3 December 2020

Reporting actual self-employed income by 31 January

Tax credit claims last a maximum of one tax year. Each year, existing claimants have their claims renewed either automatically or by completing forms. This happens after the tax year has ended and, if a reply is required, that must be given by 31 July 2020. The renewals process does two things, it finalises the claim for the tax year just ended and it acts as a claim for the new tax year. In order to finalise the claim for the year just ended, HMRC ask the claimant to confirm their income for that year. So during the renewals exercise in Summer 2020, claimants were asked for their 2019/20 tax year income (or HMRC used the income they held to automatically finalise the claim).

Not all claimants will know their actual income by 31 July renewals deadline. This is often the case for self-employed claimants who may not have their accounts finalised or tax returns submitted at that point. Tax credit rules allow claimants to provide an estimated income figure by 31 July and then confirm their actual income by the following 31 January. If they don’t report an updated actual income by 31 January, the previous estimated income is then taken as the final income figure.

We recently became aware of a specific issue involving self-employed claimants who estimated their self-employed income as a positive figure by the July deadline, but who then found they had made a loss once their actual figure became known. For tax credit purposes, losses must first be set-off against other income of the claimant and then their partner’s income (if they have one). Anything left after that set-off has taken place, can be carried forward to be set-off against trading profits in future years.  See our guidance for more information about how losses from self-employment are treated in tax credits .

In the cases highlighted to us, when the claimants tried to give their actual income figure by 31 January (which was a loss) they were told it was not possible to set it off against other types of income on the claim because the award had already been finalised. We escalated the issue to HMRC who have confirmed that there is nothing in the legislation, IT system nor guidance that prevents offsetting self-employed losses against other household income in this situation. However, such changes do require a higher level of access and so some helpline advisers will not have the necessary IT permissions to carry out the change. HMRC have recently issued a technical note to all advisers highlighting existing guidance which confirms that cases should be escalated so that the necessary action can be taken.

We are keen to hear any feedback from advisers if any cases arise where this guidance is not followed or where there is a refusal to offset a self-employed loss reported by 31 January against other household income. Please contact us here.