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Chapter V5: ESA and self-employed earners

Contents
Self-employed earners
V5001:General
V5007:Who is a self-employed earner
V5015:Directors of limited companies
V5017:Earnings of self-employed earners
V5019:Board and lodging accommodation
V5023:Deciding if a person is a self-employed earner
V5027:Sickness
V5051:Assessment period for self-employed earners
V5052:Business trading for less than a year
V5053:Business trading for more than a year
V5060:Changes likely to affect the normal pattern of trading
V5069:New businesses
V5100:Calculation of normal weekly earnings
V5101:Evidence - cash flow
V5105:Accounts
V5116:Income tax certificate
V5117:Method of calculation
V5125:Gross receipts
V5127:Payments received for goods and services provided
V5135:Schemes to help with self-employment
V5138:Business subsidies or payments of compensation
V5139:Personal drawings
V5154:Income from letting or sub-letting
V5155:Sale of certain business assets
V5156:Tips and gratuities
V5158:Payments in kind
V5160:VAT
V5166:Capital receipts
V5167:Income for a different period
Business expenses
V5190:Conditions for deducting business expenses
V5191:Wholly and exclusively
V5192:Expenses for both business and private use
V5198:Reasonably incurred
V5206:Allowable business expenses
V5210:Partner's earnings from the business
V5211:VAT
V5214:Expenditure for a different period
V5220:Expenses not allowed
V5221:Capital expenditure
V5222:Depreciation
V5226:Sums used in setting up or expanding a business
V5227:Loss incurred before the beginning of the assessment period
V5230:Loss incurred in any other employment
V5232:Repayment of capital on business loans
V5235:Business entertainment
V5236:Loss on disposal of a capital asset
V5237:Payments into contingency funds
V5240:Personal drawings
V5241:Personal consumption
Calculation of income tax, National Insurance Contributions and qualifying
premium
V5260:Introduction
V5266:Chargeable income
V5270:Deduction for notional income tax
V5271:Tax allowances
V5274:Personal allowance
V5275:Tax rates
V5288:Calculation of deduction
V5297:Deduction for notional Class 2 NI contributions
V5298:Liability for a Class 2 contribution
V5304:Calculation of the Class 2 contribution
V5316:Deduction for notional Class 4 NI contributions
V5318:Calculation of Class 4 deduction
V5325:Premiums for personal pension schemes
V5326:Personal pensions
Particular forms of self-employment
V5350:Child minders
V5361:Crofts or small holdings
V5370:Farmers
V5380:Hotels, guest houses, bed and breakfast establishments
V5382:Bars and restaurants in hotels, guest houses
V5385:Local exchange trading systems
V5387:Participating in a local exchange trading system scheme
V5390:Local exchange trading credits
V5400:Partnerships
V5407:Calculation of a business partner's normal weekly earnings
V5410:Salaried partners
V5425:Renting out property as a business
V5440:Seasonally self-employed
V5450:Sub-contractors
V5452:Actors and entertainers
V5455:Share fishermen
V5459:Claims from share fishermen
Notional deductions for income tax .................................................... Appendix 1
Notional deductions for National Insurance contributions .................. Appendix 2

Chapter V5: ESA and self-employed earners

Self-employed earners

V5001 General

ESA has no condition of entitlement based on income and so earnings are not taken
into account against the amount of ESA paid to the claimant. However, where a
claimant who is entitled to ESA is working then the guidance in this chapter should
be used to identify
1. the type of earnings and
2. the weekly amount of those earnings.
The level of earnings will then determine whether the work is within the PWK limits (1).
ADM Chapter V3 provides guidance on the effect of work on ESA.

1 ESA Regs 13, reg 39 & 76(8)

V5002

It is only the amount of a claimant's own earnings that may affect entitlement to ESA
on the grounds of whether the level of earnings is within the PWK limits (1). The
earnings of a claimant's partner cannot affect entitlement to ESA.
1 ESA Regs 13, reg 39

[V5003-V5006]

V5007 Who is a self-employed earner

A S/E earner is a person who is gainfully employed
1. in
GB
and
2. in employment that is not employed earners employment (1).
Note:
A person may also be employed as an employed earner. This does not stop
the person being S/E.

1 ESA Regs 13, reg 2; SS CB Act 92, s 2(1)(b)

V5008

A S/E earner enters into a contract for services to a customer
1. on a sole trader basis or
2. in partnership with others.

V5009

S/E earners are responsible, to the full extent of their personal fortune, for the debts
of the business and are entitled to either
1. in the case of a sole trader, all the profits or
2. if in a partnership (see V5400), the agreed share of the net profits.

V5010

A person may be S/E and also have other work as an employed earner. If so the
earnings from each employment should be calculated separately.

V5011

To determine if a person is, or has been a S/E earner, the DM should have regard to
a number of factors. A determination should be made after weighing up the answers
to the following
1. Is the person's work supervised? A lack of supervision may point towards self-
employment.
2. Does the person have the powers of appointment and dismissal and can they
employ a substitute? A power to appoint a substitute may point towards self-
employment.
3. In what form does remuneration take? Taxation paid at source may suggest
that the employment is not S/E.
4. How long in duration are the contracts of work? Short contracts may point
towards self-employment.
5. Does the person provide their own equipment? Provision of own equipment
may point towards self-employment.
6. Where does the person work? Working from home may point towards self-
employment.
7. Is the person who engages the person for work obliged to provide work? If
there is no obligation then this may point towards self-employment.
8. Does the person have discretion to the hours of work? The greater the
discretion, the more likely that the work is self-employment.

[V5012-V5014]

V5015 Directors of limited companies

A limited company is a legal person (1) and is different from a sole trader or
partnership because
1. the company belongs to its shareholders, who share in any distributed profits
according to the size of their individual holding and
2. the liability of each shareholder is limited to the number of shares taken, or the
amount that the shareholder has stood as personal guarantor for. The
shareholder is not liable for any amount above the amount unpaid on shares
(if any) or the amount guaranteed and
3. if 2. does not apply, liability for debts is limited to the company's capital.

1 R(SB) 57/83

V5016

A limited company, of whatever size, is separate from its employees, officers and
shareholders (1). This means that the profits of the company do not belong to the
directors. A director of a limited company is an office holder in the company (2) and is
an employed earner (see ADM Chapter V4).
1 R(SB) 57/83; 2 McMillan v Guest 1942, AC 561

V5017 Earnings of self-employed earners

In S/E cases, earnings are the gross receipts (see V5125) of the employment (1).

1 ESA Regs 13, reg 82(1)

V5018

S/E earnings do not include
1. charges paid to the S/E earner in return for providing BL accommodation (1)
(see V5019) or
2. any sports award (2).
1 ESA Regs 13, reg 82(2)(a); 2 reg 82(2)(b)

V5019 Board and lodging accommodation V5018 V5381

BL accommodation is accommodation (1)
1. where the charge for the accommodation includes some cooked or prepared
meals that are both
1.1 cooked or prepared by someone who is not
1.1.a
the person provided with accommodation or
1.1.b a member of the family of the person provided with
accommodation and
1.2
eaten in that accommodation or associated premises or
2. provided to a person in a
2.1 hotel or
2.2 guest house or
2.3 lodging house (see V5020) or
2.4 similar establishment or
3. that is
3.1
not provided by a close relative (see V5021 - V5022) of
3.1.a
the person provided with accommodation or
3.1.b a member of the family of the person provided with
accommodation or
3.2 provided on a commercial basis.

1 ESA Regs 13, reg 82(3)

V5020 V5019

A lodging house
1. is not a private house in which rooms are rented, even if services such as the
provision of and washing of bed linen are provided and
2. is a place where accommodation is offered on a long-term basis and
3. is the kind of establishment that may have a sign outside offering
accommodation.

V5021 V5019 V5022

A close relative is (1)
1. a parent, parent-in-law, son, son-in-law, daughter, daughter-in-law, step-
parent, step-son, step-daughter, brother, half-brother, sister, half-sister and
2. the partner of any of those persons in 1..

