Self-employment: Companies
Regulation 77 of the Universal Credit Regulations 2013 treats certain people as sole owners or partners and therefore brings them into scope of the self-employment rules.
- The legal position
- Company directors
- Analogous to a sole owner or partner
- Trading business
- Property business
- Exceptions
Regulation 77 of the UC Regs states:
‘Where a person stands in a position analogous to that of a sole owner or partner in relation to a company which is carrying on a trade or a property business, the person is to be treated, for the purposes of this Part, as the sole owner or partner’
The main group affected by this provision are those who are directors of their own limited company. This measure was introduced to ensure that self-employed claimants could not incorporate their business (become a limited company) in order to avoid the minimum income floor rules. However, Regulation 77 is not only applicable to limited company directors, it is widely drafted to apply to anyone who stands in a position analogous to a sole trader or partner. This page focuses on limited company directors.
Most limited companies are limited by shares. This means they are owned by shareholders who have certain rights. In small limited companies, usually the director(s) will own the shares. A limited company is separate from the individual director – the company is its own legal entity. Money that is paid to the company for work done belongs to the company, not to the director(s).
There are three ways that directors can take money out of their limited company:
- Dividends – this is a payment made by a company to its shareholders if it has made a profit
- Salary – if the director is also an employee of the company, they may receive a salary. The company will be their employer and in most cases the salary will be run through a normal payroll
- Director’s loan – if a director takes out more money than they put into a company and it is not salary or a dividend, it is called a directors loan.
Where a company director can be said to be analogous to that of a sole trader, they will be treated for UC purposes as being a sole owner or partner.
Analogous to a sole trader or partner
DWP guidance states that whether someone is analogous to a sole owner or partner in relation to a trading or property business is a question of fact in each case.
DWP guidance states that a person who does not work for the company can still be like a sole owner or partner because a sole owner of a business has total influence over the day to day running of a 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. Someone who has some shares in a large company with a large number of shareholders is a shareholder because they have no influence over the day to day running of the company.
Regulation 77 only applies in relation to a company who is either carrying on a trade or is a property business.
DWP guidance states that a trading business is a business with a profit seeking motive (regardless of whether or not a profit is actually made) (See H4370, Chapter H4).
Where this applies, they will generally be treated as possessing an amount of capital equal to the value (or their share of the value) of the capital of the company and the actual value of their shares in the company will be disregarded when working out their capital.
Any assets of the company that are used wholly and exclusively for the purposes of the trade are disregarded from the claimant’s capital while they are engaged in activities related to that trade.
The income consequences of triggering Regulation 77 in relation to a trading business are:
- The income of the company, or that person’s share of that income, is to be treated as the person’s income and calculated in the same manner as other self-employed UC claimants. If the activities in the course of the trade are their main employment then they will be treated as if they are in gainful self-employment and the minimum income floor may apply.
- Any self-employed earnings under these rules are in addition to any employed earnings that the person receives as a director or employee of the company.
DWP guidance states that a property business means a property business in the UK or overseas where tax is paid on the profits of the business. The company is in the business of generating income from land either in the UK or abroad (H4365 Chapter H4). The definition is set out in Corporation tax Act 2009 (Section 204).
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 for universal credit purposes.
Where someone is in a position similar to that of a sole owner or partner in a property business they will:
- Have the value of their shares in the company disregarded when working out their capital
- Be treated as having capital equal to the value of the capital of the company (if the person is treated as the sole owner) or their share of the value of the capital of the company (if the person is treated as a partner)
The following example is from DWP guidance which shows a property business and how capital is calculated:
Pablo 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 Pablo’s shares in the company are disregarded. However, the DM has to treat Pablo as being in possession of capital equal to the value of the capital of the company.
Those involved in property businesses are treated differently to those involved in trading businesses in terms of the impact on their earned income for UC purposes.
A person who is in a position similar to that of a sole owner or partner in a property business is not treated as in gainful self-employment in relation to the property business and the income of the property business is not treated as the claimant’s self-employed income (ADM H4376).
These rules do not apply where a person derives income from a company that is treated as employed earnings under arrangements made to workers by intermediaries or through managed service companies. This applies where the income is derived from activities that are the person’s main employment.
Last reviewed/updated 22 November 2021