To struggle with self employed friend who declares that income is low to avoid paying tax and get benefits

[ginorwine]

Our old friends are self employed and were saying that they were upset as they may get benefits reduced . They said that they have kept income apparently low - but not really - so that they don't pay tax at all and get credits .
Dh and I were surprised and didn't say anything as taken aback .
He had told us that for a weekend job for eg he earns 800 pounds .
I really like them but this discussion has raised uncomfortable feelings for me .if everyone did this then how would the country run , benefits be paid etc . I find it I consistant with my beliefs that we should all muck in together .of course I know this goes on and at much higher levels . I'm finding it an elephant in the room in our friendship as I find it wrong but they are lovely people . I'm not saying I'm perfect God forbid ! But this feels a deal breaker to me on my moral compass .
Has anyone had an issue with friends which they have found hard ? And did it affect things ? I can't key this affect the friendship yet I feel angry .
It's not that they are trying to make ends meet .they only work couple of days a week . Have relaxed lifestyle it seems but the benefit cut s may alter this .

Sch - I wouldn't resent this loop hole stuff that se people can use at all .
Se would not be for me as I'd find it stress full having to chase for payments , late payers , cash flow etc .

They told me it was difficult getting a mortgage as their declared income was low .

It's very common, many self employed people do this to maximise benefits. Take NMW and either state the rest is business cash or take dividends.

Only you can decide if you can be friends with people with morals like this.

How would they avoid paying tax on the dividend component of their income? Dividends are taxed (in fact under the new rules dividends are taxed more than salary!)

Ps I wdnt not be risking a friendship if this was about perks of being se . I'd be glad it was just this then business as usual !
I didn't know that there were legal routes so I'm hoping its this as I don't want to feel awkward .

Yes because their wage is. But they could be drawing dividends.

tabitha is right though in that dividends are included for tax credit purposes under the category of investment income.

What are dividends ?

we had 'friends' who claimed to only earn about 17k a year. they got tax credits and anything else they could claim. in fact they had several properties, villa abroad , fancy cars etc. She said any income from renting out villa paid off mortage, so no need to class it as an income.
Got fed up and reported them. turns out they had fiddled over 70k.

A dividend is a payment made to shareholders when a business has made a profit. So if they have set up a limited company which has made a profit then they might pay themselves a small salary but take other money in dividends.

My salary is £7,000 per annum but my income is over £150k per annum due to dividend payments.

I think its all a red herring though here because dividends are still taxed and if you take dividends you wouldn't use the phrase "declared income" since dividends are "declared" and in fact the reporting process for a limited company makes it far more difficult to cook the books. I suspect your instincts are right and they are working cash in hand.

Dividends are basically a cut of the profits a company makes. They aren't a wage but need declaring

Spartan I have just re read your post . Re expenses .
There seems to be masses put down expenses so perhaps it's legal after all .
Eh day out with wife , meal out with wife .says puts it on expenses as bee n to see - hasn't - a business related thing .
Don't have a clue what this actually means !

It seems that you don't really know enough about them to judge, yet you've decided to judge them anyway.

It does sound more likely they are working cash in hand or using loopholes and classing those bits as income

Sadly know lots of people who do this. Hence why so many kids go "into the family business" even when they have zero interest and the jobs they take are not actually advertised. Mysteriously several of DDs friends have done degrees etc and got rubbish results but a) been entitled to generous maintenance grants b) then become "arsey title director" in family business. The jobs are "created" and it is most likely totally legal. We had the misfortune to be part of a group of people who not only bragged about using every loophole going but also lied when applying for assisted places at independent schools by failing to declare all their assets. Also those who bought flats near a grammar school so DC gained place due to catchment area yet we're renting flat out to students, who they paid a small but not insignificant sum to "lie" if the school checked up. They could've easily afforded independent fees but IMHO took the grammar school place away from someone who perhaps couldn't afford fees. Hey ho, moral compasses are very variable. I sleep well knowing I am not using any loopholes, legal or not. Dividends definitely see these people benefit from the"law". I for one don't care much for this and just hope the people playing the loopholes can see it is not fair when the economy is as it is.

And to explain that further I take circa £7k in salary because I then don't pay NIC (the salary is under the NIC threshold) but still qualify for state pension etc. I pay a shit load of income tax though!

I don't believe there are masses of people taking dividends and not declaring them just to gain access to tax credits. It wouldn't be an easy thing to do.

Many years ago my NDN had a business which was run illegally from home - they also used to accept a lot of cash work which did not go through the books and ensure that they also practiced tax avoidance to an extent that they very rarely paid any
Their partner had a part time job and used to refuse overtime in case it put their earnings over the NI threshhold never mind pay tax
Although this was long before tax credits and they had no children so did not receive any benefits in that area
Recently I met them by chance whilst out with some friends they also knew we stopped to have a coffee together
The couple have recently retired and started pontificating about the current benefits system - how hard they had worked all their lives and paid into the system etc etc then proceeded to continue in the same vein about how disgusting it was that in the future they might have to pay towards care home fees out of their savings etc - they didn't see any irony in it at all.....

