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Chapter H4: Earned income - self-employed earnings

Contents
H4001:Introduction
H4002:Meaning of claimant
H4003:Earned income
The general principles of earned income
H4006:Actual amounts
H4007:Deciding entitlement before the end of the first assessment period
H4008:Failure to report earnings
H4010:What self-employed earnings are
H4012:Trade, profession or vocation
H4013:A trade
H4014:A profession
H4015:A vocation
H4016:Assessing if earnings are from self-employed activity
H4020:Gainful self-employment
H4023:The gainful self-employment test: main employment
H4033:Other factors to consider

The gainful self-employment test: earnings that are self-employed
H4040:earnings

The gainful self-employment test: organised, developed, regular and
H4050:in expectation of profit
H4051:Existing businesses and new businesses
H4054:Businesses receiving little or no income
H4057:Sickness
H4058:Further examples
The minimum income floor
H4060:What the minimum income floor is
H4070:The minimum income floor amount
H4077:Members of a couple and adjustment of the minimum income floor
H4090:Exceptions
H4100:The start-up period
Treatment of self-employed earnings
H4110:General
H4113:Method of calculation
H4120:Class 2 and class 4 contributions
H4123:Income tax
H4124:Relievable pension contributions
H4130:Gross profits
H4140:Calculation of monthly earnings - cash flow
H4157:Method of calculation
H4160:Actual receipts
H4163:Payments received for goods and services provided
H4164:Earnings payable abroad
H4168:Personal drawings
H4168:Sale of certain business assets
H4182:Tips and gratuities
H4184:Receipts in kind
H4190:Capital receipts
H4191:Accounts
Permitted expenses
H4197:Conditions for deducting permitted expenses
H4198:Wholly and exclusively
H4200:Permitted deductions for expenses
H4206:Expenses for both business and private use
H4210:Incurred unreasonably
H4214:Regular costs
H4215:Value added tax
H4217:Payment of interest on business loans
H4220:Partner's earnings from the business
H4230:Deductions for mileage and use of home as business premises
H4232:Mileage
H4240:Use of the home
H4250:Personal use of business premises
H4260:Expenses not allowed
H4261:Expenditure on non-depreciating capital assets
H4263:Loss incurred in respect of a previous assessment period
H4270:Loss incurred in any other employment
H4272:Repayment of capital on business loans
H4275:Business entertainment
Particular forms of self-employment
H4330:Partnerships
H4354:Sub-contractors
Company analogous to a partnership or one person business
H4360:Introduction
H4365:Property business
H4370:Trading business
H4374:Earned income
H4377:Exceptions
National Minimum Wage Hourly Rates............................................... Appendix 1
Further examples of the gainful self-employment test........................ Appendix 2

Chapter H4: Earned income - self-employed earnings

H4001 Introduction

Guidance in this chapter covers
1. what S/E earnings are
2. determining
gainful self-employment
3. the minimum income floor
4. the start-up period
5. the treatment of S/E earnings including permitted expenses.

H4002 Meaning of claimant

Claimant means (1) either
1. a single claimant for UC or
2. each of joint claimants for UC.
1 WR Act 12, s 40

H4003 Earned income

Earned income means (1)
1. the remuneration or profit derived from
1.1 employment under a contract of service or in an office (including
elective office) or
1.2 a trade, profession or vocation or
1.3 any other paid work or
2. any income treated as earned income for the purposes of UC.
Note: Paid work in 1.3 means 2 work done for payment or in expectation of payment.
It does not include work performed for a charitable or voluntary organisation or as a
volunteer where the only payment received in any of those cases is in respect of
expenses.

1 UC Regs, reg 52; 2 reg 2

H4004

The words "derived from" mean having their origins in (1). Payments for past, present
and future work should be treated as earnings unless specifically excluded.

1 R(SB) 21/86

H4005

A S/E person derives earned income from a
1. trade
2. profession or
3. vocation.
These are known as S/E earnings (1). See H4012 et seq for guidance on trades,
professions and vocations.
1 UC Regs, reg 57(1)
The general principles of earned income

H4006 Actual amounts

Calculating a person's earned income for UC in respect of an assessment period
should be based on the actual amounts received in that period (1). Any exceptions to
this rule - for example, the minimum income floor - are described in this guidance.
1 UC Regs, reg 54(1)

Example

Nils is in receipt of UC and works on a S/E basis as a music teacher. When
assessing Nils' earned income for an assessment period, the DM applies the
guidance in this chapter to the actual income less permitted expenses. The resulting
figure is Nils' earned income for the assessment period.

H4007 Deciding entitlement before the end of the first assessment period

Where
1. the DM is determining whether the claimant is entitled to UC on income
grounds and
2. that determination is before the end of the first assessment period for that
claim to UC
then the amount of earnings used to determine whether the financial conditions for
UC are met may be based on an estimate of the amount received or to be received (1).
1 UC Regs, reg 54(2)(a)

H4008 Failure to report earnings

Where
1. the claimant has failed to report their earned income in relation to an
assessment period and
2. the DM makes a determination as to the amount of earned income in that
assessment period
then the amount of earnings for that assessment period may be based on an
estimate of the amount received or to be received (1).
1 UC Regs, reg 54(2)(b)

Example

Lyndon is gainfully S/E and in receipt of UC. The minimum income floor does not
apply to him because he is still in the start-up period. In each of the last six
assessment periods, Lyndon has reported his S/E earnings and they have worked
out at about 120. Lyndon informs the DWP seven days after the end of his
assessment period that he is in hospital following an accident two days earlier and
expects to be there for five weeks. He is able to provide a Doctor's letter to that
effect. Nobody else can access his business accounts so he will be unable to report
his S/E earnings for the previous period within the required timescales but believes
his earnings were similar to those of the last few assessment periods. The DM
decides to use an estimate of 120 for the purposes of Lyndon's S/E earnings for
the latest assessment period.

H4009

The decision as to whether or not to use an estimate should be based on the facts of
each individual case.

Example

Andrew is self-employed and in receipt of UC. He contacts the department on the
last day of his assessment period to say he is out of town for the week on business
and will not be able to access his accounts and work out his S/E earnings until he
returns. The DM decides that in this case no estimate should be made and advises
Andrew that he can report his earnings when he returns so that his UC can be
calculated and paid. The DM reminds Andrew of the timescales within which he can
report.

H4010 What self-employed earnings are H4040 H4355

S/E earnings consist of income that a person derives from carrying on a trade,
profession or vocation and which isn't employed earnings (1).
Note:
Employed earnings are earnings derived from employment under a contract of
service or as the holder of an office (including elective office)2. ADM Chapter H3
provides guidance on employed earnings.

1 UC Regs, reg 57(1); 2 reg 55(2)

H4011

The identification of whether the claimant is in receipt of S/E earnings forms part of
the test for gainful self-employment. H4020 et seq provides guidance on the gainful
self-employment test. Regardless of whether a claimant is determined to be in
gainful self-employment or not, the DM has to decide how S/E earnings will affect an
award of UC.

H4012 Trade, profession or vocation H4005 H4022

The concept of trade, profession or vocation has its origins in tax law. A trade,
profession or vocation may be carried on by a person
1. on a sole trader basis or
2. in partnership with others.

H4013 A trade

In order to recognise whether a person is engaged in a trade, the DM should have
regard to
1. whether there is a profit seeking motive (regardless of whether or not a profit
is actually made)
2. the frequency and number of similar transactions. The more frequently that a
transaction is carried out, the more likely that this is trading
3. whether assets are modified in order to make them more attractive for a
person to buy. If this is the case then this is likely to point towards a trade
4. the nature of the asset. Was the asset bought simply to sell on for a profit?
5. whether there is a connection with an existing trade. If a person sells
something unconnected with what they normally do by way of work then this
may point towards a person not trading
6. the financing arrangements. Where an asset is bought with a short-term loan
which is to be funded by selling the asset again then this points towards trading
7. the length of ownership. The longer that an asset is owned, the more unlikely
that the sale of it constitutes trading
8. the reason for the acquisition and sale.
In some circumstances the existence of just one of the above may be enough to
show that a person is trading. In other cases, a combination of the above may show
that a person is trading.

Example 1

Bridget buys some gold and silver in order to sell on using a short-term loan. Bridget
cannot afford to pay the interest on the loan from her own resources. However, once
she sells the gold and silver then she repays the loan and also makes a profit. The
DM determines that Bridget is engaged in a trade because she has a profit seeking
motive. The assets were bought to sell on for a profit with the aid of the short-term
loan.
The DM will then need to consider whether the self-employment activity is gainful
self-employment. See H4020 et seq for guidance on gainful self-employment for UC.

Example 2

Mark has had a long interest in classic cars. He owns two and has had them both for
a number of years. After losing his job, Mark decides to sell both of the cars because
he can no longer afford the upkeep on them. The DM determines that Mark is not
engaged in a trade and that he has just sold personal possessions of which he has
had ownership for a number of years in a one off transaction.

Example 3

Warren buys 10,000 toilet rolls from a wholesaler with the intention to sell them for
profit. He sells these in a single transaction to a restaurant chain for a profit. The DM
determines Warren is engaged in a trade because his motive was profit seeking and
the number of the toilet rolls he bought suggests they were bought to sell on for
profit, not for his own use.
The DM will then need to consider whether the self-employment activity is gainful
self-employment. See H4020 et seq for guidance on gainful self-employment for UC.

