WTC, work and self-employment
Mark Willis reviews recent caselaw providing helpful clarification of when a claimant’s work enables her/him to count as ‘self-employed’ for the purposes of working tax credit (WTC).
Recent caselaw has examined the definition of 'self-employed’ for WTC purposes. The starting point to get WTC is to be normally working at least the requisite number of hours a week (16, 24 or 30, depending on circumstances). Work must be done for payment, or in expectation of payment, and can be either employed or self-employed, or a combination of both. To continue to qualify for WTC as a self-employed person, it is necessary to meet the definition, which was amended with effect from 6 April 2015:
‘self-employed’ means engaged in carrying on a trade, profession or vocation on a commercial basis and with a view to the realisation of profits, either on one’s own account or as a member of a business partnership and the trade, profession or vocation is organised and regular.1Working Tax Credit (Entitlement and Maximum Rate) Regulations 2002, No.2005
This was intended to tighten up the eligibility conditions, to prevent bogus self-employment and abuse of the tax credits system.2HM Treasury, Autumn Statement 2014, para 1.232
C v HMRC (TC) [2019] UKUT 69 (AAC)
The claimant developed and sold computer games and had been in receipt of WTC for the previous tax year, for which he had declared an annual income of £845. HM Revenue and Customs (HMRC) requested further information and evidence about his business at the start of the new tax year, before a renewal decision was made. The claimant asserted that he provided evidence of customers and work done, bank statements, evidence of prices, relevant trade qualification, profit projection and business plan, but this was not received by HMRC. He declined to obtain replacement documents, because he said HMRC lost the documents previously sent. HMRC decided that he was not entitled to WTC for that year. The claimant appealed against this decision, but did not provide any further evidence and did not request a hearing, despite being offered further opportunities by the tribunal do so. The First-tier Tribunal dismissed the appeal without a hearing, finding that his self-employment was not done for payment or in expectation of payment. In the Upper Tribunal, Judge Mitchell found that this decision was flawed because it had failed to distinguish between income and turnover and made inadequate findings of fact, but dis- missed the appeal due to the claimant’s lack of co-operation.
‘While there may have been flaws in the First-tier Tribunal’s analysis, in my judgment it had no alternative but to dismiss Mr C’s appeal. Only he could provide the information necessary to support a finding that he was self-employed for the purposes of the Regulations. He did not do so. …. taking into account Mr C’s unwillingness to engage with the appeal process, the Tribunal made the only decision open to it on the evidence’ (paragraph 42).
It may be worth noting that although this demonstrates it is the claimant’s responsibility to provide evidence (even if HMRC says it has not been received), earlier caselaw established that tribunals need to ‘get real’ about the level of evidence expected from modest enterprises – eg, there is no requirement to have a business plan.3JF v HMRC (TC) [2017] UKUT 334 (AAC); see also NN v HMRC (TC) [2019] UKUT 386 (AAC) re: credibility 4 VO v HMRC [2017] UKUT 343 (AAC)
JW v HMRC (TC) [2019] UKUT 114 (AAC)
The claimant was a self-employed author, musician, publisher and promoter, who had written 20 books and recorded 18 albums, working on average 11 hours a day. He had been in receipt of WTC since 2006, and provided evidence showing profits of approximately £8.44 a week. HMRC originally awarded the claimant WTC for the tax year, but later made a revised decision that he was not entitled for the whole of that tax year because he did not meet the definition of self-employed. The First-tier Tribunal foundthatthe claimant’s trade was ‘organised and regular’, with a view to the realisation of profits, but decided he did not meet the full definition because his activities were not ‘commercial’ in the sense that they were quite unprofitable, and his work could not be described as genuine and effective. In the Upper Tribunal, Judge Poole held that this was an error of law for a number of reasons, including:
‘No minimum income provision was made in the amendments to the 2002 Regulations. It would have been possible to do so, particularly given that there are anti-abuse provisions providing for a minimum income floor in relation to self-employment in regulations 62 and 64 of the Universal Credit Regulations 2013’ (paragraph 22). There is no requirementof actual profitability. Rather there must be a view to profits’ (paragraph 24.1).
‘“Commercial” is essentially about commerce, or buying and selling, and in my opinion that should be the focus of the “commercial” part of the definition of “self-employed”. Consideration has to be given to whether a business is truly engaged in buying and selling exchanges, or if there is bogus self-employment abusing the WTC system’ (paragraph 25.4).
