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Sam
Sam, Accountant
Category: UK Tax
Satisfied Customers: 12852
Experience:  26 HMRC expertise, PAYE, Self Assessment ,Residency, Capital Gains, CIS ask for Sam Tax
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Hello, My question is about Working Tax Credits and Company

Resolved Question:

Hello,

My question is about Working Tax Credits and Company Directors.

Firstly, some history quickly which is relevant to my current situation.

I underwent a major operation in 2008 which meant I was put on Incapacity Benefit. While in recovery I thought about what I could do with my future now that my ability to work "normally" had changed. The operation left me with circumstances that affected how I work, where, what type etc...

So, I started my own Limited Company and made myself and my wife directors.

I then was allowed to do Permitted Work which meant a limit of no more than 12 hrs per week and a maximum wage of £20 per week. I started and paid myself I think once in the three years I have been working. That was in the first year and I took around £600.

I have now had my DWP assessment for moving from Incapacity to ESA and have been deemed fit for work by the DWP (Which I am appealing as I am fit for work but in a limited capacity which doesn't seem to have been taken in to account) I am looking at my alternatives to claiming ESA and instead maybe claiming Working Tax Credits.

Now I am thinking if I can claim Working Tax Credits then I can forget about being dependent on very restrictive rules as far as ESA is concerned and concentrate more on building up my current work which fits my circumstances and actually trying to make something of the rest of my working career.

So, current situation is I can declare myself as working the minimum 24hrs, even up to a full 40 if necessary (I don't really stop working as I am providing mostly remote I.T. support and also computing is my hobby so I don't really leave the computer alone) but the business is in no shape to pay me any meaningful wage.

So my question really is can I claim Working Tax Credits? If yes, great, but the Tax Credits Helpline wasn't really that helpful, hence me being here? If not, why and what would I need to do in order to be able to claim.

Many thanks for any advice offered, it is highly appreciated!
W
Submitted: 11 months ago.
Category: UK Tax
Expert:  Sam replied 11 months ago.

Hi W

 

Thanks for your question and asking for me.

 

Yes of course you can claim working tax credits (which would also be coupled with child tax credits if you have school age/full time education children living at home with you)

 

An d it certainly does not seem that you would pay yourself a low income just to benefit from a claim, so as long as you work more than 16 hours a week, then you have a valid claim. However make sure you are paying yourself as least 16 hours at the national minimum wage - the latest threshold are -

 

 

Year21 and over18 to 20Under 18Apprentice*
2013 (current rate)£6.31£5.03£3.72£2.68

As this prevents any dispute of "milking" the figures to ensure a claim is successful.

And make this a solid position by drawing up an employment contract between yourself and the company detailing the hours you work and the hourly rate.

The same should apply for your wife as your claim would be a joint claim, taking all her income into account as well.

 

If there is insufficient income in the company to pay yourself the National minimum wage, then you may find HMRC refusing the claim.

 

Thanks


Sam

 

 

Customer: replied 11 months ago.

Thank you for the fast reply Sam.

Unfortunately I don't have enough in the business to pay myself the minimum wage portion you point out.


 


Do you think they will be as black and white as you say? Is there no room for appreciating my circumstances and seeing this as a genuine claim?

Expert:  Sam replied 11 months ago.

Hi

 

I do apologise for the delay - we have a short but effective power cut !

 

The position with company directors and tax credit claims has been a bone of contention for HMRC - where company directors draw a small salary from the company - and retain profits in it, just to make a full claim for tax credits.

So the more water tight the position is the better, and whilst your claim may not be refused, clearly the more you have in place to cover the points of issue, then the more successful a claim would be. I can see your case is genuine, and so eventually would the tax credit department but every claim they receive appears to be genuine on face value.

 

If there is not likely to sufficient money in the business, to draw up an employment contract, then you should make a claim but I fear it would be refused, and you will come under as much scrutiny as the employment and support regime.

 

Thanks


Sam

 

 

Customer: replied 11 months ago.

Thank you so much Sam. You have been extremely helpful!


 


Last question which is probably a good idea regardless of Working Tax Credits is can I get an Employment Contract drawn up that allows me to be exempt from minimum wage as a Director?

Expert:  Sam replied 11 months ago.

Hi

 

Thanks for your response

 

No, as that would not be an employment contract! An employment contract has to detail salary (whether annually, monthly or hourly) at the minimum, and you cannot put in a place a NIL paid position I am afraid.

 

Thanks

 

Sam

Customer: replied 11 months ago.

Thank you.


 


So could I just put in something like salary £100 per calendar month?

Expert:  Sam replied 11 months ago.

Hi

 

Thanks for your response

 

I am sure you can appreciate I can only advise that you put in what actually will take place - and note this has to tie in with what is declared to HMRC as salary and what are in your profit and loss accounts for Corporation tax purposes

 

 

Thanks

 

Sam

Customer: replied 11 months ago.