Example 4

Roy is a plasterer. He has been working as a plasterer for the past year but has not
made a profit from the work. Roy wants to make a profit but is running at a loss. The
DM determines that Roy is engaged in a trade notwithstanding the loss he is making
because his motivation is to make a profit.
The DM will then need to consider whether the self-employment activity is gainful
self-employment See H4020 et seq for guidance on gainful self-employment for UC.

H4014 A profession

Examples of professions include
1. accountancy
2. the law
3. consultancy.
Whilst it may be clear that a person is engaged in a profession, in order for the
earnings from a profession to be S/E earnings then the profession has to be carried
out in a capacity other than as an employed earner.

Example 1

Ros is a solicitor and works for a government department. Ros is employed as a civil
servant and is subject to a contract of service. Whilst Ros' work as a solicitor is
classed as a profession, the earnings received from her profession are not S/E
earnings.

Example 2

Jeremy is an accountant. He works for himself and completes accounts for a
number of clients. The earnings that Jeremy receives are from his profession as an
accountant and are earnings from self-employment.
The DM will then need to consider whether the self-employment activity is gainful
self-employment See H4020 et seq for guidance on gainful self-employment for UC.

H4015 A vocation

Examples of vocations include
1. sport
2. music
3. acting.
In order for the earnings from a vocation to be S/E earnings then the vocation has to
be carried out in a capacity other than as an employed earner.

Example

Keith is a darts player. He plays in tournaments around the country and competes
for prize money on his own account. The DM determines that Keith's dart playing is
a vocation and the income derived from this vocation is S/E earnings.
The DM will then need to consider whether the self-employment activity is gainful
self-employment. See H4020 et seq for guidance on gainful self-employment for UC.

H4016 Assessing if earnings are from self-employed activity

To assess if a claimant's earnings are S/E earnings for the purposes of UC, regard
should be had to a number of factors and weighing up the answers to
1. what form does remuneration take? Where tax is deducted at source, this
may suggest that the employment is not self-employment
2. is the claimant's work supervised? If they have control over agreeing to
conduct work, fixing the price of work or how long the job may take this may
point towards self-employment If the claimant has own control over their
costs, this may point towards self-employment
3. does the claimant have the powers of appointment and dismissal and can
they employ a substitute, for example to cover holidays or sickness? A power
to appoint a substitute may point towards self-employment
4. how long in duration are the contracts of work? Short contracts may point
towards self-employment
5. does the claimant provide their own investment, for example, equipment.
Provision of own equipment and tools may point towards self-employment
6. where does the claimant work? If they work from home, or a workshop or
office they own or rent, this may point towards self-employment
7. is the person who engages the claimant for work obliged to provide work? If
there is no obligation then this may point towards self-employment
8. does the claimant have discretion over the hours they work? The greater the
discretion then it is more likely that the work is self-employment.
Note: A determination that a person has earnings from self-employment does not
necessarily mean that for the purposes of UC, they are gainfully S/E. See H4020 et
seq for guidance on gainful self-employment for UC.

Example 1

Leo works as a steward at race courses throughout the country. The work depends
on the frequency of race meetings at the race courses to which he is prepared to
travel. Leo only works when a race meeting is on and then only for the duration of
each meeting. Some meetings last for five days whilst others just for one. The race
courses differ on how they calculate remuneration. Some of the courses pay per
hour, whilst some calculate a daily rate. The frequency of payment varies too with
some courses paying monthly whilst others pay after each period of work. When at
work, Leo is instructed as to his duties by a supervisor and any payment of tax and
NI is deducted at source. Leo sometimes provides his own clothing for work but at
some courses a uniform is provided. Leo has no discretion to the hours that he
works but he is not obliged to accept employment from race courses and can decide
which meetings to attend.
After considering the evidence, the DM determines that, for UC purposes Leo's
earnings are not from S/E activity but rather they are from employed activity.

Example 2

Polly is a proof reader. She does work for various publishing houses. The frequency
of the work varies and is difficult to predict. When she has work, Polly works from
home and for the hours which suit her within the deadlines set by the publishing
houses. Polly provides her own dictionaries and reference books for her own use.
She is paid for each completed piece of proof reading. Tax is not deducted when
she is paid for her work and Polly completes a self-assessment calculation for
HMRC.
After considering the evidence, the DM determines that, for UC purposes Polly is
S/E and her earnings are from S/E activity. The DM will then need to consider
whether the activity is gainful self-employment. See H4020 et seq for guidance on
gainful self-employment for UC.

H4017

A determination that a person has earnings from self-employment for UC is not
decisive for other purposes and nor is the DM bound by a determination made by a
DM in another government department.

H4018

If the person has ceased self-employment the DM should consider if
1. there are any capital assets from the business and
2. any capital assets from the business should be disregarded (see ADM
Chapter H2 for guidance on the treatment of the business assets)1.

1 UC Regs, Sch 10, para 8

[H4019]

H4020 Gainful self-employment H4011 H4013 H4013 H4013 H4014 H4015 H4016 H4016 H4374

The determination as to whether a claimant is in gainful self-employment for UC
purposes is important. This is because it determines whether the
1. minimum income floor applies to the claimant's S/E earnings (1) and
2. claimant is eligible for a start-up period (2).
The determination may also have an impact on the work-related requirements which
the claimant is subject to. ADM Chapter J3 provides guidance on the work-related
requirements.

1 UC Regs, reg 62(1); 2 reg 63(1)

H4021

It is for the Secretary of State to determine who is in gainfully S/E for the purposes of
UC. This determination should be made after information has been gathered from
the claimant. This will take place at a Gateway Interview shortly after a claim for UC
has been made.

H4022

A claimant is in gainfully S/E where (1) for the purposes of UC, the Secretary of State
has determined that
1. the claimant is carrying on a trade, profession or vocation as their main
employment and
2. their earnings from that trade, profession or vocation are S/E earnings (see H4012 et seq) and
3. the trade, profession or vocation is organised, developed, regular and carried
on in expectation of profit.
In order to be in gainful self-employment for the purposes of UC, 1., 2. and 3. have
all to be satisfied. If any of those are not satisfied then the claimant cannot be in
gainful self-employment.
1 UC Regs, reg 64

H4023 The gainful self-employment test: main employment

As part of the gainful self-employment test, the DM needs to decide if the trade,
profession or vocation is the claimant's main employment (1). This is the case for
claimants who are
1. only undertaking S/E activity but on a few hours or low paid basis and
2. both S/E and also working as an employed earner.

1 UC Regs, reg 64(1)(a)

H4024

In determining whether self-employment is the person's main employment, the DM
should consider whether self-employment is the
1. main employment activity and
2. claimant's main employment goal.

H4025

Evidence gathered at the Gateway Interview (or elsewhere) which may indicate
whether the trade, profession or vocation is the main employment include
1. a statement of the number of hours spent on the activity and
2. the claimant's intention as to which activity is their main form of employment
and
3. the amount of earnings from the S/E activity.

[H4026-H4029]

H4030 To determine whether the S/E activity is the main employment, the DM needs to
consider the amount of available work hours spent on it.

H4031

The S/E activity is likely to be the claimant's main employment where the claimant
1. undertakes only S/E activity and it occupies a significant proportion of their
expected number of hours per week. S/E activity which accounts for more
than half the expected number of hours is very likely to show that self-
employment is the main employment or
2. undertakes both S/E and employed earners activity and the S/E activity takes
up more time than the employed activity (but also have regard to H4032 2.) or
3. is starting a new business and the types of activities outlined in H4053 take up
most of their expected number of hours per week.

Example

George is a trained hairdresser. He has lost his job at the salon where he worked.
George does, however, still cut hair for some private clients. He does this on an ad
hoc basis and charges just a small fee to cover his costs. In the course of a week,
George probably spends about 18 hours on hairdressing and earns on average 80.
George has stated that he is not looking to increase his client base or his earnings.
George spends more than half of his working hours on self employment. The activity
is seen as his main form of employment.
The DM has to consider whether the earnings are S/E earnings and whether the
activity is organised, developed, regular and carried on in expectation of profit.

H4032 H4031

The S/E activity is unlikely to be the claimant's main employment where the claimant
1. undertakes only S/E activity and that activity occupies significantly less than
half the expected hours or
2. undertakes S/E and employed earners activity and the S/E activity takes up
more time than time spent on employed activity but still only represents a
small proportion of the expected hours of work (but also have regard to H4034
1.)

Example

Ziggy plays guitar and every fortnight performs at his local pub. He plays for about
two hours and receives 20 for each performance. The pub where Ziggy plays
advertise the nights that Ziggy performs. Ziggy does not play anywhere else and
regards the fortnightly performances as a bit of fun.
Ziggy only spends a few hours on the S/E activity and receives a low wage. The DM
determines that the self-employment is not Ziggy's main form of employment.
He is therefore determined by the DM to not be gainfully S/E because the self-
employment is not Ziggy's main employment.

H4033 Other factors to consider

Whilst hours are a good indicator of someone's main employment, it is not the only
factor that a DM should consider in reaching a determination. The DM should
consider other factors such as
1. the amount of income received from each employment and
2. whether the S/E activity is the claimant's main goal.

