HMRC internal manual

Tax Credits Technical Manual

TCTM02415 - Entitlement: WTC entitlement - qualifying remunerative work: self-employed person

In order to be engaged in qualifying remunerative work, a person must satisfy the conditions contained within Reg 4(1). The first condition is that the claimant is working and is employed or self-employed.

‘Self-employed’ - for the purposes of tax credits is defined in Reg 2(1) as follows:

“self-employed” means engaged in carrying on a trade, profession or vocation on a commercial basis and with a view to the realisation of profits, either on one’s own account or as a member of a business partnership and the trade, profession or vocation is organised and regular.

Commercial basis 

The self-employment must be carried on a commercial basis, this being the main aim of the trade, profession or vocation is to seek a profit and all actions/efforts support that aim.

Commerciality is essentially about commerce or buying and selling and that should be the focus of the ‘commercial’ part of the definition of ‘self-employed’.  Consideration has to be given to whether the business is truly engaged in buying and selling exchanges.

In considering commerciality, the relevant factors are whether the business generates goods or services by enterprise and effort; makes those goods or services available to shops, or listing for sale online; actually makes sales, and the terms on which those sales are made.

Also potentially relevant are: the age of the business; business plans for future commerce; and steps being taken to increase profit from the work.

Care should be taken not to link commerciality with whether the business has actually generated a profit.

We do not ask that a customer works more hours on order to be commercial. When determining the commerciality of a customer’s self-employment consideration must be given to their individual circumstances. For example, customers with caring responsibilities or a disability would not be expected to work more hours than required to qualify for Working Tax Credits, in working towards the realisation of a profit. The evidence the customer presents should demonstrate that self-employment is carried on a commercial basis for the number of hours worked.

In all circumstances we would expect the self-employment to be developed/reviewed in order to improve the business with seeking a profit as the main motivation for doing so.

To establish whether or not self-employment is carried out on a commercial basis it is may be helpful to look at what constitutes ‘uncommercial’. Self-employment may be conducted in an uncommercial way for instance the hobby market-gardening enterprise where the prices of fruit and vegetables do not realistically reflect the overheads and variable cost of the enterprise.

Examine the facts and look for the presence or absence of common features or characteristics of what a genuine trade would do and whether the business is being conducted in an uncommercial way.

View to the realisation of profits

The self-employment must be carried on with a view to the realisation of profits. If at any time, the self-employment is carried on so as to afford a reasonable expectation of profit, it is carried on (at that time) with a view to the realisation of profits.

‘With a view to’ embraces a range of realistic possibilities, which indicate that the view is a reasonable one.

The criteria for the ‘expectation of realising a profit’ does not specify any period within which the self-employment must be expected to realise a profit. It is sufficient that there is some realistic possibility of profit being earned at some future date, however distant.

There are two possible ways of establishing whether or not the person’s self-employment is carried on with the realisation of a profit.  Either there is not a reasonable expectation of a profit, or there is another reason for carrying on the trade.

Case law has clarified that actual profitability is not required. An activity with nil or little profits is still capable of being carried out on a commercial basis with a view to the realisation of profits. It is incorrect to conclude that self-employment is not carried out on a commercial basis simply because it is unprofitable.

Top of page

It is not reasonable expectation

The information and evidence provided may demonstrate that there is no possibility of a profit ever being generated regardless of how long the self-employment is carried on.  In these circumstances, the expectation of realising a profit is unfounded and is evidence by closely examining the future plans for the business , profit projection or other information provided as the basis for the person’s expectations of profit. You are justified in pointing to past results when considering whether the person’s expectation of realising a profit is reasonable.

Top of page

There is another reason for carrying the self-employment

A person who makes losses with no realistic possibility of making a profit may have some other reason for carrying on the trade. For example, it may be that the trade is a hobby or gives the person personal enjoyment. It may also be the case that the person is simply seeking to offset personal expenditure.

Organised and regular

The trade, profession or vocation in question are required to be both organised and regular.

Self-employment should be structured in an organised way and it should be regular and ongoing.

When determining if the self-employment is carried out in an organised way, consideration is given to matters of the business organisation such as accounts, sales, returns and tax records. Consideration is also given to whether the business is organised in a way that one would expect such a business to be organised.

When determining if the self-employment is carried on a regular basis, consideration is given to the conduct of the business, matters such as regularity of business and opening hours, or whether the business is merely undertaken at the person’s convenience.