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Universal Credit: Issues for start-ups and the self-employed

The introduction of Universal Credits (UC) is the radical overhaul to the benefit and welfare system. It’s set to replace six existing benefits and will instead be one single monthly benefit payment. This project was initially planned for national roll out in October but there have been a number of delays and setbacks which has provided start-ups and those who are self-employed additional time to prepare.

Fundamentally it’s important to keep abreast of the latest developments on UC. Read up on the latest news at the Gov.Uk website. DWP recently published a PDF book entitled Universal Credit and self-employment which is a good starting point. But if you are struggling I would always recommend seeking professional advice.

Other issues for start-ups, self-employed and entrepreneurs to consider are:

Additional burden
The imposition of monthly reporting will be a big administration burden at a time when many entrepreneurs and start-ups are trying to get their business off the ground. Monthly reporting of income to the DWP is a big shift from the one-off annual reporting schemes that currently exist for HMRC. These processes are naturally very timely and costly. I would recommend that you consider changing your VAT accounting method to the Flat Rate, or Cash Accounting schemes. Or even consider accounting for VAT on the Annual Accounting basis. Such action might align your income and accounting with UC’s requirements.

Unconventional reporting processes
The regime as it stands has arbitrarily assigned dates for the monthly periods i.e. not calendar months. It doesn’t follow conventional accounting principles and ignores normal accounting rules – such as deferring income received in advance of work being undertaken and allowing for expenses incurred but not paid. In order to help reduce the increased burden, start-ups and micro-businesses should seriously consider taking advantage of the simpler cash-based method of accounting for tax, introduced at the start of the current tax year. You can find the relevant information on the Gov.UK website. While it will not exactly map the method of accounting required by the DWP it will certainly help.

Losses arising in one month are not taken into account for offset against future income. For example, a seasonal trader could generate 90 per cent of their income in December but have incurred all of their costs during the preceding 11 months. The effect of the current arrangements would be that the losses in the preceding months would be ignored in December, leaving a huge spike of income in that month. This means that the amount of tax credit claimed would not be a true reflection of overall income and may result in potential loss for the individual. Where possible the self-employed should attempt to match their cash expenditure with their cash received. In cases where receipts are evenly spread, arrange to pay large bills in monthly staged payments. In cases of uneven receipts, try to arrange the payment to mirror the cash received.

Disproportionate effect
My concern, and that of the wider profession, is that the additional administration burden will fall disproportionately on those less able to cope or to understand i.e. those at the lower end of the social economic scale. Taking this into account, someone in this position will struggle to comply with monthly report filing, as will be required under UC. The upshot will be that they will not claim the benefit to which they are fully entitled. If you are not claiming Tax Credits but think you might be entitled, or if you are planning to start a business, consider doing so sooner rather than later.

By Adam Harper, director of professional development for AAT, the UK’s leading qualification and membership body for accounting and finance staff

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