Advice needed on proof of earnings for Self Employed for Tax Return

ravenmoon36

Hi, to put the situation in context, my mum was employed at the school I worked in, but has been registered as self employed for years, as at one point she had an eBay shop, which she made a small amount of money on. The shop has been closed for a few years and each year when the accountant has filled in a tax return there has been no income to declare. However, she was advised to keep the self employed status going incase she wanted to take it up again and has therefore been paying the minimum NI contributions (about 15 a month by direct debit).

We made the decision this year that she would give up her job (as they were cutting her pay) and I would pay her to child mind my daughter when I returned from maternity leave. We checked with HMRC and were told that she could legally do this and claim the income as self employed income.

She started this from September and I pay her £500 a month straight into her personal bank account. I have been thinking ahead to April and worrying about filling in the tax return as the only form of proof of income will be her personal bank statements, which are a bit of a mess as sometimes I've had to lend her money until her tax credits or housing benefit goes in, to make sure there's enough in there for her direct debits at the start on the month. Though this shouldn't be a problem from next month as the housing benefit starts going in at the end of the month, so in time for her bills.

She has been giving me paper invoices, just those handwritten ones with the blue copy paper on them, but I'm not really sure what records she should be keeping. Should she open a separate bank account which I should pay the money into? Am I right in assuming she won't pay tax on such a low income? Will she definitely have to send off bank statements? I think she uses the tax return for proof if earning for her tax credits renewal as well, so I really want to make sure we are doing everything correctly.

I have checked what we are doing is above board with all the relevant people, but am really beginning to worry about the paperwork side of it, so I would really appreciate any help or advice anyone can give! Thank you!

TonyMMM

She needs to keep proper accounts.

She doesn't pay tax on the £500 income, but on the profit she makes from her self employment. So she needs to make sure she is keeping track of any expenses she incurs as well as the amount you pay her (and needs to understand what she can and can't claim for).

e.g. if she uses her own property for child minding she may be able to claim some of the house costs (energy, council tax, insurance etc).

If she comes to you, then she can potentially claim her travelling costs as expenses.

Get a good book on tax for Self Employment and keep records.

If her earnings are under about £5k - she may also be able to register for exemption from having to pay Class 2 National Insurance payments

antrobus

ravenmoon36 wrote: »

....She has been giving me paper invoices, just those handwritten ones with the blue copy paper on them, but I'm not really sure what records she should be keeping. ....

Perfectly acceptable.

ravenmoon36 wrote: »

....Should she open a separate bank account which I should pay the money into? ....

Not necessary.

ravenmoon36 wrote: »

....Am I right in assuming she won't pay tax on such a low income? ....

The IT allowance for 2013-2014 is at least £9,440. So if her total earnings are £6,000 tops there will be no tax payable. It is also below the NI primary threshold, so no NI to pay, but above the lower earnings limit, so your mother should get NI credits.

ravenmoon36 wrote: »

....Will she definitely have to send off bank statements? ....

Only if she is subject to an investigation. Which is unlikely.

In general;

- the whole point of self assessment is that it is self assessment; no one has to prove anything unless asked.

- when it comes down to it, you are giving your mother £500 a month. You don't get any IT relief on that, so HMRC won't really care about this arrangement one way or another. (At least as far as income tax is concerned).

richie799

Why not pay your self employment tax online, you can fill out the complete incomings and expenditures at HMRC.gov.uk you just need to apply for a special code which comes in the post. Using that method you don't have to show proof that way

Laurajo_2

As an aside, I'd be more peed off at the accountant for keeping her in SA when she didn't need to be....presumably he's been charging her to do tax returns?

Yes, she would've had to reregister as self employed, but for the sake of filling in a simple form to reregister, and assuming she is expecting to have enough contributions to qualify for full state pension, the only reason to keep her in SA would be so he could still charge her for doing it.

Back to the point - provided she keeps a copy of her invoices, she should be fine, also a record of any expenses etc. (mileage log etc)

John_Pierpoint

Don't we need to be a bit more careful with this situation?
If this is a purely family arrangement then HMRC ought not to get involved.
However is there an intention to keep an entitlement to working (as against unemployed) benefits ? Plus an intention to keep up the cheapest basic entitlement to future state benefits? (other than the LEL entitlement for low paid employees?)

Let us be honest, mum is an employee not self employed?!?