H4034 H4032

The S/E activity is likely to be the claimant's main employment where the claimant
1. undertakes S/E activity for a small number of hours each week but is
receiving a high hourly return on the activity or
2. works more hours on employed earners employment but receives a greater
proportion of their income from S/E activity.

Example 1

Jos works as a bouncer in a nightclub. He has a contract of employment with one
nightclub and works on a S/E basis for another establishment. His contract of
employment is for 12 hours per week and he is paid 80. He spends on average six
hours per week on self-employment, which earns him about 140. Jos advertises his
business in the local press and actively markets his services on his website.
Jos spends more time on his PAYE employment, however he earns more from his
self-employment. The DM therefore needs to look at both in order to make a
determination. Based on the earnings, the DM determines that Jos' main
employment is his S/E work.
Based on a determination that self-employment is Jos' main employment, that the
earnings are S/E earnings and that it is organised, developed, regular and carried on
in expectation of profit (see H4050 et seq), the DM determines that Jos is gainfully
S/E.

Example 2

Kendra makes a claim for UC and here expected hours of work for UC are 35. She
is an animal lover and has a small business as a pet walker and pet sitter. She
spends about 12 hours a week walking dogs for clients and checking on the pets of
owners who have gone on holiday. Kendra charges for these services and earns
about 160 a week from them. She has no other employment. She has begun
advertising with leaflets and distributing business cards and has plans to increase
the locations where she is available to take on work.
Kendra spend less than half her available hours on her S/E activity, however she
receives a relatively high wage from the activity. The DM considers both hours and
earnings and decides that the S/E activity is her main employment due to the income
it generates.
The DM then has to determine whether Kendra meets the other parts of the gainful
self-employment test.

H4035

The S/E activity is unlikely to be the claimant's main employment where the
claimant spends
1. marginally over half the expected hours engaged in S/E activity but receives
only limited income from the activity and/or has very limited opportunity to
expand the business or
2. marginally more time on S/E activity than employed activity but receives a
significantly larger proportion of their earnings from the employed activity.

Example 1

Jasumati has been a portrait artist for over three years. She spends around 18 hours
a week on her S/E work and she earns around 60 a week from this activity. Her
expected hours of work for UC are 35. Jasumati has a portfolio of work and a
website where she shows her work and advertised her services. She has tried
various ways of promoting and marketing her work, but demand for her services has
remained fairly constant.
Jasumati spends over half of her available time on S/E activity but it only generates
a small income. On balance, looking at both hours and earnings the DM decides that
the self-employment is not the main form of employment.
The DM determines that Jasumati is not gainfully S/E because her work is not her
main employment.

Example 2

Ann has claimed UC and the expected number of hours she can work per week are
35. She has both self-employment and PAYE work. Ann works for eight hours a
week in a pub and is paid 49.60 weekly by the pub landlord as a PAYE employee.
Ann also carries out sewing work from home. This work is carried out on a S/E
basis. Ann normally spends about 10 hours a week on this activity and earns about
40 but the earnings vary because the level of work fluctuates. Ann can choose
when she does her sewing and the amount of hours she spends doing this can
change. She can take on more work and can charge different prices for her work.
Ann spends similar amounts of time on both activities. The DM determines that
Ann's PAYE work is her main employment because she generates most of her
income from that activity.
The DM determined that Ann's self-employment was not her main form of
employment. She therefore fails to meet part of the gainful self-employment test.
The DM determines that Ann is not gainfully S/E.

[H4036-H4039]

H4040 The gainful self-employment test: earnings that are self-employed earnings

In order for the gainful self-employment test to be satisfied the claimant's earnings
from their
1. trade
2. profession
or
3. vocation
have to be S/E earnings (1). H4010 provides guidance on what S/E earnings are.
1 UC Regs, reg 64(1)(c)

[H4041-H4049]

H4050 The gainful self-employment test: organised, developed, regular and in expectation of profit H4034

In order to determine if the S/E activity is organised, developed, regular and carried
on in expectation of profit, the DM should take into account
1. whether the activity is undertaken for financial gain
2. the number of hours spent each week on the work
3. any business plan or steps taken to increase income from the activity
4. how HMRC regard the activity
5. how much work is in the pipeline
6. whether the claimant is actively marketing or advertising for work.
The above is not exhaustive.

Example

David has claimed UC and expected number of hours per week he can work are 35.
He works for a supermarket for 11 hours a week and is paid 68 a week. David also
works as an office cleaner. In a typical week, David earns about 110 from the
cleaning business for 10 hours of work.
David is paid in cash from the office manager for cleaning the offices and arranges
to pay tax on this income through self-assessment. He is responsible for buying his
own equipment and arranging for someone to cover for him when he takes a holiday
or falls sick. David advertised his services and is actively marketing his business in
order to take on more cleaning work
David spends a similar amount of time on both activities. The DM therefore has to
look at earnings in order to determine what the main form of employment is. The
earnings generated from the office cleaning work are higher than the earnings from
the supermarket, so the DM determines that the office cleaning work is David's main
employment.
David has a clear profit-seeking motive. He buys his own equipment and is
responsible for arranging cover if he goes on holiday or falls sick, the DM determines
that the earnings from his office cleaning are S/E earnings
David has a regular cleaning contract with the office, which is considered significant
work in the `pipeline'. HMRC consider David's cleaning work to be self-employment
because he does a taxation self-assessment and pays VAT on this income. The DM
determines that the cleaning work is organised, developed, regular and in
expectation of profit.
David met all three parts of the test. He is therefore determined by the DM to be
gainfully S/E.

H4051 Existing businesses and new businesses

In addition, the characteristics of gainful self-employment may vary depending on
whether the business is
1. an existing business which has been trading for some time or
2. a new business or
3. an existing business receiving little or no income.

H4052

An existing business may
1. have a list of regular customers
2. be registered with HMRC for Self Assessment and/or VAT
3. have accounts covering current and previous activity
4. have evidence of trading and regular income.
The decision, therefore, to determine gainful self-employment for UC purposes may
be relatively straightforward. This is because the evidence shows an established
business which is organised, developed and regular with S/E earnings from a trade,
business or vocation as the main employment.

H4053 H4031

For a new business, the DM should consider
1. the business plan or proposal and whether there is a reasonable prospect of
the business being an on-going concern in terms of an expectation of profit
2. what steps a claimant is already taking to progress their new business activity
or towards carrying out work in relation to the business and whether there is
work in the pipeline, for example, a list of suppliers, diary of appointments etc
3. what work has already been done and what income has been received
4. whether the claimant is making it known to potential customers that they are
available to take on work, for example, marketing and advertising
5. whether the claimant has registered as S/E with HMRC (although this will not
verify S/E activity for UC purposes).

Example 1

When making her claim for UC, Jenny indicates that she wants to start a new
wedding photography business. She has invested in camera equipment and recently
completed a two week online photography course. Jenny has a portfolio of photos
from two events she covered as part of her course. She has registered a domain
name for a business website and engaged a web designer to design a site for her
business. Jenny has also drawn up a business plan which includes plans to
advertise in local bridal shops, wedding magazines and has approached a number
of wedding venues with whom she hopes to establish a business relationship. She
has researched wedding photographer hire prices and has developed a pricing
structure for her business in line with her research. Whilst Jenny is yet to receive any
commissions, the DM determines that Jenny's plans demonstrate that she is in
gainful self-employment for the purposes of her claim to UC and is eligible for a
start-up period.
Jenny has spent time on planning and taking steps to progress her business idea
and the DM decides that on balance Jenny has demonstrated it is her main
employment goal.
Jenny is providing her own equipment and will control the prices and hours she
works. The DM decides that any earnings would be S/E earnings.
Jenny has demonstrated that she has put effort into planning, researching and
developing her business idea and can show from her pricing structure how she
intends to make a profit from the business. The DM decides that based on Jenny's
evidence and steps taken the business will be developed, organised and carried on
in expectation of profit
Jenny has met all three parts of the test and the DM determines her to be gainfully
S/E.

Example 2

John has recently been given a modest sum of money by family members and is
thinking about using this money to start a new small business. In his claim for UC he
has declared that he is currently looking at becoming a market trader. He thinks he
might put down money for a market stall pitch in the local market next month.
However, he hasn't approached the local market office, is yet to buy any stock or
identified any suppliers. He states he has designed some t-shirts himself and has
sold five or six to friends and family on an ad hoc basis but has not considered any
next steps to extending this activity.
John has to date spent only around six hours in two weeks designing his t-shirts and
has not spent any other time on his business idea. The DM determines that his new
business is not currently his main form of employment despite the fact it may be his
main employment goal in the future.
The DM does decide that John's activity is a trade as John would provide the t-shirts
and paints to illustrate the designs on them.
The DM determines that John's activity currently is not developed, regular or
organised as no steps have been taken beyond to fully plan or realise the business
idea.
The DM determines that John is not in gainful self-employment for the purposes of
his claim to UC. John has not shown that time has been spent planning and
developing his business idea or that he has taken any substantial steps to progress
the business beyond an idea. Whilst it is his main employment goal the DM doubts
that currently it could provide John with gainful self-employment.

H4054 Businesses receiving little or no income

A claimant who has already been determined to be gainfully S/E may experience
times where their business is not generating much by way of an income. However,
this does not mean that they are no longer gainfully S/E for the purposes of UC.