1 ESA Regs 13, reg 2; R(SB) 22/87

V5022 V5019

For the purposes of V5021, a child who is adopted becomes
1. a child of the adoptive parents and
2. the brother or sister of any other child of those parents.
The child stops being the child of, or the brother or sister of any children of the
natural parents. Whether an adopted person is a close relative of another person
depends upon the legal relationship and not the blood relationship (1).
1 R(SB) 22/87

V5023 Deciding if a person is a self-employed earner V5024 V5025 V5027 V5028 V5028 V5440 V5440 V5451 V5451 V5454

To determine whether a person is still trading and therefore still gainfully employed
as a S/E earner, the DM should consider the following:
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 hopes or intends to restart work in the business when economic
conditions improve and
4. if the person is undertaking any activities in connection with the self
employment and
5. if there is work in the pipeline and
6. if the person is regarded as S/E by HMRC and
7. if the person claims to be anxious for work in the S/E occupation, trade or
business. Is the person making it known that the business can take on work (1)?
For example,
7.1 by advertising or
7.2 by visiting potential customers and
8. if the interruption in question is part of the normal pattern of the
8.1 person's work or
8.2 work that the person is seeking.

1 Vandyk v. Minister of Pensions & National Insurance [1955] IQ (29)

V5024

All eight factors in V5023 should be considered in all cases where a person who has
been working as a S/E earner is now without work. This includes
1. people unable to work because of sickness
2. seasonal workers
3. sub-contractors and
4. share fishermen.

V5025

Some of the factors in V5023 may point toward the fact that a person is still trading
as S/E. Others may not. No one factor is decisive. The DM should consider the
weight to give each relevant factor.

V5026 V5027 V5028 V5028 V5440 V5440 V5451 V5451 V5454

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

Example

Ira runs a business that supplies and fits doors and windows. Because of the
competition in the area the business has received fewer and fewer orders, until now
there are none. Ira states that
1. he has been unable to pay the rent on his shop and the landlord is threatening
eviction and
2. his bank has advised that the business should be wound up and
3. he still has an advertisement in the Yellow Pages.
The DM decides that the business is no longer a going concern and that Ira is not
gainfully employed.

V5027 Sickness

If a S/E earner is unable to work in the business due to sickness, the DM should consider
1. the guidance at V5023 - V5026 and
2. whether the person remains gainfully employed as a S/E earner.

V5028

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

Example 1

Will is a S/E plumber. He is a sole trader. He claims ESA as he has broken both his
legs and has been advised by his doctor to avoid work for six months. Will states that
1. his business activity depends entirely on his ability to work and until his legs
have healed he cannot undertake any work in connection with his business
2. he has had to advise customers that he is unable to carry out the work that he
had arranged so that they can find alternative contractors
3. he and his bank do not consider the business as a going concern
4. he intends to restart work in the business when his leg has healed so he has
not removed any of his advertisements in case any contracts can be arranged
for when he returns to work.
The DM considers the guidance at V5023 - V5026 and determines, in this case, that
self-employment has ceased.

Example 2

Liza is the owner of a fish and chip shop. She claims ESA because she has had a
serious operation and has been advised by her doctor to avoid work for three
months. Liza states that the fish and chip shop continues to trade with day to day
management taken over by her sister-in-law.
The DM considers the guidance at V5023 - V5026 and determines, in this case, that
Liza remains gainfully employed as a S/E earner.

[V5029-V5050]

V5051 Assessment period for self-employed earners

The normal weekly earnings of a S/E earner should be calculated by using the
1. gross receipts (see V5125) and
2. expenses paid out (see V5190)
during the assessment period.
Note: The assessment period for determining earnings from self-employment
should not be confused with the ESA Assessment Phase (see ADM Chapter V1).

V5052 Business trading for less than a year

If the business has been trading for less than a year, the assessment period should
be a period that will allow the DM to calculate the earnings most accurately (1).
1 ESA Regs 13, reg 77(1)(b)

Example

Luke is a S/E window cleaner. He started doing occasional window cleaning jobs in
February but it was not until May of the same year that the business really got off the
ground.
The DM decides to use an assessment period starting from 1 May to 31 October as
the figures produced for this period would most accurately reflect the current level of
earnings.

V5053 Business trading for more than a year V5063

If the business has been trading for more than a year and there is no change likely to
affect the normal pattern of business, the assessment period should be a year (1) (but
see V5167 - V5168).

1 ESA Regs 13, reg 77(1)(a)

V5054

The year does not need to be the year immediately before the claim or the date the
award is being looked at. If profit or loss accounts are available for the last trading
year the DM can use these as the assessment period. The profit and loss accounts
should be converted to a cash flow basis (see V5101 - V5111).

V5055

A year means a period of
1. 365 days or
2. 366 days if the assessment period includes the February of a leap year.

[V5056-V5059]

V5060 Change likely to affect the normal pattern of trading

If there has been a change that is likely to affect the normal pattern of trading, the
assessment period should be a period that will allow the DM to calculate the
earnings most accurately (1). The period does not need to be made up of complete
weeks.

1 ESA Regs 13, reg 77(1)(b)

V5061

The assessment period should
1. normally start on the date the change affecting the pattern of the business
occurred (but see V5064) and
2. end on the date that the most recent figures regarding earnings and expenses
are available, for example, the next week or month.

V5062 V5071

The earnings would then be averaged over that period and apportioned on a weekly
basis until the figures for the following week or month become available. The
assessment period would then be extended. The assessment period would
1. start on the date the change affecting the pattern of business occurred and
2. end on the date that the new figures became available.
The DM should supersede if the new figures affect entitlement to ESA. Where
entitlement is not affected, a decision not to supersede should be made if the
claimant asked for earnings to be looked at again. For further guidance on
supersession including the effective date rule, see ADM Chapter A4.

V5063

This procedure should continue until the assessment period has been extended to
one year and the earnings can be averaged over that year (see V5053). In most
cases this procedure will provide the most accurate determination of a S/E earner's
earnings (but see V5064).

Example

Carlo is S/E, he buys and sells Italian wine. On 9 August Carlo's business goes into
receivership. He continues to trade but he lost some of his suppliers and customers.
The DM decides
1. Carlo is gainfully employed
2. that the receivership is a change that has affected the normal pattern of trading
3. that the assessment period is from 9 August (the date the change affecting
the pattern of business occurred) to 30 October (the date that the most recent
figures for gross receipts and expenses are available).
The earnings for the assessment period are averaged for that period and
apportioned on a weekly basis until 30 November when the figures for the following
month become available.
At this point the DM extends the assessment period. The assessment period is now
9 August to 30 November. The earnings for this period are averaged and
apportioned on a weekly basis until 31 December when the figures for the following
month become available.
The DM continues with this procedure until the assessment period has been
extended to one year.

V5064 V5061 V5063

When considering the assessment period the DM should consider the facts of each
case carefully. A period that does not start with the first day of the interruption may
sometimes give a more accurate determination of the S/E earner's earnings. If so,
that period should be used instead.

V5065

The DM should be satisfied that any change
1. has affected or
2. is likely to affect
the normal pattern of trading.

Example 1

Lucy works as a S/E draughtsman providing technical drawings for builders. Most of
her work comes from one particular building firm. Six months ago the building firm
went into receivership.
The DM determines that
1. there had been a change that had affected the normal pattern of business
and
2. the assessment period starts from the date Lucy lost her major customer.

Example 2

Joe is a S/E roofer. The business has been trading for five years. Joe has not been
able to work due to a period of severe snowy weather. The period he was unable to
work was ten days.
The DM determines that, although the bad weather might be a change, it was not
one that would affect the normal pattern of business. The normal pattern of business
would include times in the winter when roofing work could not be done.
Note: Weather conditions that are exceptional for the area could be regarded as a
change affecting the normal pattern of business.

[V5066-V5068]

V5069 New businesses

A claimant may start up a new business
1. at the same time as claiming ESA or
2. whilst in receipt of ESA.
No income should be taken account of until the S/E earner starts to receive actual
earnings. When the first payment of earnings is received the DM should use the
assessment period
1. starting on the first day of the benefit week in which the person started S/E
and
2. ending on the last day of the benefit week in which actual earnings are
received.

[V5070]

V5071

The assessment period should be extended every week or month until a yearly
assessment is possible (see V5062). In most cases this procedure will provide the
most accurate determination of a S/E earner's earnings (but see V5072).