‘The word “organised” directs HMRC to look at how the business is organised, for example its accounts, tax returns, sales records and so on’ (paragraph 24.2).
‘The word “regular’” directs HMRC to look at the way the business is conducted, covering matters like opening hours and regularity of business. It is also arguable that the use of the word “regular” allows consideration of irregularities, and so can assistin furthering the intention that claimants should not qualify where there is bogus self-employment’ (paragraph 24.2).
‘The words “genuine and effective” are words used in other legislative contexts, around which a detailed body of caselaw has built up. If this body of caselaw is read in by the back door, there is potential for an unwarranted additional layer of complexity being added into the tests in the (WTC) Regulations 2002…. “Genuine and effective” is not part of those tests, and in my opinion is best avoided’ (paragraph 27).
Judge Poole was satisfied that the point in issue in this appeal has wider importance and directed HMRC to have regard to this finding when reviewing its final decision.
OM v HMRC [2019] UKUT 263 (AAC)
The claimant was a self-employed legal advisor and car dealer receiving WTC. HMRC made a decision to terminate his award during the tax year because it decided he no longer met the definition of self-employed. The First-tier Tribunal upheld the decision, finding the trade or profession was not profitable (making only £49 a week for a 30-hour working week), not ‘regular and organised’ (the evidence only showed only five pieces of legal work and two car sales in a tax year), and lacked commerciality as the transactions were so few the activities did not appear to be conducted as an effective business. In the Upper Tribunal,
Judge Hemingway identified errors of law in these reasons and found that:
‘whilst the profitability or otherwise of self-employment might be a relevant factor to consider amongst others, it cannot be said that profitability is actually a requirement’ (paragraph 19);
it does not necessarily follow ‘that a business is not regular and/or organised simply because there are a limited number of actual financial transactions’ (paragraph 19).
HMRC examines self-employed claims more closely when profits fall below the minimum wage for the hours declared, but this case (and earlier caselaw4VO v HMRC [2017] UKUT 343 (AAC)), establishes that this does not automatically disqualify the claimant. However, the First-tier Tribunal’s decision was not set aside because it had already been made redundant by a final decision, which the claimant was advised to challenge.
HMRC has identified £60 million in overpayments on 30,000 claims a year due to its application of the amended definition of self-employed.5HMRC, Child and Working Tax Credits Error and Fraud Statistics 2016-17 (Updated), April 2019, Table 9 However, the caselaw demonstrates that it may be worth challenging HMRC’s interpretation, and serves as a reminder that the general policy intention of WTC is to make work pay and it was deliberately designed to top up low earnings, whether employed or self-employed.
Universal credit
Some of the terms considered in WTC caselaw are also relevant to the definition of ‘gainful self-employment’ for universal credit purposes, which requires that:6Reg 64, Universal Credit Regulations 2013, No.376
a)‘the claimant is carrying on a trade, profession or vocation as their main employment;
b)their earnings from that trade, profession or vocation are self-employed earnings; and
c)the trade, profession or vocation is organised, developed, regular and carried on in expectation of profit.’
Compared with WTC, the common terms are ‘organised’ and ‘regular’. Also, ‘expectation of profit’ may be broadly similar to WTC’s ‘with a view to the realisation of profits’. However, ‘gainful’, ‘main employment’ and ‘developed’ are new for universal credit (UC), while WTC’s ‘commercial basis’ is missing.
In contrast to WTC (where meeting the definition is necessary to qualify), for UC, in some cases, it may be in the claimant’s interests to argue that s/he is not in gainful self-employment. For example, a claimant with some self-employed earnings may wish to argue s/he is not in gainful self-employment, so that the minimum income floor cannot be applied, although s/he would then be subject to all work-related requirements – ie, making her/himself available for other work as well as her/his self-employed activity.
1     Working Tax Credit (Entitlement and Maximum Rate) Regulations 2002, No.2005 »
2     HM Treasury, Autumn Statement 2014, para 1.232 »
3     JF v HMRC (TC) [2017] UKUT 334 (AAC); see also NN v HMRC (TC) [2019] UKUT 386 (AAC) re: credibility 4 VO v HMRC [2017] UKUT 343 (AAC) »
4     VO v HMRC [2017] UKUT 343 (AAC) »
5     HMRC, Child and Working Tax Credits Error and Fraud Statistics 2016-17 (Updated), April 2019, Table 9  »
6     Reg 64, Universal Credit Regulations 2013, No.376 »