Could & would HMRC Argue No Profession Exists?

Securing State Pension with Ultra Low Profits?

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Client has loads of income from rents but received a tiny amount for self-employed music exam invigilations fees (2017/18 = £140) (she has passed all of her piano exams).

Original 2017/18 Tax Return showed nil entry for this (Page TR3 - Other Income) due to £140 Trading Income Allowance, but white space disclosed full details (i.e. £140 - £140 = nil).

Client now wants to pay voluntary Class 3 NIC for 2017/18 of £741 (£14.25 per week). However, 2017/18 Class 2 would only be £148.20. Class 2 secures more state benefits.

If client revises 2017/18 Tax Return to show first year of self-employent 6.4.17 to 5.4.18 with profit of £140 (less £140 trading income allowance) and ticks for voluntary Class 2 NIC is there any chance HMRC could or would dispute this. I assume HMRC would argue that the self-employment pages were only completed to secure the lower Class 2 NIC.

I have warned client that she needs to increase turnover in future years, although I have doubts she will want to do a great deal more. I imagine she could start using her piano skills for some self-employed teaching, but I have a feeling she does not want to really get involved.

Have any readers ever had HMRC question whether or not a trade/profession actually existed in this connection, or whether the trade/profession could possibly exist for a whole year with such a small turnover.

 

 

Replies (19)

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By thomas34
22nd Sep 2018 08:21

Can't see a problem apart from the fact that the £140 probably should have been shown under self-employment in the first place (less the allowance). I virtually insist that all self-employed clients with very low profits pay the class 2 contribution voluntarily simply to tick off another year of their state pension. I can't think of a better deal than to buy a year's state pension entitlement for £148.

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Replying to thomas34:
By penelope pitstop
22nd Sep 2018 14:00

When the original tax return was completed the £140 was treated as sundry income, hence the self employment pages were not prepared. That is why page TR3 (other income) was completed instead, but showing a nil entry for income due to the TI allowance. Now that Class 2 NIC has come into focus by the client looking at their Personal Tax Account, the self employment pages will have to be completed if client wants to pay voluntary Class 2.

Thanks (1)
Replying to penelope pitstop:
RLI
By lionofludesch
22nd Sep 2018 14:33

penelope pitstop wrote:

When the original tax return was completed the £140 was treated as sundry income, hence the self employment pages were not prepared.

Why did you do that ? You've made a rod for your own back, effectively saying there's no trading.

I've not done this in a real case as yet but I note that Taxfiler has a box to tick to claim the Trading Income Allowance. Apart from that, you fill in the Trading pages as usual.

Thanks (3)
RLI
By lionofludesch
22nd Sep 2018 10:02

Lots of self employed people have had no income or, indeed, losses, from a trade and have still been voluntarily paying Class 2 NI.

It's never been a problem in the last 70 years and it's unlikely to be one now.

Thanks (4)
blue sheep
By NH
24th Sep 2018 07:10

Start with BIM definition - Broadly, ‘trade’ can be taken to refer to operations of a commercial kind by which the trader provides to customers for reward some kind of goods or services.
There is no need for her to seek to increase turnover, she is clearly Self Employed, not sure why you would think otherwise

Thanks (2)
Replying to NH:
RLI
By lionofludesch
24th Sep 2018 12:07

The problem lies in entering it as Sundry Income on the return.

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Replying to lionofludesch:
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By Tax Dragon
24th Sep 2018 13:27

You would be happy calling these "operations of a commercial kind"?

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Replying to Tax Dragon:
RLI
By lionofludesch
24th Sep 2018 13:39

Why not ?

Lots of businesses start on a small scale.

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Replying to Tax Dragon:
blue sheep
By NH
24th Sep 2018 13:45

it is not the amount of turnover that is in question when determining whether or not a trade exists, it is the intention of the trader.
If one offers ones services on a Self Employed basis in return for a fee, how could that not be an intention to trade?

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Replying to NH:
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By Tax Dragon
24th Sep 2018 17:46

You have changed the test - or, rather, removed the requirements for a) operations and b) commerciality of said operations.

I also think that "services" (of this kind) tend to relate to professions or vocations (aligning myself with the OP), although I too have read BIM14010 and accept that some trades relate to services. I'd be happier saying that professions and vocations can exist without income (because I think that's in line with what court cases have decided); conversely less happy to say that there's a trade in those circs.