V5072 V5071

When determining the assessment period for new businesses the DM should
consider the facts of each case carefully. A period that does not start with the first
day of self-employment may sometimes give a more accurate determination of the
S/E earner's earnings. If so, that period should be used instead.

[V5073-V5099]

V5100 Calculation of normal weekly earnings

V5101 - V5244 provides guidance on the calculation of earnings of most S/E
earners. Specific guidance is given for
1. child minders (see V5350)
2. crofts or small holdings (see V5361)
3. farmers (see V5370)
4. hotels, guest houses, bed and breakfast establishments etc (see V5380)
5. partnerships (see V5400)
6. renting out property (see V5425)
7. seasonally S/E (see V5440)
8. sub-contractors (see V5450)
9. actors and entertainers (see V5452).

V5101 Evidence - cash flow V5054 V5100

To calculate the amount of earnings the DM will need evidence of
1. the gross receipts (see V5125) actually received, not money owed to the
business and
2. expenses defrayed, that is, actually paid for, not unpaid bills
for the assessment period. This is known as cash flow and evidence should be
presented on a cash flow basis.

V5102 V5103

On a claim to ESA, the onus is on the S/E earner to provide the evidence necessary
to support the claim. A claimant who is S/E should be asked to submit details of
1. the business and
2. actual gross receipts and expenditure
during the assessment period.

V5103

The figures provided in V5102 2. should be accepted as accurate unless
1. there is reason to doubt or
2. they are unrepresentative of the current trading position.
Supporting evidence of every item of expenditure, or receipt, is not always required.
Totals for the assessment period are acceptable provided that each type of
expenditure, or receipt is separately detailed and 1. or 2. does not apply.

V5104

V5105 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 gross receipts and expenses paid for.

V5106

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.

V5107

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.

V5108 V5109

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 gross receipts and expenses paid.

V5109

The figures provided in V5108 1. and 2. should be accepted as accurate unless
1. there is reason to doubt or
2. they are unrepresentative of the current trading position.
Supporting evidence of every item of expenditure, or receipt, is not always required.
Totals for the assessment period are acceptable provided that each type of
expenditure, or receipt is separately detailed and 1. or 2. does not apply.

V5110

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.

V5111 V5054

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.

[V5112-V5115]

V5116 Income tax certificate

The DM should not accept as conclusive evidence of the weekly net profit an
1. income tax certificate or
2. accountant's statement of the net profit figure that is acceptable for tax
purposes.

V5117 Method of calculation

To calculate the earnings of a S/E earner the DM
1. should establish the gross receipts of the business during the assessment
period (see V5125) and
2. deduct from the gross receipts the allowable expenses that have been paid
out during the assessment period (see V5206) and
3. deduct from any remaining figure amounts for
3.1 notional income tax (see V5270 et seq) and
3.2 notional NI contributions (see V5297 et seq) and
3.3 half of any premium paid for a personal pension scheme (see V5326)
The figure that is left is the earnings that should be taken into account (1).

1 ESA Regs 13, reg 83(1)

V5118

The whole process can be summarized as follows gross
less allowable
less
notional income tax
less
notional NI contributions
less
half of any personal pension scheme
divided by
the number of days in the assessment
multiplied by
period 7 to give a weekly figure
equals
the weekly net profit
equals
the weekly earnings to be taken into account.

[V5119-V5124]

V5125 Gross receipts V5017 V5051 V5101 V5117

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

V5167 V5053 V5166

provides guidance for payments received that relate to a period different to
the assessment period.

1 ESA Regs 13, reg 83(3)

V5126

The gross receipts of a business include
1. any payments for goods and services provided (see V5127)
2. earnings payable abroad
3. certain allowances paid to assist in carrying on the business (1) (see V5135)
4. any business subsidies or payments of compensation (see V5138)
5. personal drawings (see V5139)
6. income from letting or sub-letting (see V5154)
7. sale of certain business assets (see V5155)
8. tips and gratuities (see V5156)
9. payments in kind (see V5158)
10. any VAT receipts (see V5160).
1 ESA Regs 13, reg 82(1); E & T Act 73, s 2; Enterprise and New Towns (Scotland) Act 90, s 2

V5127 Payments received for goods and services provided V5126

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

[V5128-V5134]

V5135 Schemes to help with self-employment V5126

An allowance may be payable under certain schemes to assist people to become
S/E. In a business partnership one or all of the partners may be receiving payments.

V5136

Any allowance paid into the S/E earner's business bank account during the
assessment period should be included in the gross receipts of the business (1).
1 ESA Regs 13, reg 82(1)

V5137

V5138 Business subsidies or payments of compensation V5126

Some businesses may receive
1. subsidies, for example businesses involving farming or agriculture receive
subsidies from the Department for the Environment, Food and Rural Affairs
(DEFRA), or the EU or
2. payment of compensation from another person because of disruption to the
business. For example payments of compensation awarded because of BSE.
Such payments should be included in the gross receipts of the business.

V5139 Personal drawings V5126

A S/E person may draw money from the business for day to day expenses. These
drawings, known as personal drawings, are in anticipation of profits or business
income and should be included as part of the gross receipts of the business. It is
possible for personal drawings to exceed the eventual profit.

V5140

Where drawings are made in excess of the profits of the business they should be
treated as capital in the hands of the claimant. Money taken from the business in
excess of profits comes from
1. capitalized profits from earlier years or
2. increased borrowing.
In
1. or 2. the drawings are withdrawals from the capital of the business.

V5141

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

V5142

A S/E person who is a sole owner of, or a partner in, a business may pay interest to
the business on money taken as personal drawings. These payments should be
included in the gross receipts of the business.

Example 1

Kim is a S/E earner. His assessment period is twelve months. He produces
evidence of his gross receipts and expenses for the assessment period. Personal
drawings are shown as an expense and are not included in the gross receipts of the
business.
The DM determines
1. that the personal drawings should be added to the gross receipts of the
business and
2. allowable expenses should be deducted from this new gross receipts figure.

Example 2

Tahira is a S/E earner. Her assessment period is twelve months. She produces
evidence of her gross receipts and expenses for the assessment period.
Personal drawings are shown as an expense and are not included in the gross
receipts of the business. It appears from the figures that the personal drawings may
exceed any profit.
The DM calculates the net profit without including the personal drawings as a gross
receipt of the business. This calculation shows that the personal drawings exceed
the net profit of the business.
The DM determines
1. that personal drawings equal to the amount of the net profit previously
calculated should be added to the gross receipts of the business and
2. allowable expenses should be deducted.

[V5143-V5153]

V5154 Income from letting or sub-letting V5126

Any income received from letting or sub-letting of business premises or land should
be included in the gross receipts of the business. Any expense connected with the
letting should be included with other business expenses.

V5155 Sale of certain business assets V5126 V5166 V5236

The amount received from the sale of a capital asset should not be included in the
gross receipts of the business, unless the asset was part of the stock in trade of the
business (1).
1 R(FC) 1/97

Example

Sean runs a business that manufactures computers. The sale of these computers is
included in the gross receipts of the business. But when Sean sells a computer that
he uses to keep his business records on, the amount received for this computer is
not included in the gross receipts of the business (see V5166).

V5156 Tips and gratuities V5126

Tips or gratuities received in response to the service provided by a S/E earner, for
example as a hairdresser, taxi driver or coach driver, should be included in the gross
receipts of the business.

V5157

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 gross receipts of the
business.

V5158 Payments in kind V5126

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 gross receipts of the business.

Example

Terri does some work for a local farmer on a S/E basis. The farmer pays Terri for
the work in the form of farm produce.
The DM values the produce at what it would have cost if bought from the farmer (or
a local grocer), and includes that amount in the gross receipts of the business.

V5159

V5160 VAT V5126 V5161 V5161

A S/E person who is registered for VAT is required to submit three monthly returns
to HMRC showing amounts of
1. VAT collected from customers - known as output tax and
2. VAT paid by the S/E person to supplier - known as input tax. If
1. exceeds 2. the S/E person pays the difference to HMRC. If 2. exceeds 1. the S/E person receives the difference from HMRC.

V5161 V5212

Where
1. a business is registered for VAT and
2. in the assessment period the amount received is greater than the amount paid
to HMRC
the difference should be included in the gross receipts of the business. This is the
amount that V5160 2. exceeds V5160 1..
Note:
VAT can also be an allowable expense of the business, see V5211 - V5212.