Thank you for the reply Sam.


 


I appreciate what you say and am merely trying to understand what you said about not putting nil as the salary and so, for the case of argument, just put in £100 per calendar month.


 


What the final amount is I will need to work out.


 


Can you clarify this for me please?

Expert:  Sam replied 11 months ago.

Hi

 

The botXXXXX XXXXXne is everything must be

1) Accurate

2) ties in with all aspects of the business

 

So you cannot draw up an employment contact stating that you will be paid £100 a month (which would suggest that you only work 15 hours a month - which would make any claim invalid anyway) so at the minimum you have to be paid at least £6.31 an hour so to reach the required 16 hours a week this would be 16 x 52 /12 = 69 hours a month x £6.31 = £437.50 a month

And then whatever the employment contract states actually HAS to take place - with evidence through the operation of PAYE AND what you enter in as salary paid through your accounts.

 

If in fact you are paid NIL, as there are insufficient profits in the company - then you either need to increase your profit levels so that everything ties in OR forgo any working tax credit claim.

 

But there has to be continuity in what you state takes place, in all aspects of the business. Does that make sense?

 

Thanks

 

Sam

Customer: replied 11 months ago.

Thank you for your patience Sam.


 


Do I understand you correctly in saying thinking that what you have said means I am paid the minimum 16hrs minimum wage? That is something that I can't do and so am trying to understand (and of course am being completely honest in all aspects of this argument and have every intention of the same with HMRC) what figure would be acceptable in the employment contract seeing as I cannot pay the minimum wage.


 


I thought minimum wage didn't apply to directors and so long as I can provide evidence I am not deliberately paying myself a low wage in order to qualify for benefits this would be acceptable.


 


I honestly didn't think it would be this hard.


 


Thank you for taking the time to help.

Expert:  Sam replied 11 months ago.

Hi

 

Thanks for your response

 

If you have a NIL salary then this will cause issues as it would be asked why you continue to trade with no profits.

Then you wish to apply for working tax credits which has been made more watertight for company directors due to the fact that so many draw less money from the business then they could, just to maximise their tax credit claim.

SO, for any company director to succeed in a claim, they have to show that

1) They are drawing at least the minimum wage to match at least 16 hours a week - so they meet the remit of the minimum hours one has to work to make a claim and

2) Are deemed to be employed at a set rate of pay (whether per hour, per week, month or year

 

You are trying to make a contract fit, what will keep HMRC (tax credits) willing to consider a claim from you, and it doesn't work like that - either the employment contract reflects what actually takes place, or it does not.

You cannot draw up a contract to fit just the needs of HMRC, it has to be absolute in practice as well.

 

So the reality is

1) The business does not make much of a profit

2) Therefore you cannot draw up an employment contract to meet both the 16 hour remit and to meet the national minimum wage position

3) You cannot have an employment contract detailing a NIL wage

4) But without both of these conditions (a) earning enough to show you work 16 hours at a national minimum wage and (b) provide this through an employment contract that also is consistent within the PAYE to operate on the pay AND the profit and loss accounts - you will not have a valid claim.

Normally minimum wage does not apply to directors but you want to try and make a claim for tax credits, and without the extra evidence to support the fact you are not squirreling money away and have a solid position in your directorship with the company - this allows the tax credit office to consider a claim for tax credits.

 

My advise - close the limited company - trade as a sole trader - so that the true position is permitted. (what you earn less your expenses) and the fact you keep records detailing the hours you work - then you will have an easier time making a claim for tax credits - but a word of warning, if you do not start to make profits as time passes, HMRC will argue this is a hobby and not a business and then you will not have to declare the income,(less paperwork) but you are back to a NIL position again with income from a trade. So do consider this position.


Thanks

 

Sam

 

 

 

 

 

 

Customer: replied 11 months ago.

Thank you Sam.


 


So, until I can get the company to a position where it can pay the minimum 16hrs at minimum wage then I cannot ask for Working Tax Credits help.


 


3yrs effort, paying to have the accounts prepared, BookKeeping, VAT registered etc.. This wouldn't help my claim?


 


Is it a case of the computer says no?


 


 

Expert:  Sam replied 11 months ago.

Hi

 

Thanks for your response

 

There is noting stopping you from making a claim without an employment contract or sufficient monies in the company to pay a wage - just expect it to be "computer says no" !

 

I can only advise why tax credits are difficult to claim as a company director - I do not agree with it (especially when individuals are in a position like yours) but I can only try and advise the best way to proceed.

 

I am sure you can appreciate this.

 

Thanks


Sam

 

 

Customer: replied 11 months ago.

Thank you for your time Sam.

Expert:  Sam replied 11 months ago.

You are welcome

 

Thanks

 

Sam

Sam, Accountant
Category: UK Tax
Satisfied Customers: 12852
Experience: 26 HMRC expertise, PAYE, Self Assessment ,Residency, Capital Gains, CIS ask for Sam Tax
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