Client's figures are as follows:
2016/17 - First year of trade
Self employment - £2,818
PAYE - £10,164
2017/18
Self employment - £8,886
2018/19
Self Employment profit -£0. Client actually made a trading profit but this was wiped out by a large capital purchase in the year to create a small loss of £2,000
On the surface he seems to meet the conditions, just over 50% of his income is from self employment over the 3 years in full. The only reason I can think they're rejected him is that instead of treating 2018/19 as nil, they're deducting the loss from his self-employed income over the three years, reaching a total which is less than 50% of his total income over the three years and then declaring that he doesn't qualify. Is this how it works? I was not under the impression that we had to take losses into account when calculating the 50% income total and it seems particularly perverse in this case given he made a trading profit and only has a taxable loss because he bought equipment.
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Replies (19)
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Its taxable profits so by claiming the capital allowances and creating a loss then no profit. If he had no other income in 2018/19 why would you claim the capital allowances and waste personal allowances. Regardless of Covid - seems a weird bit of tax planning, I would have forgone AIA or only partially claimed so to utilise personal allowances.
Y1 - 50% of income is greater - so move to 18/19 - no profit so 80% of nil is nil!
We are all talking taxable profits which is always after capital allowances.
My understanding was that you qualified provided >50% of your income over three years in total arose from self employment, so, over three years:
Total Employment Income: £10,164
Total Self-Employment Income: £11,704
Therefore by my calculations he should qualify. The only way I can work it so that he doesn't qualify is if instead of treating 2018/19 as nil, HMRC are taking into account the tax loss in 2018/19
The question for me is - how were his personal allowances used in 2018/19 if he had no other income ?
There's a few pieces missing from the jigsaw.
I can't recall exactly since I'm looking at accounts produced over a year ago, but my best educated guess from looking it over is he had a small profit covered by personal allowance and we had to decide whether to claim 18% over 5 years or claim the 100%, waste some of it, but create a tax loss to use the rest of the relief in the following tax year.
OK - reasonable enough, I suppose.
Well, my interpretation was that losses have never just been a negative version of profits, profits in 2018/19 would be zero.
I'd be asking for clarification with a probable appeal if I did not receive satisfaction.
If from SA302 - then HMRC are correct and the tax payer has lost out - may be he wanted nil income to claim higher tax credits - either way no claim available
Could you explain why or point me to why? I gave my reasoning above and I'm a little unclear as to which of the conditions he has breached. To my mind he qualifies under having, over the three years, >50% self employment income. Even allowing for nil in 2018/19
Like you, I have several clients who have been told they are ineligible for SEISS even though, prima facie, they meet the qualifying conditions as set out by HMRC.
I have simply appealed each case and will be interested to see what they come back with.
They're not treating losses a nil, they are deducting it from the profits for the purposes of the SEISS grant.
I was worried about that SJRUK, is that published anywhere? I can't seem to find any reference to this approach.
They're not treating losses a nil, they are deducting it from the profits for the purposes of the SEISS grant.
It's not what I read originally.
I should have added to my original response that I had another client who, on initially applying, was told he was ineligible for SEISS. At my suggestion he re-applied several hours later and he was told that indeed he qualified.
It seems to me, therefore, that there is some lack of robustness in HMRC's programming (surely not?!).
https://www2.deloitte.com/uk/en/pages/tax/articles/self-employment-incom...
try this calculator.
Look at the example under Eligibility here:
https://www.gov.uk/guidance/how-hmrc-works-out-total-income-and-trading-...
Losses in 2018/19 deducted from profits.
@ Jdopus (OP).
Sally and jwgrogan have correctly pointed out the key factor, ie that the Loss MUST be deducted from the profits (the legislation itself supports the HMRC guidance to which jwgrogan has kindly supplied a link).
[In the early stages, the HMRC guidance was less clear, and APPEARED to say that Losses were disregarded, hence the understandably mistaken view in some quarters that Losses should be ignored].
I have considerable sympathy for your client’s circumstances since, with hindsight, VERY PROBABLY your client would have been financially better off (taking into account Income Tax and conceivably Tax Credits if applicable - I cannot be entirely sure without seeing more information) if you had restricted the Capital Allowances on the 2018/19 Tax Return.
Whilst you are “in time” to submit an amended Tax Return for 2018/19, reducing the Capital Allowances, unfortunately a rule has been introduced under which such amendment is DISREGARDED. for the purposes of SEISS. If, for example, the Capital Allowances had been restricted so as to produce a Taxable Profit figure of £1, then the SEISS Claim would have been approx. £780. Noting your indicating that a “small profit” (clearly the Net Profit per the Accounts) arose in 2018/19, then if the Capital Allowances had been restricted to exactly match the Depreciation) and if the Net Profit (and thus the Taxable Profit) had been (say) £2294, then the SEISS Claim would have been £933 approx. If the SEISS scheme continues beyond the initial 3 months, as surely it will, then the overall Loss suffered by your client will be even greater than those example figures of £780 and £933.
I have, in another thread, expressed the view that HMRC should have allowed taxpayers to amend their 2018/19 Tax Returns to enable them to restrict the Capital Allowances (in the manner outlined above, ie so as to “match” the addbacks) but was disappointed that such view was not supported.
At the risk of upsetting you, and your client, with hindsight your client would have been better off if the Tax Return had not been submitted (presumably) on time – if he had been tardy in responding to your requests for information to submit that Tax Return, he could have taken advantage of HMRC’s giving tardy taxpayers the opportunity to submit the 2018/19 by late April 2020, at which time you would have been able to determine that a restricted Capital Allowances claim was very probably advantageous overall.
Basil.
Thanks for the comprehensive reply.
I'm not upset, no point in being upset over something that was completely unforeseeable at the time this return was prepared. However, I remain extremely frustrated that HMRC chose to measure this relief on the basis of taxable totals after capital allowances rather than actual profit.
For a government that's spent years talking a big game about encouraging investment from UK businesses, it's extremely galling to have all the clients who invested in their companies to buy new machinery and equipment punished and excluded from government aid because of it. If my client had just lifted all of his profits out and frittered it away at the pub, he would be receiving a large handout cheque from HMRC today. Not the sort of government approach that encourages entrepreneurship.