[V5162-V5165]

V5166 Capital receipts V5155

Capital receipts do not form part of the gross receipts of the business (1). For
example,
1. loans
2. injections of capital
3. grants from the Prince's Trust and
4. proceeds from the sale of business assets, unless that asset was part of the
stock in trade of the business (see V5155).
1 R(FC) 1/97
V5167 Income for a different period A payment of income may be assessed over a period different to the assessment
period if the normal weekly amount of the item of income can be established more
accurately (1).
Note:
The DM should not consider any payment made before or after the
assessment period.

1 ESA Regs 13, reg 83(9)

V5168 V5053

It is not intended that every payment is assessed individually over a period different
to the assessment period. This should be the exception rather than the rule. So, any
payment for a period
1. equal to or shorter than the assessment period should be assessed over the
full length of the assessment period or
2. longer than the assessment period should be converted on a pro rata basis to
represent the length of the assessment period.

Example

Roddy is a S/E earner. He receives a payment that is a half-yearly payment under a
long-term contract. As the level of trading has changed recently due to a fire on the
business premises the assessment period used is 13 weeks.
The DM considers that
1. the payment should be multiplied by 13 and divided by 26 and
2. the resulting sum should be added to any other gross receipts of the business.

[V5169-V5189]

Business expenses

V5190 Conditions for deducting business expenses V5051 V5191 V5206 V5220

When calculating the net profit of a S/E earner the DM should deduct from the gross
receipts any business expense that (1)
1. was paid out wholly and exclusively for the purposes of the business (2) and
2. was paid out during the assessment period and
3. was reasonably incurred (3) (see V5198) and
4. is an allowable expense (see V5206).
1 ESA Regs 13, reg 83(2)(a); 2 reg 83(3); 3 reg 83(6)

V5191 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 V51902. - 4.
1 ESA Regs 13, reg 83(3)

V5192 Expenses for both business and private use

If expenditure is for both business and private use, for example
1. a business that is run from home or
2. there is only one vehicle for both business and private use
the DM should apportion the cost. Only the portion of the expenditure that is wholly
attributable to the business can be deducted.

V5193

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.

V5194

The DM should normally accept the evidence of
1. the S/E earner 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

V5195

Examples of expenses that may be apportioned between private and business use
1 are
1. telephone calls and telephone rental
2. motor expenses such as fuel, road fund license (sometimes called road tax),
insurance premiums, servicing, maintenance or repair charges
3. fuel costs and standing charges for gas and electricity.
1 R(FC) 1/91; R(IS) 13/91

Example 1

Shanta runs a business from her home. She uses the telephone for private and
business use. The total cost of telephone charges in the assessment period is 300.
Shanta provides evidence that HMRC have agreed that the apportionment is 60%
for business use and 40% for personal use.
The DM decides that 180 of the expenses have been reasonably incurred and
allows this amount when calculating Shanta's net profit.

Example 2

Alan uses a car for both business and private use. The total cost in the assessment
period is 750. Alan provides information that 55% of the cost is for business use
and 45% is for personal use.
The DM decides that this is reasonable and allows 412.50 as an expense.

Example 3

Darcy is a dressmaker who works at home using an electric sewing machine. She
uses an electric fire to heat the room when working. A quarterly electric bill is
included as a business expense but no breakdown is given of business and private
use.
The DM apportions the expenses so that only the part that is wholly and exclusively
for the business is allowed. To do this the DM makes a determination based on all
the facts, including
1. the size of the working area in relation to the rest of the rooms
2. how many other people live in the home
3. what amount Darcy thinks represents business use
4. how many hours are spent working and using the appliances
5. what other electrical appliances are used in the home.

[V5196-V5197]

V5198 Reasonably incurred V5190

The term "reasonably incurred" 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.

V5199

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

V5200

The DM may have to consider if it is reasonable for a person to reduce the by
employing someone to do part of the work of the business. To determine if this
expense is reasonably incurred the DM should consider all of the circumstances of
the individual case including if the
1. person is capable of doing the work and
2. evidence suggests that the person is employing another so that the
remunerative work condition is satisfied.
The DM may conclude that the expense of employing another person is not
reasonably incurred, therefore cannot be deducted from the gross receipts.

V5201

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

V5202

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 receipts.

[V5203-V5205]

V5206 Allowable business expenses V5117 V5190 V5207 V5210 V5220 V5221 V5226 V5232

If the conditions in V5190 1. - 3. are met, all day to day expenses of a business are
allowable, including (1)
1. accountancy charges
2. advertising costs
3. certain capital repayments on a loan used to (2)
3.1
replace an item of equipment or machinery that has
3.1.a
worn out in the course of the business or
3.1.b
become outdated or
3.2 repair an existing asset, but only to the extent that the loan exceeds any
sum paid or due to be paid under an insurance policy for that repair, for
example, labour may not be covered by the policy
4. cleaning of business premises
5. employee's wages before any deductions, including wages payable to a
partner, but not a business partner (see V5210)
6. employer's contribution to an employee's pension scheme
7. employer's secondary Class 1 NI contributions
8. heating and lighting
9. hire or rental costs, but not any capital or purchase elements
10. income spent on the repair of an existing business asset, but only to the
extent that cost of the repair exceeds any sum paid or due to be paid under an
insurance policy for that repair (3)
11. interest payable on a mortgage, loan, credit sale, consumer credit agreement
or a hire purchase agreement - this does not include any capital element, but
see 3.4
12. legal fees for the running of the business, but not with the setting up or
expansion of the business
13. payment in kind for work done for the business - the monetary value is allowed
14. rent, council tax, water charges and insurance premiums on the business premises
15. stationery
16. stock purchases
17. sundries, if the DM is satisfied that the expenses are allowable
18. telephone, fax or telex
19. transport, for example business use of the car including petrol costs, road
fund license, insurance and servicing
20. VAT (see V5211)5.
This list is not exhaustive.
1 ESA Regs 13, reg 83(2)(a), reg 83(3), reg 83(4), reg 83(6);

2 reg 83(5); 3 reg 83(7)(b)(ii); 4 reg 83(7)(b)(iii);5 reg 83(7)(b)(i)

V5207

For the purpose of V5206 3.2 an asset includes buildings, plant machinery, vehicles
or equipment.

Example 1

Hattie is a mobile hairdresser. She takes out a loan to buy a replacement car as her
existing car is beyond repair.
The DM determines that
1. the loan is used to replace a car with a similar item and the capital
repayments are allowable and
2. interest payments on the loan are allowable.

Example 2

Dermot is a builder. He takes out a loan to buy an additional van after taking on an
employee.
The DM determines that
1. the capital repayments on the loan are not allowable because the loan is for
an additional item and
2. interest payments on the loan are allowable.

Example 3

Miles is a farmer. He takes out a loan to replace a tractor but decides to buy a
combine harvester instead.
The DM determines that
1. the capital repayments on the loan are not allowable because the loan is for a
different piece of machinery and
2. interest payments on the loan are allowable.

[V5208-V5209]

V5210 Partner's earnings from the business V5206

The earnings of a partner (but not a business partner) who is employed in the
business should be allowed as a business expense (see V5206 5.). The wage
should not be added back to the business accounts to offset any loss (1).
1 ESA Regs 13, reg 83(10)

V5211 VAT V5161 V5206 V5212 V5212

A S/E person who is registered for VAT is required to submit returns to HMRC
showing amounts of
1. VAT collected from customers - known as output tax and
2. VAT paid by the S/E person to suppliers - known as input tax.
If
1. exceeds 2. the S/E person pays the difference to HMRC. If 2. exceeds 1. the
S/E person receives the difference from HMRC.

V5212 V5161

Where
1. a business is registered for VAT and
2. in the assessment period the amount paid to HMRC is greater than the
amount received in the same period
the difference should be taken into account as an expense (1). This is the amount that V52111. exceeds V5211 2..
Note:
VAT can also be a gross receipt of the business (see V5161).
1 ESA Regs 13, reg 83(7)(b)(i)

V5213

V5214 Expenditure for a different period

Any business expenditure paid out in the assessment period may be assessed over
a period different to the assessment period if the normal weekly amount of that item
of expenditure can be established more accurately (1).
Note:
The DM should not deduct an expense paid before or after the assessment
period.

