UC SE: Owner operator business: does my shareholding in my own business count towards my capital

seatbeltnoob

Sort of got me thinking from this thread: https://forums.moneysavingexpert.com/discussion/6457571/can-universal-credit-force-me-to-make-a-change-of-circumstance-and-backdate-it-to-start-18months-ago#latest

But it's a side issue which I wondered but never really thought too much about because my balance sheet value is quite low.

So when you file your accounts, on the balance sheet the company is worth a certain amount.

Let's say it's worth £5K.

(Business has £15K of assets, and £10k of liability for example)

If I own 100% of the business, then my shares are worth £5K.

Does that £5K have to be disclosed as capital for UC?

Because on the capital declaration, you have to disclose your bank accounts balances, savings, investments, stocks, money that other people owe you etc.

HillStreetBlues

Interesting question.

I don't know, but guess would be yes it would have to be declared.

As what would stop someone having £150k of assets and £10k of liability.

seatbeltnoob

I hope not. Although the example you gave does sound like it should be wrong. How does someone with a business worth £140K not make enough money to support themselves? That would not be a realistic scenario. Because companies valued at £140K can often be a SME employing 10+ people.

It can exclude a lot of jobs from ever claiming UC.

Taxi driver who owns their vehicle (easily over £16K)

Electrician who owns their van and tools

Delivery driver who owns their vehicle.

At least those business'balance sheets will go down with depreciation.

An ecommerce owner myself, the stock doesn't depreciate over time, it stays at the same value on the balance sheet until it's sold. So I'd be pre-occupied in trying to stunt my balance sheet from exceeding a certain amount and trying to squeeze the value of the balance sheet down.

Additionally it would just be a plain discrimination against ltd co owners over self employed businesses.

A self employed business owner doesn't have any "shares" in themselves. A ltd co owner has shares in their company.

2 businesses like for like. One as a sole trader, the other as a limited company, would be treated vastly different.

NedS

When you make a claim for UC you are asked to declare your capital. This would include any capital contained within the business.

In this example above, you would declare the £15k of business assets. A decision maker will disregard these assets as long as you continue to be treated as self employed and the assets are essential for the ongoing operation of the business.

If you were to declare them again as a share holding, then you would be declaring the same assets twice, obviously not appropriate or the intention.

So simple answer, yes you would declare the business assets as capital, with the expectation they will be fully disregarded assuming they are essential for the ongoing operation of the business.

Some examples I've seen:

A surf shop owner had nearly £200k in the bank, which was disregarded as this was to be used to purchase stock and was commensurate with their turnover. Capital disregarded in full as essential for ongoing running of the business.

An oil and gas subcontractor set up a Ltd company which billed for his work and he then paid himself dividends or otherwise took money out in a tax efficient manor. He worked ~6 months per year and claimed JSA the rest of the time. When UC came in it transpired he had over £50k held within the company. These assets were not disregarded as he had no other use for them in the business other than to leave them there as it was not tax efficient to withdraw them all in the same tax year. Claim closed as claimant deemed to have capital over £16k.

seatbeltnoob

https://revenuebenefits.org.uk/universal-credit/guidance/entitlement-to-uc/self-employment/companies/

Regulation 77 only applies in relation to a company who is either carrying on a trade or is a property business.  

DWP guidance states that a trading business is a business with a profit seeking motive (regardless of whether or not a profit is actually made) (See H4370, Chapter H4).

Where this applies, they will generally be treated as possessing an amount of capital equal to the value (or their share of the value) of the capital of the company and the actual value of their shares in the company will be disregarded when working out their capital.

Any assets of the company that are used wholly and exclusively for the purposes of the trade are disregarded from the claimant’s capital while they are engaged in activities related to that trade.

I had to embolden the sentence to understand it, because UC/HMRC documents have a habit of putting brackets and clarfiying points in mid sentence which is annoying.

Italics shows the helpful clarification I need. But the bold is puzzling. What is the company's capital? The money the business has in it's accounts?