I am out of my depth (fortunately) in any discussion about the interplay of (self?) employment and benefits, but I am just back from a visit to a shop where I overheard one assistant struggling to explain to a colleague her strange shift pattern - "Well you see as I've got kiddies [school age?] I cannot be here more than 16 hours a week or I would lose my benefits........"

http://www.which.co.uk/money/tax/guides/national-insurance-explained/national-insurance-rates/

The swamp of complexity appears to start here
http://www.hmrc.gov.uk/taxcredits/start/claiming/income-hours/self-employed-income.htm

John_Pierpoint

Don't we need to be a bit more careful with this situation?
If this is a purely family arrangement then HMRC ought not to get involved.
However is there an intention to keep an entitlement to working (as against unemployed) benefits ? Plus an intention to keep up the cheapest basic entitlement to future state benefits? (other than the LEL entitlement for low paid employees?)

Let us be honest, mum is an employee not self employed?!?

I am out of my depth (fortunately) in any discussion about the interplay of (self?) employment and benefits, but I am just back from a visit to a shop where I overheard one assistant struggling to explain to a colleague her strange shift pattern - "Well you see as I've got kiddies [school age?] I cannot be here more than 16 hours a week or I would lose my benefits........"

ravenmoon36

Thank you for your advice everyone, I do feel a little more reassured that we are going about this the right way.

John, I'm not really sure I understand your point. I spoke to the self employment people at HMRC and the Tax Credits people and explained the situation and was assured that what we were doing was perfectly above board. My mum is essentially working as a child minder, she is unregistered, but that is fine as she is looking after a family member, which is why she claims the income as being self employed. I was told the only way it would be an issue was if I was claiming tax credits myself and was using the childcare element of it to pay her, but I do not claim, nor am entitled to any tax Credits.

Sorry if I misunderstood you, but I have tried my best to make this a situation that works financially for my mum, and spent a lot of time checking it was all above board.

John_Pierpoint

Where is your mum's place of business?
What benefits, if any, will mum be claiming?
Am I right in assuming mum will be paying the minimal self employment class 2 national insurance "weekly" payment to protect her minimum benefits such as future state retirement pension, or is this not needed as mum is already coasting towards retirement?

zygurat789

ravenmoon36 wrote: »

Thank you for your advice everyone, I do feel a little more reassured that we are going about this the right way.

John, I'm not really sure I understand your point. I spoke to the self employment people at HMRC and the Tax Credits people and explained the situation and was assured that what we were doing was perfectly above board. My mum is essentially working as a child minder, she is unregistered, but that is fine as she is looking after a family member, which is why she claims the income as being self employed. I was told the only way it would be an issue was if I was claiming tax credits myself and was using the childcare element of it to pay her, but I do not claim, nor am entitled to any tax Credits.

Sorry if I misunderstood you, but I have tried my best to make this a situation that works financially for my mum, and spent a lot of time checking it was all above board.

Of course you are but HMRC do not have to advise you of any other method of doing this, they just answered your question and they make collect a bit of tax. I take it you have nothing in writing and so cannot prove that you were given this advice should there be any problems further down the road.You could also look after your grandchildren for free for pleasure as we do.
If my daughter felt the need to support her aged parents and gave us some money every now and then I would not considered it to be taxable.
The only reason why you would would want to do what you are doing is to pay NI to preserve benefits. Is this the reason?
You dio not claim to be self employed, instead you have self employed income. Whether your income is from self employment or employment is determined as a result of a number of tests, as John says. If your mother turns uop at your house and looks after the children there and then goes home I would have thought that she was employed rather than self employed.

ravenmoon36

John_Pierpoint wrote: »

Where is your mum's place of business?
What benefits, if any, will mum be claiming?
Am I right in assuming mum will be paying the minimal self employment class 2 national insurance "weekly" payment to protect her minimum benefits such as future state retirement pension, or is this not needed as mum is already coasting towards retirement?

She works from her home and is already claiming Working Tax Credit and Housing Benefit. I spoke to people linked to both benefits when her circumstances changed abd explained what she would be doing.

She's been paying NI because the accountant she used to see told her she should continue to do so when her eBay shop stopped training, should she want to re-instate it or do something else. So she's continued paying since she's been looking after my daughter. I don't understand about it contributing to benefits or pension, sorry for my ignorance! I do appreciate peoples input into the situation.