1 reg 83(9)

V5215

It is not intended that every expense is assessed individually over a period different
to the assessment period. This should be the exception rather than the rule.

V5216

Any expense for a period
1. equal or shorter than the assessment period should be assessed over the full
length of the assessment period or
2. longer than the assessment period should be converted on a pro rata basis to
represent the length of the assessment period.

Example

Dominic is a S/E taxi driver. He started trading six months before claiming ESA. The
assessment period is 26 weeks. In that time the annual road fund licence and
insurance on the taxi was paid.
The DM determines
1. that the expenses should be multiplied by 26 (the length of the assessment
period) and divided by 52 and
2. the resulting figure should be added to any other allowable expenses.

[V5217-V5219]

V5220 Expenses not allowed

Business expenses that should not be allowed are
1. those expenses where the conditions for deducting a business expense are
not met (see V5190)
2. capital expenditure (1)
3. depreciation of capital assets (2)
4. expenses used, or intended to be used, in setting up or expanding a business (3)
5. any loss incurred
5.1
before the start of the assessment period (4) or
5.2
in any other employment (5)
6. repayment of capital on loans (6) except where V5206 3. applies
7. business entertainment expenses (7)
8. losses incurred on the disposal of a capital asset
9. payments into a contingency fund to safeguard against future bad debts (8)
10. personal drawings on income and capital
11. money on goods used for personal consumption.
1 ESA Regs 13, reg 83(4)(a); 2 reg 83(4)(b); 3 reg 83(4)(c);
4 reg 83(4)(d); 5 reg 83(10); 6 reg 83(4)(e);7 reg 83(4)(f); 8 reg 83(6)

V5221 Capital expenditure

Capital expenditure is the expenditure on fixed assets, sometimes called capital
assets. In line with HMRC practice, fixed assets include items such as tools,
equipment, machinery and vehicles used in the business. The DM should not allow
capital expenditure as a business expense (1).
1 ESA Regs 13, reg 83(4)(a)

Example

Marc is a mobile hairdresser. He buys a replacement car with cash. The
replacement car is a fixed asset of the business. The money used to buy it is capital
expenditure. The DM does not allow a deduction. But if Marc had taken out a loan to
buy the car, repayments of capital and interest would have been allowed as
expenses (see V5206).

V5222 Depreciation

Depreciation of a capital, or fixed asset is the amount that the value of that asset is
estimated to have reduced, due to age or wear and tear, during the assessment
period.

V5223

If there are fixed assets, accounts will always show depreciation as a business
expense. The DM should not allow depreciation as a business expense (1).
1 ESA Regs 13, reg 83(4)(b)

[V5224-V5225]

V5226 Sums used in setting up or expanding a business

The DM should not allow as a business expense any sum used, or intended to be
used, in setting up or expanding a business (1). This applies to expenditure on, for example
1. fixed assets of the business, including fixtures and fittings or the cost of larger
premises or
2. non-recurring costs such as legal services in obtaining a lease.
Note:
If a business loan has been obtained the DM should consider interest on the
loan (see V5206 11.) and allow as an expense other items that are ongoing regular
expenses.
1 ESA Regs 13, reg 83(4)(c)

V5227 Loss incurred before the beginning of the assessment period

The DM should not allow as a business expense any loss incurred before the
beginning of the assessment period (1).
1 ESA Regs 13, reg 83(4)(d)

[V5228-V5229]

V5230 Loss incurred in any other employment

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

V5231

Any business loss in one employment should not be offset against the earnings of
another employment (1). Also, any loss made by one member of a couple should not
be offset against the earnings of another member.
1 ESA Regs 13, reg 83(10)

Example

Ethan 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 gross receipts from teaching music and
2. calculates the net profit from each self-employment separately.

V5232 Repayment of capital on business loans

The DM should not allow the repayment of the capital part of a business loan as a
business expense unless it is for replacement or repair of an asset (1) (see V5206 3.).
1 ESA Regs 13, reg 83(4)(e)

[V5233-V5234]

V5235 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 business expense (1).
1 ESA Regs 13, reg 83(4)(f)

V5236 Loss on disposal of a capital asset

When an asset is sold for less than the value shown in the books of the business the
difference is referred to as the "loss on disposal" and is accepted as a loss for
accounting purposes. But the DM should not
1. allow the loss as an expense or
2. include the proceeds from the sale of the asset as a gross receipt of the
business (see V5155).

V5237 Payments into contingency funds

Any payments into a contingency fund set up to safeguard against future bad debts
should not be allowed as a business expense. This is an allocation of funds rather
than an expense.

[V5238-V5239]

V5240 Personal drawings

Personal drawings may be shown as a
1. trading expense of the business or
2. withdrawal of capital on the balance sheet (if produced).
In either case, the drawings should not be allowed as a business expense.

V5241 Personal consumption

The DM should not allow any money spent on goods for personal consumption as a
business expense.

V5242

Personal consumption is not limited to food products. It could include a range of
items, for example
1. paint
2. spare parts
3. building materials
4. drinks.

V5243

The DM should not assume
1. personal consumption or
2. if the S/E person is a partner, that the figure for personal consumption will be
the same for each partner.

V5244 V5100

If the business is one where personal consumption is likely to arise, for example
1. a farmer or
2. a grocer
and no figure has been declared, enquiries should be made about the nature and
value of any produce or goods consumed or used.

[V5245-V5259]

Calculation of income tax, National Insurance contributions and qualifying premium

V5260 Introduction V5261

Having calculated the gross receipts and expenses from self-employment on a cash
flow basis, the DM should consider deductions for (1)
1. income tax (see V5270 et seq) and
2. Class 2 NI contributions (see V5297 et seq) and
3. Class 4 NI contributions (see V5316 et seq) and
4. half of any premium for a personal pension scheme (see V5326).

1 ESA Regs 13, reg 83(2)(b) & (c)

V5261

The DM should base deductions for V5260 1. - 3. on the chargeable income for the
assessment period.

[V5262-V5265]

V5266 Chargeable income V5267

The chargeable income (1), that is, the income chargeable for tax, for the assessment
period is the amount of earnings
1. in the case of a S/E child minder, one third of the gross receipts of that
employment (2) or
2. in the case of a partnership, the person's share of
2.1
the gross receipts of the employment less
2.2
any allowable business expenses (3) or
3. in any other case, the person's
3.1
gross receipts of the employment less
3.2
any allowable expenses (4).

1 ESA Regs 13, reg 84(4); 2 reg 84(4)(b); 3 reg 83(3); 4 reg 83(2)(a)

V5267

The calculation at V5266 1. - 3. should not include any deductions for
1. notional income tax or
2. NI contributions or
3. premiums for a personal pension scheme.

[V5268-V5269]

V5270 Deduction for notional income tax V5117 V5260

The DM should use the tax rates and allowances for the year (6 April to 5 April)
appropriate to the assessment period which is being used to calculate the earnings.

Example

Andrew makes a claim for ESA in June 2014. The DM accepts as evidence of his
earnings his cash flow accounts up to the tax year ending the previous April. The tax
rates and allowances used to calculate the notional tax deduction are those for the
previous tax year.

V5271 Tax allowances

A tax allowance is an amount of income a person can earn or receive in a tax year
without paying tax. There are a number of tax allowances, but for the purposes of
calculating the earnings of a S/E earner, DMs should have regard to the personal
allowance only. The rates of income tax allowances are in Appendix 1 to this
Chapter.

[V5272-V5273]

V5274 Personal allowance

All earners whether married or single get a personal allowance. There are three age-
related levels of personal allowance (see Appendix 1 to this Chapter), but for ESA
purposes only the personal allowance for a person aged under 65 is deducted - even
if another personal allowance appears to apply.

V5275 Tax rates

The tax rate is the percentage of taxable income payable to HMRC. Taxable income
is the amount of income remaining after deducting tax allowances. The rate is in
Appendix 1 to this Chapter.

