Judge Nicholas Wikeley has scrapped a tribunal’s decision to support HMRC’s ruling against a sole trader claiming Working Tax Credit – and warned future tribunals they “need to get real.”
The Definition of a Self-Employed Person
His comments came after Judge Wikeley presided over a higher tier tribunal debating the case between a sole trader, who was defending his right to claim working tax credits, and HMRC.
The sole trader has filled in HMRC’s required questionnaire, explaining that his was a very new business, which he was advertising via gumtree adverts and printed leaflets distributed door-to-door. He also submitted certificates documenting his skills and ‘preliminary accounts’, which were handwritten, dated and costed records of his jobs and outgoings.
However, HMRC told him he wasn’t entitled to Working Tax Credit because the information he provided didn’t show that his business was ‘regular and organised’, ‘commercial’ and ‘carried out with a view to profit.’
“As a result of not meeting our definition of a self-employed person you are not treated as being engaged in qualifying remunerative work,” HMRC concluded.
The Definition of Commercial
The sole trader wrote to HMRC in protest, explaining that his business was “a simple idea” with “no need for complex and expensive business plans,” and was still in the very early stages. “I’m building up a customer base and getting my business in the public eye.” He told them he had ongoing bookings and challenged their definition of a commercial business.
“I’m offering a service that can be bought by the public, that is making a profit,” he wrote. “What exactly is your definition of commercial?”
As for their assertion that there was no evidence his business was run for profit, he asked: “Why would I even bother with any of this if I didn’t intend to make a profit? Do you think I’m doing this for fun? After being on Job Seekers allowance with no sight of a job, I decided to try and make a success of something instead of waiting for other people to give me a chance. I want to do it for myself. I’m in this for the long haul with the intention of being successful and making a profit.”
But the first tribunal upheld HMRC’s ruling, stating that the trader “was unable to provide sufficient evidence to show that his self-employment was commercial, profitable, regular and organised.” While admitting that he “did provide some evidence of that nature,” they pronounced it “lacking,” as it had no receipts, expenses, sales records, purchase invoices or financial projections.
Tribunals Need to ‘Get Real’
However, Judge Wikely, presiding over the second higher tier tribunal, was highly critical of the expectations of the first tribunal and set aside its decision completely, judging it had made “a material error in law.” He also ordered HMRC to treat the sole trader as self-employed and calculate the Working Tax Credit he is owed.
He referred to the new definition of self-employment and precedents that mean “that in the context of self-employment, remunerative work means ‘work carried out with the desire, hope and intention of claiming a reward or profit’ and that ‘activities in the course of remunerative work are not in respect of the self-employed restricted only to these activities which are costed.’”
“The second point is that tribunals need to ‘get real’,” he continued. “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.”
He also pointed out that while this particular claimant had an accountant, “I must stress that not having an accountant would not itself be taken as an indicator that the Appellant had failed to meet the “self-employed” test (ditto the absence of a business plan).”
This was the first time an Upper Tribunal had dealt with the definition of being “self-employed” applied in the context of entitlement to working tax credit since April 6, 2015, when the legislation was amended. As such, it’s a triumph not just for this particular sole trader, but for any other freelancers and one-person business owners who need to apply for Working Tax Credit in future.