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HMRC internal manual

Tax Credits Technical Manual

Income: Trading (self-employed) income

The Tax Credits (Definition and Calculation of Income) Regulations 2002, Reg. 6

Self-employed income for the purpose of calculating entitlement to tax credits will generally be the taxable profit for the tax year from the person’s work in their trade, profession or vocation, carried on in the United Kingdom or elsewhere or their share in a partnership’s profit if the person is a partner in a trade, profession or vocation.

For Tax Credit purposes, “taxable profit” has the same meaning as it has in Part 2 of the Income Tax (Trading & Other Income) Act 2005 (ITTOIA). That is the amount after the deduction of allowable business expenses. However, the “averaging” of profits or losses of farmers, market gardeners and creative artists by virtue of Chapter 16 of Part 2 of ITTOIA is not allowed for tax credit purposes.

Note: Where a farmer has received or will receive compensation for the compulsory slaughter of animals by virtue of Chapter 16ZA Part 2 of ITTOIA, the “averaging” of profits is allowed for tax credit purposes.

Where there is no taxable profit but a trading loss, any portion of that loss which remains unrelieved after the sideways set-off described in Step 4 in the calculation of income (see TCTM04002) can be set-off against future income of the same trade, profession or vocation. This mirrors the carry forward of a trading loss allowed in income tax rules. There are slight differences in the rules relating to trading losses for tax credits purposes and income tax. However, relief can only be claimed once for each pound of loss.

For example, there is a trading loss of £5000 in the accounting period ending 2004-5. For tax and tax credit purposes this is treated as a loss for the tax year 2004-5. The claimant’s only other income that year is gross building society interest of £800, only £500 of which is included in the tax credit claim (allowing for £300 de minimis limit). If he were then to make a trading profit of £10,000 in the following accounting period ending 2005-6, for tax credit purposes he could then set the £4500 balance of his 2004-5 loss against this later profit to give a reduced profit of £5500 in his 2005-6 tax credit claim.

A trading loss is not available for tax credits purposes unless the trade is carried out on a commercial basis and with a view to the realisation of a profit.