H4055

In order to determine if a claimant is still gainfully S/E, the DM should consider
1. if there is a reasonable prospect of work in the near future and
2. if the business is a going concern and regarded as such by
2.1 the person or
2.2 the business's bankers or
2.3 any creditors or
2.4 others and
3. if the person is genuinely available for and actively seeking alternative work
and
4. if the person hopes or intends to restart work in the business when economic
conditions improve and
5. if the person is undertaking any activities in connection with the self
employment and
6. if there is work in the pipeline and
7. if the person is regarded as S/E by HMRC and
8. if the person claims to be anxious for work in the trade, profession or vocation.
Is the person making it known that the business can take on work? For
example,
8.1 by advertising or
8.2 by visiting potential customers and
9. if the interruption in question is part of the normal pattern of the
9.1 person's work or
9.2 work that the person is seeking.
Not all of these questions will be relevant to whether a person is still gainfully S/E. It
will depend on the facts of the particular case.

Example

Ira is in receipt of UC and has previously been determined to be gainfully S/E. He
runs a business that supplies and fits doors and windows. Due to competition in the
area the business has received fewer and fewer orders, until now there are none. As
Ira's earnings have been consistently below the minimum income floor (see H4060),
he is called back in for a Gateway Interview. Ira states that
1. he has been unable to pay the rent on his shop and the landlord is threatening eviction
2. his business has debts and the bank has advised that the business should be
wound up
3. he can not find a way of boosting his trade
4. there is no work in the pipeline
5. at present he is still regarded as S/E by HMRC
6. he still has an advertisement in the Yellow Pages.
His earnings are negligible but they are derived from a trade and they are therefore
S/E earnings.
Based on
1. - 6. above, the DM determines that the work is no longer regular and
there is no expectation of profit.
The DM determines that Ira is not gainfully S/E.

H4056

The DM should make a determination on gainful self-employment based on a
balanced view of the evidence. These are matters of individual judgement for the
DM concerned.

H4057 Sickness

A S/E claimant will experience occasional minor illnesses like anyone else. The DM
should regard periods of minor illness as part of the normal pattern of self
employment.

Example

Reuben performs as an Elvis Presley tribute act. He is registered with a number of
entertainment websites and also has several pubs and restaurants who pass on
work and customer recommendations. Reuben's work tends to fluctuate, with peaks
in the summer season and around Christmas when he supplements his income, as
a singing Father Christmas in the local shopping centre. Reuben works on average
19 hours per week and earns around 210. In December, Reuben experiences back
pains and has to stop working for a brief period.
Reuben spends the majority of his time working as an Elvis tribute act and has no
other income, so the DM determines this is his main employment.
Reuben is engaged in a profitable vocation. He has clients, but not an employer. The
DM determines that Reuben's income is S/E income.
Reuben is engaged in work and takes steps to maintain a significant amount of work
in the pipeline, actively promoting his business through the internet and asking his
clients to provide recommendations. He also has a business plan that
accommodates the changing demand for his services throughout the year. The DM
determines that the work is organised, developed, regular and carried out in
expectation of profit.
The DM considers that Reuben has met all parts of the gainful self-employment
tests. Although Reuben is unwell, this period of sickness is minor and temporary and
the DM regards this as part of the normal pattern of self-employment.

H4058 Further examples

Appendix 2 provides further examples of the gainful self-employment test.

H4059

The minimum income floor

H4060 What the minimum income floor is H4055

The minimum income floor is an amount of earnings which a person treated as
having in an assessment period. The minimum income floor applies where
1. the claimant has been determined to be in gainful self-employment and
2. the claimant's earnings from
2.1
self-employment and
2.2
any employed earnings
in an assessment period are below the minimum income floor.
The amount of earnings that the claimant is treated as having is equal to the
minimum income floor (1).

1 UC Regs, reg 62(1)

H4061

The minimum income floor does not apply to claimants who are not gainfully S/E for
UC purposes. There are also exceptions for some claimants who are gainfully S/E
for UC purposes - see H4090 for guidance. Where the claimant's actual earnings
are above the minimum income floor then the claimant's actual earnings are taken
into account.

Example 1

Clare has claimed UC. She works from home as a S/E piano tutor. The DM has
determined that Clare is gainfully S/E for UC purposes. The DM next has to
determine whether Clare's earnings from tutoring are below the minimum income
floor. If her earnings are below the minimum income floor for Clare then the
minimum income floor will apply to her award of UC. If Clare's earnings are above
the minimum income floor then the minimum income floor does not apply to her.

Example 2

Anna has claimed UC. She occasionally sells garden produce to her friends and
family. This is not regular work and she doesn't do this to achieve a profit. When she
has sold goods in the past, the DM has treated the income as S/E earnings. For the
purposes of UC, it has been determined that Anna is not gainfully S/E. The minimum
income floor cannot apply to Anna.

H4062

Where the claimant's actual earnings are below the minimum income floor then the
amount of earned income that the claimant is treated as having is equal to the
minimum income floor amount (1).
1 UC Regs, reg 62(1)

H4063

H4064

A claimant who is treated as having earned income by virtue of the minimum income
floor in an assessment period is also treated as having weekly earnings equal to
their individual threshold and therefore are not subject to work-related
requirements (1).
1 UC regs, reg 90(5)

[H4065-H4069]

H4070 The minimum income floor amount

The minimum income floor means
1. the amount of the claimant's individual threshold multiplied by 52 and divided
by 121 less
2. any
2.1 income tax or
2.2 national insurance contributions
which would be appropriate for the assessment period if the person's earnings
were actually at that level (2).
1 UC Regs, reg 62(2)(a); 2 reg 62(2)(b)

[H4071-H4072]

H4073 The claimant's individual threshold means (1)
1. the hourly rate of the NMW appropriate to the claimant's age multiplied by
2. the expected number of hours of work per week for claimants who would
normally be subject to all work-related requirements.

1 UC Regs, reg 90(2)(b)

H4074

The steps in applying the minimum income floor for a single claimant are
Step 1. determine if the claimant is in gainful self-employment for UC purposes. If
the claimant is not gainfully S/E then the minimum income floor cannot
apply.
Step 2. where the claimant is in gainful self-employment then is the claimant's
earned income (from self-employment plus any employed earnings) below
the minimum income floor?
Step
3. to calculate the minimum income floor, determine the claimant's individual
threshold less an appropriate deduction for income tax or national
insurance contributions in respect of the assessment period as if the
claimant had earned income of that amount.
Step
4. if the earnings are below the minimum income floor then the claimant has
to be treated as having earnings equal to that amount for the assessment
period. If the claimant has earnings equal to or above the minimum income
floor then the minimum income floor cannot apply.

[H4075-H4076]

H4077 Members of a couple and adjustment of the minimum income floor

Where the claimant is a member of a couple then the minimum income floor for the
gainfully S/E claimant has to be determined by first working out the "maximum for a
couple".

H4078

The maximum for a couple is
1. the couple's earnings threshold multiplied by 52 and divided by 121 less
2. any
2.1 income tax or
2.2 national insurance contributions
which the DM considers would be appropriate for the assessment period if
their earnings were actually at that level (2).

1 UC Regs, reg 62(4)(a); 2 reg 62(4)(b)

H4079

If the couple's actual combined earned income in an assessment period
1. is equal to or
2. exceeds
the maximum for a couple, the minimum income floor does not apply (1).

1 UC Regs, reg 62(3)(a)

H4080

In a case where
1. the claimant's earned income in respect of an assessment period is below the
minimum income floor and
2. the claimant is a member of a couple and
3. the couple's combined income is less than the maximum for a couple and
4. if the minimum income floor was applied the couple's combined income would
be above the maximum for a couple
the minimum income floor is reduced so that the amount of the couple's earned
income does not exceed the maximum for a couple (1).

1 UC Regs, reg 62(3)(b)

H4081

Where a claimant is treated as having an earned income equal to the minimum
income floor then any actual earnings in excess of that amount in the assessment
period are taken into account (1).
1 UC Regs, reg 22, 52 & 57

[H4082-H4089]

H4090 Exceptions H4061

The minimum income floor does not apply to a claimant
1. where the assessment period
1.1 falls within a start-up period or
1.2 is the period in which a start-up period begins or ends (1) or
2. who falls within the no work-related requirements group (2) or
3. who falls within the work focused-interview requirement group (3) or
4. who falls within the work preparation requirement group (4).
Note: For 2. this does not include claimants who fall within this group due to their
actual earnings exceeding the minimum amount (5).
1 UC Regs, reg 62(5)(a); 2 reg 62(5)(b)(i); 3 reg 62(5)(b)(ii); 4 reg 62(5)(b)(iii); 5 reg 62(5)(b)(i)

[H4091-H4099]

H4100 The start-up period

A start-up period is a period of 12 months. It applies from the beginning of the
assessment period in which the Secretary of State determines that a claimant is, for
the purposes of UC, in gainful self-employment where the claimant
1. has commenced their self-employment as their main employment in the 12
months before the beginning of that assessment period and
2. is taking active steps to increase their S/E earnings to the level of their
individual threshold (1).
1 UC Regs, reg 63(1)

Example

Andy is in receipt of UC. His next assessment period commences on 11 November.
Andy has informed the Jobcentre that he has started a window cleaning round. This
work started on 20 October. At the moment, he only has a few clients but he is
hopeful that with advertising and by word of mouth, the round will grow. Andy's
earnings from window cleaning currently amount to about 60 a week and this is
below Andy's individual threshold. However, Andy is spending 25 hours a week on
this activity and is taking steps to gain more clients and increase his earnings.
The DM determines that Andy is gainfully S/E and in the start-up period. Andy has to
report his earnings from this activity after the end of each assessment period so that
his award of UC can be adjusted to take account of them.