[V5276-V5287]

V5288 Calculation of deduction

To determine the notional amount of income tax to be deducted from a S/E earners
chargeable income the DM should (1)
1. establish the chargeable income
2. establish the personal allowance appropriate to the S/E earner. If it
2.1 is equal to or greater than the chargeable income there will be no
notional income tax to deduct or
2.2 is less than the chargeable income, go to 3.
3. deduct the personal allowance (see Appendix 1 to this Chapter)
3.1 in full if the assessment period is a year or
3.2 on a pro rata basis if the assessment period is less than a year (2)
4. multiply 34,370 (12/13 rates) of the remainder (or, if the assessment period
is less than a year, a pro rata amount) by the basic rate of tax (see Appendix
1 to this Chapter)
5. round up where necessary.
1 ESA Regs 13, reg 84(1); 2 reg 84(2)

Example

Noah is a married man aged 45. He works as a S/E gardener and claims ESA. The
DM determines that the assessment period is for a year and calculates the
chargeable income for the assessment period as 15,500.
The DM calculates the notional income tax as follows:

Chargeable income
-
15,500.00 less
Claimant's personal allowance
-
8,105.00
7,395.00
7,395.00 at 20%
=
1,479.00
Total notional income tax
=
1,479.00

[V5289-V5296]

V5297 Deduction for notional Class 2 NI contributions V5117 V5260

A Class 2 contribution is a flat rate contribution. The same amount of Class 2
contribution is paid by men and women, although a higher rate is paid by share
fishermen. The Class 2 rates are in Appendix 2 to this Chapter.

V5298 Liability for a Class 2 contribution

The DM should make a deduction for a notional Class 2 contribution in all cases
unless the chargeable income is below the small earnings exception level (see
Appendix 2).

V5299

The DM should only consider the chargeable income when deciding if a deduction
for Class 2 should be made. If appropriate, a deduction should still be made even if
the claimant holds a small earnings exception certificate.

[V5300-V5303]

V5304 Calculation of the Class 2 contribution

The deduction for the notional Class 2 contribution should be based on the rate of
Class 2 contributions and small earnings exception level current at the time of the
claim only (1). Take no account of any increases in the contribution rates or small
earnings exception level. To calculate the amount of the deduction the DM should
1. establish the chargeable income (2) and
2. determine if a deduction should not be made on the grounds of small earnings
and
3. multiply the weekly rate (see Appendix 2 to this Chapter) by the number of
weeks in the assessment period.
1 ESA Regs 13, reg 84(3)(a); 2 reg 84(4)

[V5305-V5315]

V5316 Deduction for notional Class 4 NI contributions V5260

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 (see Appendix 2 to this
Chapter). These payments are in addition to Class 2 contributions.

[V5317]

V5318 Calculation of Class 4 deduction

The deduction for a notional Class 4 contribution should be based on the percentage
rate and lower and upper levels current at the date of claim only (1). Take no account
of any increases in the percentage rate and lower and upper levels. The DM should
1. establish the chargeable income and
2. decide the number of weeks in the assessment period (if there are less than
52 weeks in the assessment period the DM should calculate 3. on a pro rata
basis) and
3. deduct the Lower Level from chargeable income up to the Upper Level and
4. multiply the remaining figure by the percentage rate to give the notional
contribution figure. No account should be taken of evidence of actual
payments made or due.
The Class 4 rates are in Appendix 2 to this Chapter.
1 ESA Regs 13, reg 84(3)(b)

Example 1

Assessment period is 52 weeks Chargeable income is 11,231.57 Class 4
-
Lower level is 7,605 -
Upper level is 42,475
Chargeable income 11,231.57 less
lower level
7,605
Profit
3,626.57 x 9% = 326.40
Notional Class 4 contributions for 52 weeks is 326.40.

Example 2

273
Assessment period is 39 weeks or
days 365
Chargeable income for this period is 12,958
7,605 x 273
Class 4 - lower level is
= 5,688.13 365
Chargeable income
12,958 less
lower level
5,688.13
Profit
7269.87 x 9% = 654.29
Notional Class 4 contributions for 39 weeks is 654.29

[V5319-V5324]

V5325 Premiums for personal pension schemes

When calculating S/E earnings the DM should deduct from the chargeable income
half of any premium for a personal pension scheme for the relevant assessment
period (1).
1 ESA Regs 13, reg 83(1)(b)(ii) & (2)(c)

Example

Parminder runs a small business from home. Her earnings are calculated over a
period of a year. Parminder makes contributions under personal pension scheme on
a monthly basis. The relevant assessment period is a year.
The DM should calculate the contributions on a yearly basis and deduct half of this
sum from the net profit.

V5326 Personal pensions V5117 V5260

Personal pension schemes (1) are
1. a scheme under certain pension and taxation legislation (2) or
2. an annuity contract or trust scheme under certain taxation legislation (3).
They provide benefits independently of any employer (although an employer may still
make contributions to such a scheme). Benefits are payable as annuities which may
provide lump sum and pension payments payable on death or retirement.
1 ESA Regs 13, reg 2; 2 Pensions Schemes Act 93, s 1; Income and Corporation Taxes Act 1988,
Chapter 4 of Part 14 & Finance Act 2004, Sch 36, para 1(1)(g); 3 Income and Corporation Taxes Act 1988,

s 620 or s 621; Finance Act 2004, Sch 36, para 1(1)(f) & Income and Corporation Taxes Act 1988, s 622(3)

V5327

Taking an income from the pension fund allows the purchase of an annuity to be
delayed up to the age of 75. The amount of income to be paid from the fund is
recalculated every three years. At the age of 75 an annuity must be purchased.

[V5328-V5349]

Particular forms of self-employment

V5350 Child minders V5100

A child minder is a person who engages in a contract for services to care for another
person's child in return for payment. Most child minders
1. work from their own homes and
2. are registered with the LA and
3. are restricted to the number of children they care for at any one time.

V5351

To calculate a child minder's normal weekly earnings the DM should
1. determine the assessment period in the normal way and
2. calculate the gross receipts for that period and
3. calculate the chargeable income as one third of the gross receipts during the
assessment period (1) but make no deductions for business expenses and
4. calculate a deduction (2) for
4.1 income tax and
4.2 NI contributions and
4.3 half of any premium for a personal pension scheme.
1 ESA Regs 13, reg 84(4)(b); 2 reg 83(8)

Example

Fiona is a S/E child minder. Her assessment period is 13 weeks. The gross receipts
for that period are 1,280.
The DM determines
1. that no expenses should be deducted from the gross receipts and
2. that the chargeable income is 426.67 (1/3 of 1,280) and
3. the income tax, NI contributions and premiums that are to be deducted from
the chargeable income.

[V5352-V5360]

V5361 Crofts or small holdings V5100

Earnings from a croft or small holding should be decided on the same basis as a
small business. The person should produce an annual statement giving details of
1. income from sales, subsidies, etc and
2. expenditure, including for example, seed, fertiliser, feed and labour.
This statement should be used to calculate the person's net profit.

[V5362-V5369]

V5370 Farmers V5100

A farmer in need of financial assistance may first seek advice from a surveyor, land
agent, valuer or some other similar professional to ensure he is taking advantage of
any schemes or subsidies, such as those administered by DEFRA's Rural Payments
Agency, that may be available.

V5371

DEFRA are unable to supply opinions about the amount of work involved in
particular farms or their likely annual returns. However, DMs may consult the
DEFRA website (www.defra.gov.uk - Economics and Statistics page) for information
about total farm income for the type of enterprise in question.

[V5372-V5379]

Hotels, guest houses, bed and breakfast establishments

V5380 V5100

The normal self-employed earners rules for ESA should be considered when
determining a claim involving a person running a hotel, guest house, lodging house
or bed and breakfast establishment.

V5381

The DM should note that payments received for providing BL accommodation (see V5019) are not earnings (1).
1 ESA Regs 13, reg 82(2)(a)

V5382 Bars and restaurants in hotels, guest houses

Income from bars and restaurants where services are provided that are not included
in the BL charge should be treated as earnings from self-employment. The DM
should determine the assessment period and calculate the gross receipts and
allowable expenses in the normal way.

[V5383-V5384]

V5385 Local Exchange trading systems

LETS are associations that allow participants to exchange goods and services with
others in the community.

V5386

LETS members list their offers of, and requests for, goods and services in a
directory and then trade them using a system of credits. These can be given many
different names such as
bobbins
brads
newberries
beacons
acorns.