There's nothing wrong with him taking and declaring a low salary to minimise his personal tax bill and then topping up earnings as dividends. Dividends are paid out of post-tax business profits and are also subject to lower income tax. Salary is a tax deductible expense to the business and is subject to income tax (if over the personal allowance). It makes sense for a SE person to structure their income in a tax efficient way. What is not OK about what he's doing is declaring personal expenses (eg days out) as business expenses - assuming they are actually personal trips not business related. This has the effect of reducing the corporation tax bill so should only be for genuine business expenses.
I don't know about the benefits situation I'm afraid.
I think you possibly don't have enough information to know exactly what's going on and personally I would just shrug it off as careless, indiscreet boasting on the part of your friend. Sounds like they're trying to sound clever by 'beating the system' rather than doing anything very wrong or immoral.

I don't want to judge them negatively if it's lack of understanding on my part !
Things said .
Keep income declared low to avoid tax and get tax credits . Seems proud .
Trouble getting mortgage on low declared income .
Days out put as expenses .
If these things are normal practice them I'd be glad as I may have not understood .
If they are avoiding supporting our society and claiming stuff too on top then it's a no no to me .
I can't tell which is wish maybe I should just ask but as I said I don't discuss money with friends . My dh just got a promotion - there is no way I'd tell anyone how much more he's earning . I kno somepeople can put boast stuff on fb etc but I think it's a bit tacky and can be insensitive .

It sounds like your friends are evading tax by recording personal expenses as business expenses. Not legal and potentially of interest to HMRC.

Regarding expenses me and dh had to travel for work purposes recently. The hotel was claimed against expenses, because it was for work.

We are having a 3 day break this month for fun. That won't be on expenses.

We have to be able to back up why both of us had to go, who we met etc if investigated.

As I said it's fine line.

atticus how does the NIC thing work, out of interest? I though you had to pay NI for 30 (soon 35) years to qualify for a state pension? Sorry for being a bit over-curious but I may be going self-employed soon and am collecting useful information.

You sound jealous of your friends who are doing nothing wrong.
We are going to do something similar tbh.
My dh is taking half his usual income and I am having the other half.
We will both be employed and able to continue claiming tax credits.
No tax as min wage.
What's your problem? I don't understand your beef tbh.

Wonder
They have frequent days out on expenses . They seem pleased about this.
I'm wondering if it may be boasting but I can't think why anyone would want to boast about It .
My dh and I have decent jobs and I wonder if its a bit of sour grapes .
To me se Wd be too stressful .
To me I accept the relative security as a pay off for other things I don't like about the job as I kno o cdnt cope with the unpredictability of se .i wonder if he's having a bit of resentment that we have a predictable income . He does choose to work not much and I struggle to think that he chooses this in terms of few hours. When he could work more but not them get benefits but also gets perhaps resentful of our income which is gained by regular hours little flexibility . Each choice had a pkus and a minus surely
I wonder if he envys out predictable salary but does not want to pay the price for it . Eg they lie in late , we can't .days off when it's sunny etc . I don't mind that o can't its what I exghange for security . Maybe he wants the security of our income but won't do what needed for that or it wdnt suit his disposition .

It sounds to me like they are running a small business in a perfectly normal and legal way. They take a small salary and pay tax on it. Other company income (what they earn, whether from services or sales, you don't say) remains "in the company" for accounting purposes. It might be being used to buy or pay off assets, it might be used in part to pay expenses (which will all have to be properly accounted for), it might be used to pay back a director's loan or be offset by earlier losses in the business. Running a business and being self-employed is a complicated matter. Anyone doing it properly will be employing an accountant. Taking a low salary and attributing company income to other matters (including dividends) is entirely legal and not even slightly shifty. The complexity of it means that you really cannot judge from the outside, and I am sure if they have an accountant, as they almost certainly do, then they are quite properly claiming tax credits and HMRC will have complete oversight of their financial affairs. I don't think you should worry, and I certainly don't think you should "shop them" as someone up thread suggested

New .
My beef is that as other have said I'm concerned that my friend is telling me he may be doing something illegal . As others have said for eg it's not legal to put personal expenses down as business ones . If doing it that is.
I felt very uncomfortable about the potential of this being the case as it's not something o agree with . If they are not doing anything wrong I would be relieved .
No I'm not at all jealous . I've said up thread that I coulnt cope with being s e with the benefits and burdens it entails . I'm glad to pay tax too .