H4101

Where a claimant is determined to be in a start-up period then the minimum income
floor cannot apply (1). However, the actual earnings from S/E have to be taken into
2
account .

1 UC Regs, reg 62(5)(a); 2 reg 57

H4102

A start-up period cannot generally apply where a claimant has previously had a start-
up period on a current or previous award of UC. However where that previous start-
up period
1. began more than five years before the beginning of the assessment period in
which the claimant is determined to be gainfully S/E and
2. applied to a different trade, profession or vocation
then the Secretary of State may apply a new start-up period (1).

1 UC Regs, reg 63(2)

H4103

The Secretary of State may end a start-up period at any time if the person is no longer
1. in gainful self-employment or
2. taking active steps to increase their S/E earnings to the level of their individual
threshold (1).

1 UC Regs, reg 63(3)

H4104

A Gateway Interview may be used to gather the information as to whether a claimant
meets the conditions for the start-up period (1).
1 UC Regs, reg 93(f)

[H4105-H4109]

Treatment of self-employed earnings

H4110 General

Earnings derived from a
1. trade or
2. profession or
3. vocation
and that are not employed earnings are known as S/E earnings (1). Even though the
claimant may not be determined to be in gainful self-employment, if the claimant has
S/E earnings then they have to be taken into account.

1 UC Regs, reg 57(1)

H4111

S/E earnings have to be calculated in respect of an assessment period. The amount
of a claimant's S/E earnings is the gross profit minus deductions for
1. class 2 or class 4 contributions and
2. income tax
and
3. any relievable pension contributions (1).
1 UC Regs, reg 57(2)

H4112

H4113 Method of calculation

The steps to calculate S/E earnings for an assessment period are to
1. deduct from the actual receipts received in the assessment period any
permitted expenses. This gives the gross profit and
2. deduct from the gross profit any
2.1 class 2 or class 4 contributions paid to HMRC during the assessment
period and
2.2 income tax paid to HMRC during the assessment period and
2.3 relievable pension contributions made in the assessment period.
The figure that is left is the earnings that should be taken into account.

[H4114-H4119]

H4120 Class 2 and class 4 contributions

A class 2 contribution is a flat rate contribution but a higher rate is paid by share
fishermen.

H4121

A class 4 contribution is a deduction of a fixed percentage of the annual profits of a
business when these profits fall within lower and upper levels. These payments are
in addition to class 2 contributions.

H4122

Any payment made to HMRC during the assessment period of
1. class 2 contributions or
2. class 4 contributions
in respect of the trade, profession or vocation has to be deducted from the gross
profits (1).
1 UC Regs, reg 57(2)(a)(i)

H4123 Income tax

Any payment of income tax made during the assessment period to HMRC in respect
of the trade, profession or vocation has to be deducted from the gross profits (1).
1 UC Regs, reg 57(2)(a)(ii)

H4124 Relievable pension contributions

A relievable pension contribution means (1) a contribution paid to a registered pension
scheme by or on behalf of a member of that scheme. This means that the
contribution can be paid by the individual member, who must be a relevant UK
individual, or by a third party on behalf of the individual member.

1 UC Regs, reg 53(1); Finance Act 2004, s 188

H4125

A relevant UK individual means (1)
1. a person with earnings chargeable to UK income tax or
2. a person resident in the UK for some time of the year or
3. a person was resident in the UK both at some time during the five tax years
immediately before that year and when that person became a member of the
pension scheme or
4. a person, or their spouse, who has for the tax year general earnings from
overseas Crown employment subject to UK tax.

1 Finance Act 2004, s 189

H4126

A contribution will not be a relievable pension contribution if it falls into
1. contributions after age 751
2. life assurance premium contributions (2)
3. contributions paid by employers (3)
4. age related or minimum payments (4).

1 Finance Act 2004, s 188(3)(a); 2 s 188(3)(aa); 3 s 188(3)(b); 4 s 188(3)(c)

H4127

Any relievable pension contribution made by the person in the assessment period
should be deducted from the gross profits. However, this does not apply if a
deduction has already been made in respect of relievable pension contributions
when calculating the claimant's employed earnings (1).
1 UC Regs, reg 57(2)(b)

[H4128-H4129]

H4130 Gross profits

The gross profits of the trade, profession or vocation are the actual receipts from the
business in the assessment period minus any deductions for permitted expenses (1).

1 UC Regs, reg 57(3)

H4131

Actual receipts from the business include (1)
1. receipts in kind and
2. any refund or repayment of
2.1
income tax or
2.2
VAT or
2.3
national insurance contributions relating to the trade, profession or vocation. 1 UC Regs, reg 57(4)

[H4132-H4139]

H4140 Calculation of monthly earnings - cash flow

To calculate the amount of S/E earnings the DM will need to be satisfied with
1. the receipts actually received, not money owed to the business and
2. expenses defrayed, that is, actually paid for, not unpaid bills
for the assessment period that has just ended. This is known as cash basis model
(or "cash in/cash out") and evidence should be presented on a cash flow basis.

H4141

A claimant who is S/E or whose partner is S/E should be asked to report monthly
between 7 days before and 14 days after the end date of each assessment period
details of
1. actual receipts income and
2. allowable expenditure of expenses
during the assessment period that has just come to an end.

[H4142-H4156]

H4157 Method of calculation

To calculate the earnings for an assessment period the DM
1. should establish the actual receipts of the business during the assessment
period and
2. deduct from the actual receipts the permitted expenses that have been paid
out during the assessment period and
3. deduct from any remaining figure amounts for
3.1 income tax and
3.2 class 2 or class 4 contributions and
3.3 relievable pension contributions.
The figure that is left is the earnings that should be taken into account.

[H4158-H4159]

H4160 Actual receipts

Any payment actually received by the business during the assessment period,
regardless of when it is earned should be included as an actual receipt (1).

1 UC Regs, reg 57(3)

H4161

The actual receipts of a business include
1. any payments for goods and services provided
2. earnings payable abroad
3. personal drawings
4. sale of certain business assets
5. tips and gratuities
6. payments in kind
7. any VAT receipts
8. refund or repayment of income tax or national insurance contributions.

H4162

H4163 Payments received for goods and services provided

All
1. cash and
2. cheque and
3. credit card payments
received in return for goods and services supplied, should be included as an actual
receipt of the business.

H4164 Earnings payable abroad

Money that is due to be paid to a business in a country outside the UK should be
included as an actual receipt only when it is received by the business, for example
when it is paid
1. to any branch or official representative of the business or
2. into any business account.

[H4165-H4167]

H4168 Personal drawings

A S/E person may draw money from the business. These drawings, known as
personal drawings, are in anticipation of profits or business income and should not
be deducted from the gross receipts of the business. It is possible for personal
drawings to exceed the eventual profit.

[H4169]

H4170

If personal drawings are declared the DM should establish if the amount has been
deducted from the amount shown as the actual receipt. If it has, the amount of the
drawings should be added back to the amount of the actual receipts.

[H4171-H4180]

H4181 Sale of certain business assets

The amount received from the sale of a capital asset should be included in the
actual receipts of the business.

Example 1

Adam runs a business that manufactures computers. The sale of these computers is
included in the actual receipts of the business. Adam also sells a computer that he
uses to keep his business records on. The amount received for this computer is also
included in the actual receipts of the business in the assessment period in which the
sale happens.

Example 2

Solly has an engineering business. Included in the assets of the business is one of
the lathes that he uses. Whilst the lathe is used for Solly's business, it is disregarded
for UC purposes as it is a business asset (see ADM Chapter H2). Solly decides to
sell the lathe and sells it for 10,000. He hasn't yet decided what to replace it with.
The 10,000 is included in the actual receipts of the business for that assessment
period.

H4182 Tips and gratuities

Tips or gratuities received in response to the service provided, for example as a
hairdresser, taxi driver or coach driver, should be included in the actual receipts of
the business.

H4183

Any tips or gratuities that are made as a gift unconnected to the self-employment, for
example, on personal grounds should not be included in the actual receipts of the
business.

H4184 Receipts in kind

If a S/E person is paid in kind the DM should decide a monetary value equal to what
would have been paid and include this amount in the actual receipts of the
business (1).
1 UC Regs, reg 57(4)

Example

Terry is a S/E electrician in receipt of UC. He does some work for a local farmer.
The farmer pays Terry for the work in the form of farm produce.
The DM values the produce at the cost of the work carried out by Terry and includes
that amount in the gross receipts of the business.

[H4185-H4189]

H4190 Capital receipts

Capital receipts do not form part of the actual receipts of the business. For example,
1. funds introduced by the owner of the business for the purposes of financing
the business and
2. loan capital borrowed from third parties for financing purposes..

