Universal Credit

by Tax Faculty Team on 22.06.2012 19:05

Small businesses to make a monthly return using a cash basis

The draft Universal Credit Regulations 2012 (UCR 2012) were published by the Department for Work and Pensions (DWP) on 15 June 2012. Although these regulations are not specifically being consulted on, the Social Security Advisory Committee has published a call for evidence asking for comments, to which the ICAEW will be responding separately in due course.

It appears that the decision to implement the cash basis, at least for Universal Credit (UC) purposes, has already been taken with little, if any publicity, consultation or discussion either with those businesses which will be affected, or with the accounting and tax professions.

We support a unified tax system, where common definitions and systems are used as far as possible. This reduces the administrative burden placed on business and is simpler to understand and implement. While we have responded to the proposals for a cash based system for income tax in good faith, it would appear that for UC a cash based system has in effect already been adopted, but with little publicity and little or no consultation. This is very disappointing.

This places us in an extremely difficult position in relation to the income tax proposals. See our separate news item this week for our views on the cash basis for income tax.

UC will be payable to self employed people on a low income as well as to employees.

We note that the DWP proposals for UC are similar to, but not the same as, those proposed by HMRC for income tax. Most notably, a self employed person who makes a claim for UC must use the cash basis as the basis for the claim: the accruals basis is not an option.

We cannot emphasise strongly enough just how surprised and disappointed we are that the UC proposals appear to have been developed separately during the same period that the OTS was consulting and developing proposals for a simpler income tax system for small businesses and, latterly, while HMRC was developing its ideas, without taking care to ensure that the systems would be the same.

We note that the Explanatory Memorandum for the SSAC says at para 175:

'HMRC is currently consulting on its proposal to give people who run small businesses (i.e. turnover up to £77,000 a year) the option of reporting their income for income tax purposes on a cash income basis. The proposals below are intended to work effectively as a standalone system, but the book-keeping a Universal Credit claimant who also reports his/her income for income tax has to maintain will be streamlined if the tax system is changed in line with this consultation.'

We sincerely hope that the measures of income used for income tax and to pay UC will themselves be brought into line, not just the book-keeping.

Reg 53, UCR 2012 requires gross profits for each month to be declared by the claimant, and this is required within 7 working days of the end of that month. Gross profits are actual receipts less expenses paid in that period, including amounts spent on utilities, phone and travel costs, including VAT. However, a scale of flat rate deductions must be used instead of the actual costs incurred of using a home for a business or the actual costs of using a car for the business.

We note that the flat rate deductions for use of home are at the same rates as those set out in para 9.9. of the simpler income tax consultation. These are based on the number of hours spent on various activities undertaken for the business while at home. There is no mention of the alternative basis set out in para 9.10. We have commented later in this response on our views of this proposal.

The flat rate deduction for using a car or motor cycle is based on the mileage in that assessment period, ie that month. The deduction for mileage covered in the month for a car used for the business would be 45 pence per mile for the first 800 miles and 25 pence per mile thereafter. This will give a different result to the annualised deduction required for income tax, which is 45 pence for the first 10,000 miles and 25 pence thereafter.

The regulations, as presently drafted, do not allow any deduction for interest paid. While we have commented on the non deductibility of overdraft interest in the cash basis proposals, we note that other interest will be allowed for income tax but not as a deduction for UC.

The UC reporting structure requires a declaration by the claimant within 7 working days of the end of that month. This will be an assessment period, which according to draft Reg 17, will be.

'(1) An assessment period is a period of one calendar month beginning with the first date of entitlement and each subsequent period of one calendar month during which entitlement subsists.'

This will be one calendar month from when the claim starts. This means that the small business will be making a return for UC each month, to whatever date within that month they first made their UC claim, using figures that are similar to, but not the same as those used for income tax. If the business uses the cash basis for income tax there will be a similarity, but it won’t be the same, and if accounts are being prepared using accruals accounting, they are even less likely to be the same.

Far from offering worthwhile simplification, the UC proposals and their interaction with the proposals in this consultation have the potential to increase considerably the administrative burdens on very small businesses. We are now very concerned that, taken together, these proposals have all the hallmarks of a policy disaster in the making. Both these and the UC proposals need to be reviewed as a matter of urgency.