V5387 Participating in a local exchange trading system scheme

Participating in a LETS scheme should be regarded as work. The credits obtained
are payment for the goods or services provided.

[V5388-V5389]

V5390 Local exchange trading credits

Credits can be exchanged for goods and services in participating shops and
businesses in much the same way as ordinary currency. Credits are considered
taxable income by HMRC.

V5391

Credits can be treated as earnings depending on the circumstances of each case.
Credits are not payments in kind.

V5392

If a person is gainfully employed as a S/E earner and receives credits as payment
for services provided, those credits should be included in the gross receipts of the
business.

V5393

The value of credits is equivalent to the number of credits awarded for the particular
goods or services at the relevant exchange rate.

V5394

The DM should firstly find out whether the organisers of the scheme have equated
the credits to a sterling equivalent. This may have been done for HMRC or VAT
purposes. If so, that equivalent can be used as the exchange rate.

V5395

If a sterling equivalent is not available the DM should consider the question based on
the circumstances of each case, including
1. how the transaction price is arrived at
2. whether the amount of credits earned varies with the type of work performed
3. what the exchange value of a credit is (what does it buy?)
4. whether the claimant works in the cash economy as well as in the LETS economy
5. what the average local rate of pay is for the particular work performed.

[V5396-V5399]

V5400 Partnerships V5009 V5100

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

V5401

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

V5402

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
relevant legisaltion (1). 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.

1 Partnership Act 1890

V5403

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 relevant legislation (1)), 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 (2), 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; 2 s 4(2)

V5404

A partnership does not necessarily end when it ceases trading. It must be formally
dissolved. The partnership deed or the legislation (1) 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.
1 Partnership Act 1890, s 38

[V5405-V5406]

V5407 Calculation of a business partner's normal weekly earnings

Before calculating a partner's share of the net profit of the business, the DM should
ensure that the gross receipts include the following for all partners
1. allowances from schemes to help with self-employment
2. personal drawings
3. expenses covering business and private use.

V5408

To calculate the normal weekly earnings of a business partner (1), the DM should
determine the assessment period and
1. total the gross receipts of the whole business and
2. deduct any allowable expenses incurred by the whole business and
3. calculate the partner's share of the resulting "net profit"2. The partner's share
will be
3.1 the share set out in the deed of partnership, if there is one or
3.2 the shares agreed in an express or implied agreement between the
partners or
3.3 an equal share (3) if neither 3.1 nor 3.2 apply, for example, if there are
four partners, each partner's share is 25% and
4. deduct from 3. an amount for
4.1 income tax and
4.2
NI contributions calculated on the amount at 3. and
5. deduct half of any premium for a personal pension scheme.
1 ESA Regs 13, reg 83; 2 reg 83(3); 3 Partnership Act 1890, s 24

Example 1

Daniel is one of two partners in a building firm. He is in receipt of ESA. There is a
deed of partnership that states that Daniel will receive 40% of the profits and the
other partner 60%. The gross receipts for the business during the assessment
period are 10,600. The allowable expenses are 5,400. The DM decides that
Daniel's share of the profits is 2,080, calculated as follows

Gross receipts
10,600
Less allowable expenses
5,400
=
5,200
Divided by Daniel's
= 2,080 share - 40% The DM then deducts from 2,080 amounts for notional income tax and NI
contributions and half of a premium for a personal pension scheme.

Example 2

Agnes and her brother are partners in a small pottery business. Agnes is in receipt
of ESA. There is no deed of partnership or other agreement that profits should be
shared unevenly. The gross receipts of the business during the assessment period
are 8,750. Allowable expenses are 4,562. The DM determines that Agnes share
of the net profit is 2,094, calculated as follows

Gross receipts
8,750
Less allowable expenses
4,562
=
4,188
Divided by Agnes's
= 2,094 share - 50% The DM then deducts from 2,094 amounts for notional income tax and NI
contributions. Agnes was not paying premiums for a personal pension scheme.

[V5409]

V5410 Salaried partners

A salaried partner may be an employed or S/E earner. A salaried partner may be a
person who
1. receives a salary as remuneration and maybe a profit-related bonus. This type
of salaried partner is an employed earner (1) or
2. may be paid a fixed salary not based on profit. But in addition is included in
the partnership deed and is entitled to a share of the profits. This type of
salaried partner is a S/E earner.

1 Ross v. Parkins (1875) LR 20 Eq 331 at 336

V5411

The DM should
1. consider the facts of each case and
2. examine the relationship between the person and the other parties
to decide if the salaried partner is a S/E earner.

V5412

If a S/E salaried partner receives a salary from the business in addition to a share of
the business profit, the salary should not be deducted before arriving at the total net
profit to be shared between partners. The DM should
1. calculate the chargeable income and
2. deduct tax, NI contributions and any premiums for a personal pension scheme
from the partner's share of the chargeable income.

[V5413-V5424]

V5425 Renting out property as a business V5100

If a person is letting properties that are not the home, the DM needs to consider if
this is by way of a business (1).

1 R(FC) 2/92

V5426

A person who
1. has a single property that is not the home and
2. lets the property to tenants and
3. collects rents and does any repairs
is not conducting a business.

V5427

A person who joins with others to buy properties so that they can be let as flats or
offices could be said to be conducting a business. The
1. number of properties involved and
2. long term intentions of the person
are factors that need to be considered.

V5428

If the DM determines that a person is conducting a business from renting out
properties the rent is a gross receipt of the business.

Example

Michael has a partnership with another person in a business. The business has
been set up to buy land and property for sale and let to tenants. Michael and his
partner own a garage with two flats above it and two terraced houses on the same
street.
The flats and houses are all let to tenants and Michael collects the rent and does the
repairs and maintenance.
The DM determines that Michael is a S/E earner. The DM calculates Michael's
earnings, the rental income is regarded as part of the gross receipts.

[V5429-V5439]

V5440 Seasonally self-employed V5100

If a S/E earner is seasonally S/E the DM should
1. consider the guidance at V5023 - V5026 and
2. determine if the S/E earner remains gainfully employed as a S/E earner.

Example

Shaun is S/E as an amusement arcade owner. The amusement arcade closed in
October because the summer season had ended. Shaun stated that
1. he and his creditors regarded the business as a going concern. This is
because he anticipated that his business would start up again in the following
April when the holiday trade would re-commence
2. in April, when the holiday trade would re-commence he intends to start work
again in the amusement arcade
3. he still undertakes some activities in the business. He is currently redecorating
the arcade. He plans to renovate and maintain the electrics and make minor
repairs before April. He also plans to update the alarm system. He is also
looking to update some of the machines in the arcade
4. his accountant only submits figures from April to September each year. It is
normal for him to only work between April and September each year.
The DM considers the guidance at V5023 - V5026 and decides, in this case, that
Shaun remains gainfully employed as a S/E earner. As there had been no changes
that had affected the normal pattern of trading the DM determines that the
assessment period for the earnings should be one year.

[V5441-V5449]

V5450 Sub-contractors V5100

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.

V5451

If a S/E sub-contractor claims ESA the DM should consider
1. the guidance at V5023 - V5026 and
2. if the S/E sub-contractor remains gainfully employed as a S/E earner.

Example

Bruce is a S/E electrician. He sub-contracts for other contractors. Bruce has just
finished one contract and work on the next contract is not due to start for another
couple of weeks. Bruce states that
1. he still regards himself as S/E and his business as a going concern but has no
work at the moment
2. there are good prospects of work in the future
3. he is advertising for work all of the time and further contracts are in the pipeline
4. there have been other occasions where there has been a break between
contracts.
The DM considers the guidance at V5023 - V5026 and determines, in this case, that
Bruce remains gainfully employed as a S/E earner.

V5452 Actors and entertainers V5100

DMs must consider claims from actors and other entertainers in the same way as
any other claimants. Each case must be decided on its own merits. The DM should
decide whether a claimant's earnings are from employment as a S/E earner or
employment as an employed earner (see ADM Chapter V4 for the meaning of
employed earner).

V5453

In general, because of the nature of an actor's or entertainer's employment, the DM
may find that their earnings are from employment as a S/E earner. However, it is
possible for an entertainer whose general pattern of employment is that of a S/E
earner, to have periods of employment as an employed earner at the same time as
his overall self-employment.

