Income from self employment

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    We have a claim from a person who is self employed. She sells jewellery on the internet. In July 2012 her accountant prepared her Profit and Loss accounts for the years ended 31 January 2010, 2011 and 2012.

    There is no problem with the first year's accounts. The list of expenditure shows items for premises, light and heat, telephone and internet, motor expenses and accountancy charges.

    However, the accounts for the second year show, in addition to the above, an item for stock loan.

    The accounts for the third year do not show the stock loan but they do show a provision for VAT liability.

    We have treated the stock loan and the provision for the VAT as non allowable expenses. Her accountant is also her representative and he has appealed on her behalf.

    He says that the stock loan is stock which has been provided by a supplier on the understanding that this is a liability which can be paid for at a much later date, compared to usual credit terms.

    The supplier is based in China and the claimant is acting as an agent for the company, with the aim of creating a presence in the UK for this organisation. The supplier has provided stock, on loan, to the value of in excess of £500,000.00.  

    Some of the stock has already been sold.

    We consider that, because the claimant does not have to pay for the stock until a much later date, she has not actually expended money for the purposes of the business (HB reg 38 (8 ) (a).

    As far as the VAT is concerned, she appears to have not actually paid any (her VAT liability is not yet known) and, because of this, we consider that no dedution for VAT can be allowed at this stage under Reg 38 (8 ) (b) (i) because because there is no excess of VAT paid over VAT received in the assessment period. It is only a provision.

    HMRC may allow these expenses but we consider that they are not allowable under the HB/CTB Regs. Any ideas would be welcome.

    NB The accountant says that we are infringing the Human Rights Act 1998 under Article 1 of the First Protocol – Protection of Property and that the claimant is in a position to take this to the Ombudsman as maladministration. We think this is nonsense.







    I agree with the latter comment…the claimant has the right of appeal and can raise any HR issues at Tribunal (although unlikely to have any sucess). As such, the Ombudsman will not usually intervene because of the possible of other redress to an independent body.

    On the VAT provision I would agree with you. Until the claimant gets a bill for vat, there is no cost and until and unless she is registered I dont really understand the accountants point. It may be prudent accountancy but that is not what matters in the HB context.

    I am less convinvinced by the stock loan issue. The claimant has sold stock; she has to pay for it. I am not sure paying on extended terms is a reason to refuse to allow that. For instance, the claimant sells £5,000 in goods and has to pay the supplier £3,000 for those goods albeit in 18 months time. I would be minded to allow the £3,000 from this years accounts. To suggest the entire £5,000 is profit is unrealistic and I am not convinced by the reg you quote. Many small businesses run on extended credit and the requirement is to determine the gross income of the employment.


    Thank you, Peter. That is very helpful

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