H4191 Accounts

A person may submit a set of accounts as evidence of S/E earnings. Accounts
provide some, but not all, of the information required by the DM to decide the
amount of the actual receipts and expenses paid for.

H4192

A set of accounts consists of two main statements
1. the balance sheet: that is, a statement of the financial position of a business
at a given date and
2. the profit and loss account: that is, a summary of the results of a business's
transactions for a period ending on the date of the balance sheet.

H4193

Accounts are prepared using accounting principles. Accounts may include
anticipated receipts and expenses for the accounting period. The anticipated
amounts are not
1. gross receipts as they have not been received by the business or
2. allowable expenses as they have not been paid for.

H4194

If accounts are submitted as evidence the S/E person should be asked to provide
evidence of actual amounts received and expenses paid so that the evidence can be
converted into a cash flow basis. The S/E person can do this by providing
1. accounts that are calculated on a cash flow basis or
2. evidence of the actual receipts and expenses paid.

H4195

The S/E person should be asked any questions that cannot be resolved. It may be
necessary for the S/E person to provide further supporting evidence, for example
1. bank receipts
2. purchase receipts
3. expenses for a different assessment period.

H4196

As profit and loss accounts are prepared using normal accounting principles, they
include certain entries that would not be included in a cash flow account. For example
1. the value of stock at the start and end of the accounting period
2. money owed to the business by debtors
3. money owed by the business to creditors
4. depreciation of assets of the business.
As the DM is considering the S/E person's cash flow, these will not be allowable
expenses.
Permitted expenses

H4197 Conditions for deducting permitted expenses H4198

When calculating the gross profits in respect of an assessment period, the DM
should deduct from the actual receipts any business expense that (1)
1. was paid out wholly and exclusively for the purposes of the business and
2. was paid out during the assessment period and
3. was reasonably incurred and
4. is an allowable expense.
1 UC Regs, reg 58(1)

H4198 Wholly and exclusively

An expense is wholly and exclusively paid out when it has been incurred only for the
purpose of the business (1). Any such payment should be deducted in full, subject to H41972. - 4..

1 UC Regs, reg 58(1)

H4199

Where an expense has been incurred for more than one purpose, an identifiable
part or proportion has to have been incurred wholly and exclusively for the purposes
of the trade, profession or vocation (1).
1 UC regs, reg 58(1)(b)

H4200 Permitted deductions for expenses H4214

The deductions allowed (1) when calculating S/E earnings are those deductions
1. paid in the assessment period and
2. wholly and exclusively incurred (or where incurred for more than one purpose,
an identifiable part or portion has been wholly and exclusively incurred) for the
purposes of that
2.1 trade or
2.2 profession or
2.3 vocation and
3. incurred reasonably.

1 UC Regs, reg 58(1)

H4201

Expenses that have been incurred unreasonably during the assessment period
cannot be allowed as deductions for permitted expenses (1) (see H4210)

1 UC Regs, reg 58(1)

H4202

The expenses which may be allowed include
1. regular costs such as rent or wages
2. purchase of stock
3. utilities, phone and travel costs (but see H4203 as appropriate)
4. expenditure on the purchase, lease or acquisition of
4.1 equipment
4.2 tools
5. VAT (1).
Note: The above is not exhaustive.

1 UC Regs, reg 58(2)

H4203 H4202 H4204

A deduction cannot be allowed for expenditure on the purchase, lease or acquisition
of a car (1).

1 UC Regs, reg 59(2)

H4204

In H4203 car means (1) a mechanically propelled road vehicle but not a
1. motor cycle or
2. vehicle designed mainly for the movement of goods or burden of any
description or
3. vehicle of a type not commonly used as a private vehicle.

1 UC Regs, reg 53; Capital Allowances Act 2001, s 268A

H4205

Motor cycle means (1) a mechanically propelled vehicle, not being an invalid carriage,
with less than four wheels and the weight of which unladen does not exceed 410
kilograms.
1 UC Regs, reg 53; Capital Allowances Act 2001, s 268A

H4206 Expenses for both business and private use

If expenditure is for both business and private use the claimant should apportion the
cost, where applicable in reference to any apportionment agreed with HMRC or
based on the claimant's own judgement. Only the portion of the expenditure that is
wholly attributable to the business can be deducted.

H4207

It is a common practice for a S/E person to put private expenses through a business
account. If a set of accounts has been submitted as evidence of expenses the DM
should establish the amount of the expenses paid out for the business.

H4208

The DM should normally accept the evidence of
1. the claimant or
2. an accountant or
3. any apportionment already agreed by HMRC for tax and contribution
1
purposes .

1 R(FC) 1/91; R(IS) 13/91

[H4209]

H4210 Incurred unreasonably H4201

The term "incurred unreasonably" is not defined in legislation. It should be given its
ordinary everyday meaning. To be reasonably incurred an expense must be
1. appropriate to the business and
2. necessary to the business and
3. not excessive.
The DM should consider the nature of the business, level of trading and if there are
any employees.

H4211

To determine what is reasonable the DM should have regard to the circumstances of
each individual's case (1), including the level of the person's earnings (2).

1 R(P) 2/54; 2 R(G) 1/56

H4212

If expenditure on a particular item is necessary to enable the person to run the
business, the whole of that expenditure may be a deductible expense unless there is
evidence that it is excessive (1).
1 R(G) 7/62

Example

Simon is a painter and decorator requires transport in order to travel to jobs and
carry his equipment and materials. He can use his car for this but decides to
purchase a small second hand van because he wishes to keep the car for family
use. The cost of the van is a deductible expense because it is not excessive.

H4213

If the DM is not satisfied that the whole of an expense is reasonably incurred only
the part that is considered to be reasonable should be allowed as a deduction
against gross profits.

H4214 Regular costs

If the conditions in H4200 are met, all day to day expenses of a business are
allowable, including (1)
1. rent of business premises
2. employee's wages before any deductions, including wages payable to a
partner, but not a business partner
3. cleaning of business premises
4. accountancy fees
5. employer's contribution to an employee's pension scheme
6. employer's secondary class 1 contributions
7. heating and lighting
8. hire or rental costs
9. income spent on the repair of a business asset
10. legal fees for the running of the business
11. payment in kind for work done for the business - the monetary value is allowed
12. council tax, water charges and insurance premiums on the business premises
13. stationery
14. stock purchases
15. advertising
16. telephone bills
17. sundries
18. transport, for example business use of the car including petrol costs, road
fund license, insurance and servicing
19. VAT
20. payment of interest in relation to a business loan
if the DM is satisfied that the expenses are allowable. This list is not exhaustive.
1 UC Regs, reg 58(2)

H4215 Value added tax

Payments of VAT can be a permitted deduction from S/E earnings (1) and repayments
of VAT by HMRC can be a receipt into the business (2). HMRC allows individuals a
choice in how they treat VAT receipts in their cash basis. Individuals registered for
VAT can either report earnings
1. inclusive of VAT and deduct a VAT payment to HMRC or
2. exclusive of VAT and not permit a deduction of a VAT payment to HMRC.

1 UC Regs, reg 58(2); 2 reg 57(4)

H4216

For UC purposes, claimants have the same choice. Claimants are expected to be
consistent with their choice of VAT inclusive and exclusive in each assessment
period.

H4217 Payment of interest on business loans

A deduction can be made for a payment of interest in relation to a loan taken out for
the purposes of the
1. trade
2. profession
or
3. vocation.
The deduction cannot exceed 41 in total in respect of any amount of interest paid in
the assessment period (1). The 41 figure is a cumulative limit and covers the total
amount of interest payable across any and all relevant loans relating to the trade,
profession or vocation.
Note: Interest on loans may include but is not limited to credit card and overdraft
interest and charges where the original expense related to the trade, profession or
vocation.
1 UC Regs, reg 58(3A)

[H4218-H4219]

H4220 Partner's earnings from the business

The earnings of a partner (but not a business partner) who is employed in the
business should be allowed as a business expense if the expense has been incurred
reasonably. The wage should not be added back to the business accounts to offset
any loss.

Example

Rose runs a dress-making business from home. She is in receipt of UC. Her
business is making a loss of 50 per week. The accounts show that Rose pays her
husband 45 per week for book keeping and other tasks. The DM is satisfied that
the amount paid to her husband is a reasonable expense.
For UC purposes their income is
Rose
NIL
husband 45 total
45 per week.

[H4221-H4229]

H4230 Deductions for mileage and use of home as business premises

A permitted expense can be made as a flat rate deduction where a person is
carrying on a trade, profession or vocation and incurs expenses in relation to the use of
1. a motor vehicle or
2. accommodation occupied as their home (1).

1 UC Regs, reg 59(2) & (3)

H4231

The flat rate deduction is made from the actual receipts in the assessment period (1).
1 UC Regs, reg 59(2)

H4232 Mileage

The flat rate deductions for mileage covered in the assessment period is
1. 45 pence per mile for the first 833 miles and
2. 25 pence per mile for every mile in excess of 833 miles
in respect of a car, van or other motor vehicle (but not a motorcycle)1.

1 UC Regs, reg 59(2)(a)

H4233

The flat deduction for mileage covered in the assessment period by a motorcycle is
24 pence per mile (1).