I see no relevance at all in how the tax return was completed. Either there was a trade, profession or vocation or there wasn't.

Thanks (2)
Replying to Tax Dragon:
RLI
By lionofludesch
24th Sep 2018 17:54

If you're not confident in your assertion, of course you should urge your client to pay the higher charge to NI.

That goes without saying.

Thanks (1)
Replying to lionofludesch:
By penelope pitstop
24th Sep 2018 22:13

Have again discussed the position in more detail with client. Salient points are:
1) On 6.4.17 client had motive of invigilating 4 piano theory exam sessions per annum at the local music centre. Payments would be made gross by the music centre. Client is free to turn down the work. It appears there will be similar work available for years to come.
2) Client does not want to increase turnover because it would mean travel into London, the expense of which could wipe out any profit. There may be slight increase in the exam sessions at the local music centre and client may reluctantly increase their exam invigilation there, but client has no real desire to increase the exam invigilation income nor travel outside of client's locality.
3) Client's young child is learning piano at the music centre and the owner of the music centre sings in a choir with the client. So there is a family and friend connection between client and music centre.
4) Client wants to do the honest thing. After explaining the gist of the above comments etc. client says they do not feel they are self-employed, and client is disinclined to build the "business" due to other more desirable interests. Client says if they have to pay Class 3 then client will pay it, albeit being almost £600 extra out of pocket compared to the Class 2 route.

Thanks (1)
Replying to Tax Dragon:
By penelope pitstop
24th Sep 2018 22:32

.

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Replying to Tax Dragon:
By penelope pitstop
24th Sep 2018 22:27

As a matter of interest, years ago in a posh town a client owned two adjoining shops. One was an antiques shop and the other an art shop. Client's accountant always prepared two sets of trading accounts one for each trade, one as antiques dealer the other as art dealer.
Back then (probably same today) when francs/deutchsmarks etc. were strong there was much interest from the continent. Conversely, when the pound was strong, continental interest dried up. During one particular year, there was not a single sale in the antiques shop because of the strength of the pound. But the trade premises still existed and overheads were ongoing. Client still had the motive of carrying on trading despite no sale that year. Without doubt, nobody could argue that the trade had ceased. Business then picked up when the pound weakened.

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Replying to penelope pitstop:
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By Tax Dragon
24th Sep 2018 23:13

penelope pitstop wrote:

Without doubt, nobody could argue that the trade had ceased.

The absence of sales did not mean an absence of commercial operations; conversely the presence of sales does not mean the presence of commercial operations.

"Self employed" is defined slightly differently in SSCBA (which may be why NH changed his/her wording in this thread), but your client's attitude cannot be faulted in the 'fair play' stakes.

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By mike01
26th Sep 2018 10:41

It would be better for your client not to work!If your a parent registered for Child Benefit for a child under 12 you get Class 3 credits automatically.However,I think that period may now be limited to 10 years whereas under the old HRP rules it was restricted to 20 years.

Thanks (1)
Replying to mike01:
By penelope pitstop
26th Sep 2018 13:12

Thanks for that.
Youngest child is now 13, so my understanding is that there are no longer any automatic NIC credits once child reaches 13 years old.
But can you please explain what you mean by the 10 and 20 years you mention. That part is not jumping out at me when I glance at the Gov.UK site.

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Replying to penelope pitstop:
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By mike01
26th Sep 2018 21:21

Apologies for the delay in getting back to you.
You are correct in your assertion.
I wasn't sure of the number of years you could claim/get credits for in these circumstances and the 10 year limit was something I seemed to recall from an article I read some considerable time ago prior to the introduction of the new state pension system.My recall is obviously incorrect as the following link suggests you could get credits for up to 22 years!The 20 year limit was again my recall of the limit under the old Home Responsibility Protection rules but I may also be slightly out there!Sorry I cannot be anymore helpful without further research.

https://www.litrg.org.uk/latest-news/news/170615-you-may-get-national-in...

Thanks (1)
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By ArianBloodwood
27th Sep 2018 16:28

I have definitely had HMRC arguing about whether a trade exists. Client has 3 small self-employed trades, all reported separately and all made losses for some years while she was employed full time and had little time to focus on growing them. HMRC disallowed loss offsets for those years until she quit her job and 1 business broke even and another made profit (3rd was still loss-making). Then they retrospectively allowed losses back 2 prior years. It all hinged on "evidence of trade", principally that they didn't believe she had an intention to make profits.

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