8 September 2017, by Desmond Rutledge
Importance of being realistic about small sole traders and their audit trails
In JF v Her Majesty’s Revenue and Customs (TC):  UKUT 334 (AAC) the claimant had been in receipt of JSA and decided to become self-employed as a painter and decorator. He made a claim for working tax credit (WTC) and provided details of how he was advertising his business – using gumtree and by going door to door handing out leaflets. He also provided very rough handwritten preliminary accounts, which consisted of a list of jobs detailing dates, addresses and prices charged along with outgoings.
HMRC refused the claim on the basis that the information provided did not show the trade was regular and organised, was not commercial, nor carried out with a view to a profit, as required by the definition of ‘self-employed’ in reg 2(1) of the Working Tax Credit (Entitlement and Maximum Rate) Regulations 2002 SI 2005 effective from 6 April 2015. A First-tier Tribunal (FTT) dismissed the appeal due to the absence of evidence “such as written quotations provided by the appellant to prospective customers; invoices for work done; evidence of payments actually received for work done; evidence of a business bank account and vehicle and/or public liability insurance in respect of the business”.
Allowing the appeal, the UT Wikeley said the FTT had been wrong to disregard the time JF had spent in setting up the business and handing out leaflets door to door as remunerative work. The Judge went on to find that the JF was working in a trade, with a view to a profit (taking account of the business having just started), and although rudimentary, the business was organised. Consequently, he was self-employed for the purposes of the WTC regulations. The Judge also gave more general guidance, saying that tribunals need to ‘get real’ about the quality of evidence expected from new one-man businesses to show they meet the definition of “self-employed”:
“Self-employed working tax credit claimants (typically) are not putting together business proposals of sufficient rigour to pass muster on a Masters of Business Administration course or to withstand scrutiny in an episode of Dragons’ Den. Usually they are much more modest enterprises, as in the present case, and expectations about the documentary paper trail should be adjusted accordingly.” (para 31)