The government is gradually rolling out “Universal Credit”, a form of benefit that is replacing Working Tax Credit, Child Tax Credit, Income Support, Employment and Support Allowance, Housing Benefit and Jobseeker’s Allowance. Universal Credit is designed to ensure that people who are working will be better off than if they are out of work.
That being said, company directors and the self-employed cannot apply for universal credit. Existing benefits remain available to be applied for instead. Self-employed people who are transferred to universal credit by the government will find there are repercussions including more administrative burdens to bear, which we will consider in this blog.
Earnings from self-employment will need to be reported to the Department of Work and Pensions (DWP) every month. This will no doubt add to the time busy proprietors will need to spend their evenings on bookkeeping. Additionally, while adding up receipts and payments may be simply laborious rather than challenging (though we nerdy accountant types quite enjoy it), reporting one’s monthly profit assumes business owners know what expenses may be claimed as a tax deduction. Business owners typically delegate the task of deciding what is tax deductible to their accountants, who prepare the accounts at the end of the year.
Self-employed people who are being transferred into Universal Credit would be wise to consider a simple bookkeeping system, either computerised or manual, to help reduce the stress and time monthly bookkeeping will require.
Universal Credit requires self-employed claimants to be using the cash basis of accounting when the monthly figures are reported to the DWP. This means that the figures should be based on actual payments and receipts (whether by cash or bank) and not based on the invoices, which could be paid after the month end.
Since the monthly bookkeeping must be done on a cash basis, it might be more beneficial for the year end tax return to be prepared on the cash basis. Please inform us if you are transferred into Universal Credit so that we can make the necessary adjustments to your tax return.
Reporting the monthly figures will also need to be done on-line. Alongside other government forms that must be filed on-line (such as VAT returns and payroll), home internet access, and computer literacy have become somewhat of a necessity rather than a luxury in recent years.
Irregular levels of benefit payments
Universal Credit will be paid monthly and the amount will depend on what the applicant’s earnings are for the previous month. While this sounds fair, in practice this will mean wildly fluctuating benefit payments rendering cash flow, which for the self-employed is never overly predictable, even more uncertain.
The Universal Credit system has met some opposition, including some DWP staff who took part in strike action recently due to what they described as “oppressive conditions” and inadequate training and resources. It may take some time to be fully rolled out. The above is based on current information which could well change before Universal Credit is implemented, so please check with Southside Accountants Wimbledon before relying on anything stated in this blog.