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 .

With respect OP, I can't see how anybody in your friends position would be resentful of your life, they have it made believe me.
It's lovely to be at home with the kids or going for days out, not having to answer to anybody and living your life as you want.
I'm wondering what makes you think it's unpredictable and insecure as a business.
If they are claiming tax credits HMRC will have all their details and financial info to hand, so unlikely to be doing anything illegal.

No
I was aware that I might be judging them based on my own lack of knowledge . That lead me to assume .
I there fore asked if I was wrong as I didnt want to make assumptions and was aware I could be getti g it wrong - therefore asking for info from those with greater knowledge

What is it with people who can't resist boasting about how clever they are about fraud over income tax and tax credits or whatever. And then wonder why people report them.

From reading what the OP has said i do not think we can judge whether this is legal tax avoidance / tax planning or illegal tax evasion. The OP has not said whether their friend is running their business as a company (in which case paying yourself a low salary after the company has paid corporation tax on the profits made in the year is perfectly legal tax planning) or whether this friend is actually a self employed sole trader and actually not declaring income on his tax returns (if you are a self employed sole trader you are taxed on all your profits in that tax year - you cannot pay yourself a salary as you are one and the same person).

There is a world of difference between the two options.

LineRunner the NIC thing works by paying yourself a salary from your company which is above the Lower Earnings Limit (currently £5,772 per annum) which means you are treated as making NIC contributions for the state pension etc, but you pay yourself under the Primary Threshold (currently £7,956 per annum) which is the point at which you start to actually pay NICs. However, this only works where you operate your business through a company, and you are not just a self employed sole trader.

OP - do you know whether your friend runs his business through a company?

Tbh, I can't call it.

If I had to, I would say it sounds entirely legal what they are doing.

There are downsides to being self employed, there are upsides. The same as being employed.

Personally I choose to do it because it means we work as and when we want. School holidays are so much easier now. But I miss the steady income.

Although the claiming personal days out which are not business related is not allowed in either scenario.

My husband does this. He earns £550 a day for his limited company which he is the director and only employer. His company pays him a low salary and he takes out divends too. This is what his accountant suggests. We are not going to pay more tax than we need too. Why would we? We still pay a lot of tax mind you!

animalmagic thank you for that very clear explanation.

I meant employee not employer.

I think quite a lot of people do it, dividends you have to put as 'other income' on tax credits form, you can't just not declare it. If they can deduct a lot of business expenses from the profits, they might just be able to get away with claiming substantial tax credits. But you can only get away with it for so long, some people claim you're just saving up a big bill to bite you later on so choose not to run their books like that.

I think that the posters saying that "HMRC has complete oversight of their affairs so they must be ok" are being rather naive. Theoretically HMRC has complete oversight of every taxpayer's affairs. Therefore the cash economy and personal tax evasion by things like claiming illegitimate business expenses must not exist.

They have frequent days out on expenses
But you don't actually KNOW what they are putting through on expenses and what they aren't. Even if they say they are claiming something on expenses, it doesn't mean they actually do. I've joked about claiming things on expenses before, just because when you are self employed, you get into the habit of keeping receipts for absolutely everything, so it sometimes becomes a running joke that I need it for expenses, when in reality, it's just for tracking all of my expenditure.
You can't just put everything through on expenses, you do have to account for things properly.

Animal .
No it's not thro a company

You say 'they' so they are both self employed?

Then it must be a company, I would have thought. They cant be a sole trader.

It's not wise to do that anymore because you'll struggle to get a mortgage, loans, credit card, private rental.
The tax man can and does come and investigate how you live on those low incomes.
You can't pay large amounts of cash into a bank without questions, so they are risking it at home? There's only so much you can pay with cash now without questions (over 4k on a car act a dealer and it has to be declared)

You can play it clever with cash and expenses, but it's certainly not what it was 15/20 years ago to be self employed

If you take a low income & the rest in dividends (as I do) you are not self employed. You are an employee of a company. The company has to pay corporation tax on the profits but you only pay income tax on your salary.

Dividends count as income for means tested benefits.