V5454

The fact that an actor or entertainer has periods of employment during which class 1
NI contributions are payable is not conclusive when deciding whether that
employment is as an employed earner. It is for the DM deciding the claim to ESA to
decide whether earnings are from employment as an employed earner or from self-
employment. Where an entertainer whose general pattern of employment is that of a
S/E earner contends that certain engagements were as an employed earner and
that class 1 contributions were paid it will be for the DM to decide whether the
claimant was employed under a contract of service as an employed earner or
otherwise.

Example 1

Laura is an actress. Her acting engagements are sporadic, and she is not currently
working due to a broken leg. She continues to look for work and remains on her
agent's books. She has been booked for some future engagements, but nothing
substantial, and has not worked for several weeks. She says that she could find
more substantial acting work at any time, that being the nature of work. In the year
prior to the current claim, the claimant has had a number of engagements in
advertising and the theatre as well as three separate, short term, engagement with
the BBC to appear in three separate dramatic productions. Her most substantial
earnings were derived from these engagements with the BBC. She states that she
was actually employed by the BBC under a contract of service as an employed
earner and says that the fact that she paid class 1 NI contributions supports this
contention. As such she argues that her earnings from the BBC should not be
included when working out her earnings from self-employment. The DM
1. decides that the claimant is gainfully employed as a S/E earner (see V5023
V5026)
2. considers the terms under which the claimant was engaged by the BBC and
decides that as she was engaged to perform a specific role on particular
occasions for a fixed fee, she was employed under a contract for services as
a self-employed earner and not under a contract of service as an employed
earner. Therefore the earnings from the BBC fell to be taken into account with
her other earnings from self-employment
3. decides that the sporadic nature of the employment is the normal pattern of
the business and calculates her average weekly earnings over the preceding
year.

Example 2

Craig is a dancer. He is unable to work due to a serious illness. He states that he is
usually S/E, carrying out one-off engagements in the theatre. However, unusually, he
was engaged by a dance company for a fixed 26 weeks period during the previous
year. He contends that during this period he was engaged as an employed earner,
employed under a contract of service, and paid class 1 NI contributions.
The DM decides that Craig's employment with the dance company was under a
contract of service as an employed earner for the 26 weeks when he was engaged
by the dance company, and as such the earnings from that employment are not
included in the calculation of the claimant's earnings as a S/E earner.

V5455 Share fishermen V5456

A share fisherman is (1)
1. a person who
1.1 usually works in the fishing industry and
1.2 is S/E and
1.3 is the master or a crew member of a British fishing boat crewed by
more than one person and
1.4 is paid for that work wholly or partly by a share of the profits or gross
earnings of the fishing boat or
2. a person who
2.1 was a person who worked as in 1., but has permanently stopped such
work because of age or ill health and
2.2 usually works
2.2.a
ashore in GB and
2.2.b as S/E and
2.2.c
making or mending any gear belonging to a British fishing boat
or performing other services that help, or are connected with, a
British fishing boat and
2.3 is paid for that work wholly or partly by a share of the profits or gross
earnings of the fishing boat and
2.4 has not ceased to usually work as described in 2.2.

1 ESA Regs 13, reg 83(1)(b); SS (Mariners' Benefits) Regs, reg 1(2)

V5456

The master and all the members of the crew of a fishing boat are within the definition
at V5455 1., This includes those who do a specialist job, such as an engineman,
cook or firefighter, as long as they are paid at least partly by a share in the earnings
of the fishing boat (1).

1 R(U) 10/51

V5457

A share fisherman is a S/E earner. One difference between a
1. share fisherman
and
2. business partner
is that the share fisherman pays a higher rate of Class 2 contributions (see Appendix
2 to this chapter). Class 4 liability is the same (see Appendix 2 to this chapter).

V5458

Earnings should only be taken into account when a person is a S/E earner. A S/E
earner is a person who is gainfully employed
1. in GB and
2. in employment that is not employed earner's employment
Note:
A share fisherman may also be employed in another occupation as an
employed earner. This does stop that share fisherman being S/E.

V5459 Claims from share fishermen

The rules for calculating the earnings of a share fisherman are the same as for any
other S/E claimant who is in partnership with another person. DMs should contact
DMA Leeds if further guidance on dealing with claims from share fisherman is
required.

[V5460-V5999]

Appendix 1
Notional deductions for income tax
Main income tax allowances
1. The main income tax allowances are as follows
11/12 12/13 13/14 14/15

Additional
-
-
-
- personal
Personal under
65 7,475 8,105 9,440 10,000
Personal
65 - 74
9,940
10,500
10,500
10,500
Personal
75 & over
10,090
10,660
10,660
10,660
Married
under 65
-
-
-
- couple
Married
65 - 74
-
-
-
- couple
Married
75 & over
7,295
7,705
7,915
8,165 couple
Basic rates of tax
2. Income tax is payable on taxable income

11/12
1 - 35,000
at basic rate of 20%
12/13
1 - 34,370
at basic rate of 20%
13/14
1 - 32,010
at basic rate of 20%
14/15
1 - 31,865
at basic rate of 20%
Appendix 2
Notional deductions for NationaI Insurance contributions
Class 1 contributions
1. The Class 1 NI contribution for any week or month is based on the percentage
rate appropriate to the band in which the estimated gross earnings fall.
2. Earnings Bands 11/12
Earnings Limits 11/12
Earnings
Percentage rates
LEL
1. up to LEL
NIL weekly
102
2. LEL to UEL
12% of earnings that
monthly 442
exceed LEL up to UEL
UEL
weekly 817
monthly 3,540
Primary threshold
No contributions are payable on weekly earnings of 139 or less or monthly earnings of
602 or less. Otherwise contributions are still payable at a rate of 12% for earnings
between 139.01 and 817 per week and at 2% for earnings above 817 per week.
3. Earnings Bands 12/13
Earnings Limits 12/13
Earnings
Percentage rates
LEL
1. up to LEL
NIL weekly
107
2. LEL to UEL
12% of earnings that
monthly 464
exceed LEL up to UEL
UEL
weekly 817
monthly 3,540
Primary threshold
No contributions are payable on weekly earnings of 146 or less or monthly earnings of
634 or less. Otherwise contributions are still payable at a rate of 12% for earnings
between 146.01 and 817.00 per week and at 2% for earnings above 817 per week.
4. Earnings Bands 13/14
Earnings Limits 13/14
Earnings
Percentage rates
LEL
1. up to LEL
NIL weekly
109
2. LEL to UEL
12% of earnings that
monthly 472
exceed LEL up to UEL
UEL
weekly 797
monthly 3,453
Primary threshold
No contributions are payable on weekly earnings of 149 or less or monthly earnings of
645 or less. Otherwise contributions are still payable at a rate of 12% for earnings
between 149.01 and 797 per week and at 2% for earnings above 797 per week.
5. Earnings Bands 14/15
Earnings Limits 14/15
Earnings Percentage
rates
LEL
1. up to LEL
NIL weekly
111
2. LEL to UEL
12% of earnings that
monthly 481
exceed LEL up to UEL
UEL weekly
805 monthly
3488
Primary threshold
No contributions are payable on weekly earnings of 153 or less or monthly earnings
of 663 or less. Otherwise contributions are still payable at a rate of 12% for
earnings between 153.01 and 805 per week and at 2% for earnings above 805
per week.
Class 2 contributions
6. The weekly rate of Class 2 contributions are as follows

11/12 12/13 13/14 14/15

Ordinary Class 2 rate
2.50
2.65
2.70
2.75
Share fisherman rate
3.15
3.30
3.35
3.40
Small earnings exception
7. The rates of the small earnings exception are as follows.
11/12 12/13 13/14 14/15

Earnings limit
5,315 5,595 5,725 5,885
Class 4 contributions
8. The weekly rates of Class 4 contributions are as follows.
11/12 12/13 13/14 14/15

Lower
7,225 7,605 7,755 7,956 level
Higher
42,475 42,475 41,450 41,865 level
Percent
9% of
9% of
9% of
9% of
age rate 7,225 to 7,605 to 7,755 to 7,956 to
42,475
42,475
41,450
41,865
per year, per year, per year, per year,
2%
2%
2%
2% above
above above
above
42,475
42,475
42,450
41,865