I heard the essential funds the business hands for day to day expenditures is disregarded.

calcotti

https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/1163111/admh1.pdf

See H1134

Appears to mean that the value of shares is included a capital.

That isn’t logical to me. Shares in your own company isn’t someone you would sell without giving part ownership to someone else - which a small business owner would likely not want to do.

Of course, the shares may have no value.

See H1789 to H1790.

seatbeltnoob

calcotti said:

https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/1163111/admh1.pdf

See H1134

Appears to mean that the value of shares is included a capital.

That isn’t logical to me. Shares in your own company isn’t someone you would sell without giving part ownership to someone else - which a small business owner would likely not want to do.

Of course, the shares may have no value.

See H1789 to H1790.

Thanks for that, I'm not seeing h1789 AND H1790. Is it inside that document or elsehwere?

But have a look at this.

https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/1157193/admh2.pdf

H2021 - H2017 capital that is disgarded (business assets)

Assets which are used wholly or mainly for the
purposes of a trade, profession or vocation which the person is carrying on, are disregarded indefinitely

Meaning of business assets

H2022 Business assets include standard items such as machinery, vehicles, fixtures and cash held in the
bank (including money held following the sale of assets). They may also include items such as customer
lists and contacts, current and future contracts and goodwill.

I just had a look at another slight issue and that is I have directors loan accumulated in the business. And the directors loan I have in the business is my capital. I doesn't take me over the threshold but I need to be mindful of that and draw it down to 0. I have kept the directors loan in the business and making use of the tax free personal allowance at the moment.

H1133 If a director has lent capital to the company the loan is included in the capital of the company. The
director's rights to the capital that has been lent are included when working out the director's capital.

seatbeltnoob

NedS said:

When you make a claim for UC you are asked to declare your capital. This would include any capital contained within the business.

In this example above, you would declare the £15k of business assets. A decision maker will disregard these assets as long as you continue to be treated as self employed and the assets are essential for the ongoing operation of the business.

If you were to declare them again as a share holding, then you would be declaring the same assets twice, obviously not appropriate or the intention.

So simple answer, yes you would declare the business assets as capital, with the expectation they will be fully disregarded assuming they are essential for the ongoing operation of the business.

Some examples I've seen:

A surf shop owner had nearly £200k in the bank, which was disregarded as this was to be used to purchase stock and was commensurate with their turnover. Capital disregarded in full as essential for ongoing running of the business.

An oil and gas subcontractor set up a Ltd company which billed for his work and he then paid himself dividends or otherwise took money out in a tax efficient manor. He worked ~6 months per year and claimed JSA the rest of the time. When UC came in it transpired he had over £50k held within the company. These assets were not disregarded as he had no other use for them in the business other than to leave them there as it was not tax efficient to withdraw them all in the same tax year. Claim closed as claimant deemed to have capital over £16k.

Thanks for that, the two examples are reasonable. You do have to wonder how the surf shop owner had £200k lying around to buy all the stock.

I only have £6K worth of stock at any given time on my books (stock worth of £400 sells each month), and I'm generating £2000 profits each month from that. I don't know how a surf shop owner doesn't exceed profits to smash through UC eligibility due to high earnings because £200K in stock should generate quite a handsome return.

Also raises the issue of source of funds.

How does the business get £200K 

It could be: retained profits, business loan or directors loan.

Retained profits would mean the business is very profitable and owner shouldnt be claiming UC.

Directors loan, while unspent is regarded as directors capital H1133

The only valid source of the £200K that would (imho) make the eligible for UC is if they obtained a business loan.

NedS

If memory serves, they were turning over around £1M per year, so that £200k was from sale of stock in the last couple months which would then be used to replace the sold stock, pay staff wages, shop rent and other associated running costs. However, that all ended when Covid hit and they were forced to close the shop as a non-essential business and claim UC (they would not have claimed UC otherwise being a profitable business), but it illustrates the principle of disregarding capital required for the essential ongoing running of the business under the guidance highlighted above.