1 UC Regs, reg 59(2)(b)

H4234

Where a deduction is made in respect of mileage in an assessment period then no
other deduction can be made as a permitted expense with regards to the
1. acquisition or
2. use
of a motor vehicle during that assessment period (1).
Note:
If the motor vehicle is a car then this is the only deduction allowed for the
acquisition or use of that vehicle.
1 UC Regs, reg 59(2)

[H4235-H4239]

H4240 Use of the home

A person may use the accommodation occupied as the home as part of their
business. Where a person uses the home for income generating activities related to
their self-employment then a deduction can be made as a permitted expense. The
amount of deduction depends upon how many hours in the assessment period that a
person made use of their home for income generating activities. This deduction is
instead of the actual expenses incurred in the use of the home (1).

1 UC Regs, reg 59(3)

H4241

Income generating activities include
1. providing services to a customer
2. general business administration which is essential for the day to day operation
of the enterprise (such as filing invoices, recording receipts and payments and
stocktaking) and
3. action to secure business (such as sales and marketing).

Example

Wanda is an artist and specialises in portraits. When Wanda is commissioned to do
a work, she often does most of the sketching and painting at home. The hours that
she does in an assessment period are hours of income generating activity.

H4242

Income generating activities do not include using the home for
1. storage
2. time spent on completing tax returns for HMRC purposes
3. being on call or available to undertake work.

Example 1

Roger is a taxi driver and has his own private hire business. The hours that Roger is
at home waiting for customers to ring him to book a journey do not count as hours of
income generating activity.

Example 2

Scott has a market stall selling DVDs, CDs and computer games. When the market
is not open, Scott stores his stock in a spare room at home. The storage of his stock
is not an income generating activity.

H4243

The flat rate deduction is
1. 10 for at least 25 hours but no more than 50 hours
2. 18 for more than 50 hours but no more than 100 hours
3. 26 for more than 100 hours in an assessment period (1). 1 UC Regs, reg 59(3)

[H4244-H4249]

H4250 Personal use of business premises

Where a person occupies premises which is used by them mainly for their S/E work
but also lives in it as their home, the deduction for permitted expenses which can be
made is the amount that would be allowed if the premises were used wholly and
exclusively for that S/E work but reduced by an amount dependant on the number of
people also making use of those premises (1).

1 UC Regs, reg 59(4)

H4251

The rate of the reduction in respect of the assessment period is (1)
1. 350 for one person
2. 500 for two persons or
3. 650 for more than two persons.
1 UC Regs, reg 59(4)

Example 1

Fred is S/E and works from home as a music teacher. He uses the downstairs of the
house as a music studio and lives upstairs. When reporting his income for the
purposes of his award of UC, Fred says that he incurred S/E expenses relating to
the home of 800 in his most recent assessment period. Fred shares his home with
his civil partner, Andre. Andre is not involved in Fred's business. Fred claims 800 in
permitted expenses and reduces this amount by 500 as both he and Andre occupy
the premises.

Example 2

Victoria is a pub landlord. The downstairs of the building where she lives is the pub
and she lives upstairs with her husband and two children. When reporting her
expenses for her award of UC, Victoria reports expenses of 3,500 for the latest
assessment period. Victoria decides that trying to apportion these expenses
between the pub and home upstairs is not possible but is not sure what to claim. The
DM decides that the permitted expenses should be reduced by 650 because there
are three or more people occupying the premises.

[H4252-H4259]

H4260 Expenses not allowed

Expenses that should not be allowed are (1)
1. expenditure on non-depreciating assets including
1.1 property
1.2 shares
1.3
other assets held for investment purposes
2. any loss incurred in respect of a previous assessment period
3. repayment of capital or payment of interest in relation to a loan taken out for
the purposes of the trade, profession or vocation
4. expenses for business entertainment.
1 UC Regs, reg 58(3)

H4261 Expenditure on non-depreciating capital assets

Depreciation of an asset is the amount that the value of that asset is estimated to
have reduced, due to age or wear and tear. Expenditure on assets which have been
purchased by the business as an investment cannot be allowed as a permitted
1
expense .

1 UC Regs, reg 58(3)(a)

H4262

If there are fixed assets, accounts will always show depreciation as a business
expense. The DM should not allow depreciation as a business expense.

H4263 Loss incurred in respect of a previous assessment period

The DM should not allow as a permitted expense any loss incurred in respect of a
previous assessment period (1).
1 UC Regs, reg 58(3)(b)

[H4264-H4269]

H4270 Loss incurred in any other employment

A person may
1. have more than one employment as S/E or
2. be both S/E and be an employed earner, for example a director.
The earnings from each employment should be assessed separately.

H4271

Any business loss in one employment should not be offset against the earnings of
another employment. Also, any loss made by one member of the family should not
be offset against the earnings of another member.

Example

Thomas is in receipt of UC. His wife is a market trader and a S/E music teacher. The
market stall runs at a loss. The DM
1. considers that the loss from the market stall is not an allowable expense
against the actual receipts from teaching music and
2. calculates the net profit from each self-employment separately.

H4272 Repayment of capital on business loans

No deduction for a permitted expense can be made for the repayment of capital with
regards to a loan taken out for the purposes of the trade, business or vocation (1).
1 UC Regs, reg 58(3)(c)

[H4273-H4274]

H4275 Business entertainment

Any expense claimed for providing business entertainment, for example
1. business lunches or
2. hospitality in connection with the business
should not be allowed as a permitted expense (1).
1 UC Regs, reg 58(3)(d)

[H4276-H4329]

Particular forms of self-employment

H4330 Partnerships

Partners are similar to sole traders, except that ownership and control of the
business is shared between two or more people.

H4331

People can enter into a partnership under an agreement that may be written, for
example a deed of partnership, verbal or implied. A deed of partnership includes
details of how any profit or loss is shared between the partners. In the absence of an
agreement any profit should be shared equally among the partners (1).

1 Partnership Act 1890, s 24

H4332

The conditions under which a partnership is formed, operates or ends, are governed
by the terms of a partnership deed or agreement together with the provisions of the
Partnership Act 1890. For most purposes, the terms of the deed or agreement
prevail over the provisions of the Act. Where a deed or agreement exists, it
becomes a legal document and its interpretation is a matter of law.

H4333

The legal status of a partnership should not be confused with that of a company, in
that a partnership has no legal personality in law. At any one time the assets and
liabilities of the partnership are (subject to the partnership deed or agreement and
the Partnership Act 1890), the joint and several assets and liabilities of the partners.
Note:
Scots Law on the legal status of a partnership differs. In Scotland a
partnership is a separate legal entity (1), distinct from the partners who carry out its
business. DMs should refer any cases to DMA Leeds if further guidance is needed.

1 Partnership Act 1890, s 4(2)

H4334

A partnership does not necessarily end when it ceases trading. It must be formally
dissolved. The partnership deed or Partnership Act 1890 may continue to impose
rights and obligations on the parties following dissolution, providing further time for
the winding up of its affairs. Further delays may result from legal challenges
concerning the partnership's affairs.

H4335

Where a partnership ends and the claimant has finished employment in the
business, a reasonable period of time is allowed for the claimant to dispose of any
assets before they are regarded as capital for benefit purposes. In considering that
period of time, regard should be had to any legal obligations and restrictions
imposed by the partnership deed or the Partnership Act 1890.

[H4336-H4353]

H4354 Sub-contractors

A sub-contractor is a S/E person who enters into a contract with another contractor
to do a particular job, and is most commonly found in the construction industry.

Example

A firm of builders contract to build a house extension for Tony. They sub-contract the
electrical work to Lee. Lee is a S/E sub-contractor and not an employee of either the
building firm or Tony.
When Lee completes the work he moves to a different contract that may be for
further work with the building firm or for a different contractor.

H4355

If a S/E sub-contractor claims UC the DM should consider
1. the guidance at H4010 et seq and
2. if the S/E sub-contractor is gainfully employed for the purposes of UC.

[H4356-H4359]

Company analogous to a partnership or one person business

H4360 Introduction H4361 H4374

A claimant who is in a position similar to a sole owner or partner in relation to a
1. company which is carrying on a trade or
2. property business
has to be treated as the sole owner or partner (1).

1 UC Regs, reg 77(1)

H4361

The effect of H4360 is that these claimants are treated in the same way as claimants
who run a business or own a property on their own account. For the purposes of UC,
a person trading through a company is treated in the same way as one who has not
set up a company to conduct their business. ADM Chapter H1 provides guidance on
the treatment of capital in these cases.

H4362

Whether a person who has shares in a company is similar to a sole owner or partner
in the business of that company is a question of fact in each case (1). A person who
does not work for the company can be like a sole owner or partner (2).

1 R(IS) 8/92; 2 R(IS) 8/92

H4363

The sole owner of a business has total influence over the day to day running of the
business. When a business is jointly owned the number of partners is normally small
and the influence a partner has over the day to day running of the business will
depend on the terms of the partnership agreement. So for a person to be like a
1. sole owner in the business of the company that person should have total
influence over the day to day running of the company, such as when a person
owns 99% of the shares in a company (1) and
2. partner in the business of the company the
2.1 number of shareholders in the company should be small and
2.2 person should have some meaningful influence over the day to day
running of the company (2).