I am self employed in another role & for thst it doesn't matter what my drawings are. After expenses are deducted I am liable for income tax on all profits & it counts in my income whether or not I draw it out of the business bank account.

My self employment is a partnership.

If they are both self employed, there is no company, and they are running the business together then they must be running the business as a partnership. This is the same as being a sole trader in terms of how the profits are declared, it is just there is more than one person running the business.

In this scenario, then all profits are taxable in the year that they accrue so any previous comments surrounding drawing a low salary, taking dividends etc are not relevant if you are not operating as a company. If for a weekend job he earns £800 then this should be declared in the tax year that he does the work. Clearly he may just be taking the cash and not declaring it to HMRC.

Our tax system is self-assessment meaning you declare what your profits are to HMRC. They then have the right to investigate into your affairs but obviously they don't do this for everyone and it tends to be done a risk based assessment. You could of course anonymously tip them off to HMRC which may prompt them to investigate their tax returns.

As a final point Nicole is correct. If you are self employed you operate as a sole trader or partnership. If you operate your business, you are not self employed, your company operates the business and then you will be a shareholder and director (and therefore employee) of that business.

A weekend job at £800? Surely thats occasionally. Not a regular weekly 2 day job paying £800?

You do know that petrol, tools etc allowances are claimable? & that self-employed people are generating their own income/don't have a guaranteed wage cheque on last day of month? Maybe they do keep taxes lower but thats not illegal. Its what happens when you run a business you don't declare every earning as income without including living/business expenses necessary to run your business/carry out self-employed work.

You sound nosey and naive OP. I don't think you know the ins and outs of self-employment including income & expenditure declaration so you've taken your friends at their word and assumed its something illegal. Nothing you've said suggests illegality at all really.

Not having all the facts it would be cruel of you to encourage the taxman to investigate them/ Hopefully if you do that and then they confide in you, you aren't commiserating in false sympathy or round there regularly to find out whats happening

Still, I partly blame loose-lipped people who talk about their money all the time. I don't know the ins & outs of my friends' finances it never ever comes up in conversation and I wouldn't even have it in mind to ask. & vice versa. MN is an eyeopener in terms of money talk outside of people's personal relationships being pretty common. Even though in real life I never come across it.

Mistress
Yes I'm naive . That's why I'm asking -to inform myself and not to make assumptions .
Nosey - no .i don't ask as I don't like to discuss money .when it's rammed down my neck about paying no tax , when the 800 per weekend job is on top of other stuff it's actually I feel agast that it's seen as a source of pride not to pay tax - like a get one over on the system .i feel embarrassed as I don't know what to say as they seem to see it as clever .i feel that I need to ask them to stop telling me these things maybe .

Spartans
They because the dh has one business
The d w has two .
In total three seperated businesses .
No tax paid .
I'm asking as I don't want to assume they are doing anything illegal and hope that they are not .
They have tax credits and work v few hours mostly at weekend .

Mistress I agree .
I don't like discussing money .
I never disclose my wage and would not ask theirs / others !
It is them that bring it up , time and time again .

So they are two separate sole traders (another option would be for one to be a sole trader and employ the other).

It does sound as though they are fiddling things somewhat - at least with regards to claiming personal expenses as business expenses to reduce their profit, and so evade tax. It's not uncommon with sole traders to to do to some extent though that doesn't make it right.

With regards to only working a few hours, then that's another way of let's say exploiting the tax credit system. Work just enough and then sit back and get the tax credits for the rest of your income, instead of working to full capacity and not getting tax credits. Not illegal, but is it moral? Depends on the person's point of view.

Depending on the type of business there may also be cash earnings that are not declared if they do want to fiddle things, but you don't know if this is the case.

Being the owner and sole employee of a company can be dodgy tax wise if you are essentially an employee of someone else as a contracter and doing it to avoid PAYE. There's a number of tests that apply to decide whether someone is really an employee and just because an accountant says it's ok, doesn't mean it necessarily is!

It's difficult for HMRC to pick up on and they've often not bothered but apparently cracking down on it a bit.