

...

I would add that profit for our business is actually a few grand higher than 6k but it is divided between two partners, each with their own personal allowance and WTC threshold. Doesn't make it fantastic I know, but still. ...

If I understand this correctly, for some years, you and your partner have 'worked' full time and netted around 4k profit each. At 30 hours each week for this for this, it would work out at around £2.50 an hour.

Rather than 8k profit between you, you could have earned around 3 times that with a national minimum wage job with less recourse to WTC, council tax benefit, housing benefit or whatever.

How many years have you been in self employment?

HappyMJ

BigAunty wrote: »

If I understand this correctly, for some years, you and your partner have 'worked' full time and netted around 4k profit each. At 30 hours each week for this for this, it would work out at around £2.50 an hour.

Rather than 8k profit between you, you could have earned around 3 times that with a national minimum wage job with less recourse to WTC, council tax benefit, housing benefit or whatever.

How many years have you been in self employment?

True but you don't get expenses in an employed job on minimum wages. Self employed sole traders and companies can claim the cost of getting to/from a workplace (client site) which makes a significant tax deduction decreasing the tax payable and increasing the benefit available. Other expenses are available such as claiming for the cost a phone, broadband connection, some gas and electric for a home office, rental of that home office and a computer (all to fill in the endless forms required of self employed individuals). That computer can also then be used for a bit of personal use which is accounted for by only claiming half of the expense. An employed person would have to pay 100% of the cost of a computer, phone, broadband etc...from after tax pay.