1 R(IS) 13/93; 2 R(IS) 8/92

H4364

A person who has some shares in a company which has a large number of
shareholders, such as Tesco, is an investor because such a person has no influence
over the day to day running of the company (1).
1 R(IS) 8/92

H4365 Property business

A property business means a property business in the UK or overseas where tax is
paid on the profits of the business (1). The company is in the business of generating
income from land either in the UK or abroad.

1 UC Regs, reg 77(6); Corporation Tax Act 2009, s 204

H4366

Where a person is a shareholder in a company which owns property as an
investment and the company receives income in the form of rent then that will be a
property business. H4366 A claimant who is in a position similar to that of a sole owner or partner in a property business
1. has the value of their shares in the company disregarded when working out
their capital and
2. is treated as having capital which is equal to
2.1 the value of the capital of that company if the person is treated as the
sole owner or
2.2 the person's share of the value of the capital of that company if the
person is treated as a partner (1).
Note: ADM Chapter H1 provides guidance on the treatment of capital.
1 UC Regs, reg 77(2)

Example

Harry is the major shareholder in a company which owns a cottage at the seaside.
The property is an investment and generates income from holidaymakers who rent
the cottage. For the purposes of UC, the value of Harry's shares in the company are
disregarded. However, the DM has to treat Harry as being in possession of capital
equal to the value of the capital of the company.

[H4367-H4369]

H4370 Trading business

A trading business is a business with a profit seeking motive (regardless of whether
or not a profit is actually made). Usually, trading involves the provision of goods or
services to customers on a commercial basis.

H4371 H4372

A claimant who is in a position similar to that of a sole owner or partner in a company
which is carrying on a trade
1. has the value of their shares in the company disregarded when working out
their capital and
2. is treated as having capital which is equal to
2.1 the value of the capital of that company if the person is treated as the
sole owner or
2.2 the person's share of the value of the capital of that company if the
person is treated as a partner (1).
Note: ADM Chapter H1 provides guidance on the treatment of capital.

1 UC Regs, reg 77(2)

H4372

If the claimant is undertaking activities in the course of the business of that
company, the capital the person is treated as having under H4371 2. is disregarded (1).

1 UC Regs, reg 77(3)(a)

H4373

A person who is a shareholder in a company is undertaking activities in the course of
the business of the company if that person is doing some work, no matter how little,
for that company. So a person who takes telephone messages and receives mail for
the company is undertaking activities in the course of the business of that company (1).
1 R(IS) 13/93

H4374 Earned income H4375 H4375 H4376 H4377

Where H4360 applies to a company which is carrying on a trade (1)
1. the income of the company or the person's share of that income has to be
treated as the claimants S/E income and calculated in the same way as S/E
earnings and
2. the person has to be treated as in gainful self-employment (see H4020 et seq)
if their activities in the course of the trade are their main employment.
Note: the S/E earnings in 1. are in addition to any earnings the claimant may have
received in their position as a director or employee of the company (2).

1 UC Regs, reg 77(3)(b) & (c); 2 reg 77(4)

H4375

If
H4374 2. applies then the minimum income floor has to be applied if the claimant's
earnings under H4374 1. are below the minimum amount (1).

1 UC Regs, reg 77(3)(c)

H4376

H4374 does not apply to a property business (1).
1 UC Regs, reg 77(3)

H4377 Exceptions

H4374 does not apply to claimants who derive income from a company where the
income is employed earnings for the purposes of UC. This means that income
1. made to workers by intermediaries and
2. from managed service companies
is not S/E earnings (1).

1 UC Regs, reg 77(5); Income Tax (Earnings and Pensions) Act 2003, Part 2, Chapters 8 & 9

H4378

ADM Chapter H3 provides guidance on employed earnings.

[H4379-H4999]

Appendix 1
National Minimum Wage Hourly Rates
Year
21 and over
18 to 20
Under 18
Apprentice
2012 6.19 4.98 3.68 2.65
2013 6.31 5.03 3.72 2.68
Appendix 2
Further examples of the gainful self-employment test

Example 1

Outline: Both S/E and PAYE activity being carried out with no significant
difference between the hours worked or between the income received and the
S/E activity being regular, organised, developed and carried out in expectation
of profit.
Paul works as an office manager for a local charity. He works 12 hours a week and
is paid 84 a week. He also works at home, typing documents from audio. He can
decide the number of hours he works and how much work he undertakes. He uses
his own computer and broadband for this and is paid per minute of audio he types
up. Paul estimates he spends around 12 hours a week typing and earns around 90
a week on average. Paul says he prefers his office work, but the charity only needs a
part-time office manager. Paul says the typing is to supplement his income and that
the flexibility it allows means he can arrange to be at home when his children finish
school.
Part 1
Paul spends a similar amount of time on both activities. The DM therefore has to
look at earnings in order to determine what the main form of employment is. The
earnings generated from the two employments prove inconclusive. The DM
concludes, on balance, that typing is not Paul's main employment goal as he has
stated that he is not interested in increasing his output from typing. Therefore, self-
employment is not Paul's main employment.
Part 2
Paul has a clear profit-seeking motive and he uses his own equipment. The DM
determines that the earnings from his office cleaning are S/E earnings
Part 3
Paul undertakes his typing regularly and a contract with firm supplying his work. The
DM determines that the work is organised, regular and in expectation of profit.
Determination
Paul has not met part 1 of the test and he is therefore determined by the DM not to
be gainfully S/E.

Example 2

Outline: Claimant carries out both S/E and PAYE activities. The S/E activity
takes up the majority of available working hours and is organised, developed,
regular and carried out in expectation of profit.
Lizzie has claimed UC and her expected hours of work per week are 35. Lizzie is an
electrician and works in the construction industry. Some of Lizzie's work is on a sub
contracting basis and some of her work is as an employee.
Lizzie's weekly hours of work vary over the year - they depend on the availability of
work and the weather. Over the course of a typical year, Lizzie works on average 30
hours a week. She estimates that about a third of her time is on an employed basis
and the rest on a S/E basis.
Part 1
Lizzie spends the majority of her time on the S/E activity, so the DM considers this to
be her main employment.
Part 2
Lizzie's work is clearly carried out in the expectation of profit in a recognised
vocation/trade. Her sub-contracting income is not employed earnings. The DM
determines that her income from sub-contracted work is S/E earnings.
Part 3
Lizzie actively promotes her sub-contracted work. She has a list of regular
customers and has separate accounts for her sub-contract work, which also contain
evidence of regular income. The DM determines that the subcontracted work is
organised, developed, regular and in expectation of profit.
Determination
Lizzie met all three parts of the tests, so is therefore determined by the DM to be
gainfully S/E.

Example 3

Outline: S/E activity only is carried out and takes up the majority of available
working hours but does not provide much income and is not the claimant's
main employment goal.
Ed is an engineer who has had regular employment over the years. He was made
redundant 2 months ago and is looking to find employment locally in the engineering
industry. Ed also breeds rare-breed ducks and, for many years, has been selling his
ducks to local butchers. He estimates that he used to spend around 10 hours a
week caring for his ducks but, since he lost his job, he has increased this to around
18 hours a week. Ed's estimates his income from selling his ducks averages around
80 a week.
Part 1
Ed spends over half of his available time on S/E activity but it generates a relatively
small income and he is actively looking for work in his previous area of employment.
On balance, the DM decides that the S/E is not Ed's main employment goal and not
his main form of employment.
Part 2
The earnings derived from his ducks are determined by the DM to be S/E earnings
as Ed's work is a trade, he provides her own equipment and can control the hours
he works.
Part 3
The DM decides that Ed's S/E work is developed, regular, organised and whilst
providing limited income is carried out in expectation of profit.
Determination
Ed has failed to meet Part 1 of the gainful S/E test and the DM determines that he is
not gainfully S/E.

Example 4

Outline: Claimant is experiencing low to no income from S/E activity due to
bad weather. The activity normally takes up her available hours of work and
claimant can demonstrate that the business can still provide gainful S/E when
weather improves.
Sharonjit is the sole owner of a small roofing firm. Normally Sharonjit spends 40
hours a week running the business but work has stopped temporarily because of the
bad weather. The income from the business has recently therefore dropped
dramatically to the point now where no income is received from the business.
Sharonjit claims UC and brings to her gateway interview:
1. a letter from her bank stating that they regard his business as a going concern
2. purchase orders for materials relating to significant amounts of work she has
in the pipeline, waiting for the weather to improve.
3. VAT statements from HMRC, evidencing that HMRC regard her as self-
employed.
4. A local newspaper to show that she is advertising to bring in more work.
Part 1
While Sharonjit is currently engaged in a low number of hours work, there is
evidence that her SE business is her main employment goal. The DM determines
that the roofing firm is Sharonjit's main employment.
Part 2
Sharonjit is engaged in a trade/vocation in expectation of profit. There is no other
employer, so the DM determines that the income is S/E earnings.
Part 3
Sharonjit has a clear account of why her business is experiencing difficulty. She is
demonstrating concern at the issues facing her business. The bank and HMRC
recognise the business as a going concern. Sharonjit also has an expectation of
work restarting. The DM has doubts about when Sharonjit will be able to pick up the
work she has in the pipeline, but on balance the DM determines that the work is
organised, developed, regular and carried out in expectation of profit.
Determination
The DM considers that Sharonjit has met all of the parts of the test and is
determined by the DM to be gainfully S/E.