One-man band triumphs after being denied tax credit

New contractors don’t need a rigorous ‘Dragons’ Den-style’ business plan just to be eligible for working tax credit, a senior tribunal judge has declared.

They should also not have to have an accountant to pass the ‘self-employed’ test that the taxman uses to decide eligibility for the credit, says upper tribunal judge Nicholas Wikeley.

His comments in a judgment published this week deal a blow to HMRC, after it refused a new one-man band tax credit because a tax official decided that the fledgling sole trader failed the “organised” part of the test.

‘Get real’

Judge Wikeley’s comments also embarrass an earlier tribunal that upheld HMRC’s decision, which included failing the trader on ‘self-employed’s’ two other tests to obtain credit; commercial and profit-making.

“Tribunals need to ‘get real’,” an irritated judge Wikeley recommends, in a sharply-worded ruling bound to raise cheers among new contractors but eyebrows among some of his peers in the chamber.

In a reference to the BBC business reality show, the judge added: “Self-employed working tax credit claimants (typically) are not putting together business proposals of sufficient rigour to pass muster on a Masters of Business Administration course, or to withstand scrutiny in an episode of Dragons’ Den.”


In the case, the sole trader refused the tax credit but who is now having it calculated by HMRC on judge Wikeley’s orders, submitted to the department printed leaflets promoting his new painter and decorator business.

Also with the aim of passing HMRC’s tax credit eligibility test for the self-employed, he completed HMRC’s questionnaire, sent certificates documenting his skills, and submitted “preliminary accounts.”

Hand-written, these accounts were essentially a list of painting and decorating jobs, with dates, addresses of clients, prices charged as well as figures denoting his outgoings.

‘Not entitled’

But it wasn’t enough. The HMRC officer told him. “I’ve decided that you’re not entitled to Working Tax Credit. This is because the information you’ve given me does not show:

“ *[your] trade, profession or vocation is regular and organised *[your] trade, profession or vocation is commercial *[your] trade, profession or vocation is carried out with a view to profit.

“As a result of not meeting our definition of a self-employed person you are not treated as being engaged in qualifying remunerative work.”

Then, and “rather alarmingly,” judge Wikeley pointed out, the HMRC official followed-up: “My decision does not affect any other action we may take if we suspect that you have committed a criminal offence. For example, we may take criminal proceedings against you.”

‘Doing this for fun’

Formerly jobless, and a Job Seeker’s Allowance recipient who told the Revenue he was simply trying to “make a go of something,” the sole trader challenged the decision.

On HMRC saying he failed the ‘profit-making’ test, the one-man band countered: “Why would i [sic] even bother with any of this if i [sic] didn’t intend to make a profit? Do you think i’m [sic] doing this for fun?”

But his point-by-point rebuttal of the Revenue’s decision -- although ‘eloquent’ in judge Wikeley’s eyes, did not impress the first-tier tribunal.

Backing HMRC, it found that the sole trader “was unable to provide sufficient evidence to show that his self employment [sic] was commercial, profitable, regular and organised.”


The tribunal added that while he “did provide some evidence of that nature,” his submission was “lacking,” as it had no receipts, expenses, sales records, purchase invoices or financial projections.

“Expectations about the documentary paper trail should be adjusted,” particularly when it is a “more modest” operation run by a new business soloist, a displeased judge Wikeley has now told that lower tribunal.

His upper tribunal judgment speaks of the previous, lower tribunal expecting “too much of a new one-man business,” and says that, overall, it made a “material error in law.”

For example, the tribunal potentially erred in law by disregarding the hours which the trader spent in setting up the business, as it held that these “do not represent remunerative work for the purpose of claiming WTC [Working Tax Credit].”

Further siding with the sole trader, judge Wikeley opposed HMRC’s suggestion that he should send the case back to the first-tier tribunal, preferring instead to scrap its decision, class the trader as self-employed and instruct HMRC to calculate his entitlement to WTC.

‘Just trying to get on’

As to the grafter at the heart of the case, comments he made to officialdom when told he could not appeal HMRC’s decision to deny him tax credit indicate he will now ‘be happy.’

“AGAIN I am not happy,” he wrote at the time, using capitals to emphasise his displeasure. “You have not given me a reason; just tell me in simple terms why I have not qualified. I am just trying to get on in life and need a bit of help.”

The government is yet to publicly respond to the ruling, although a summary it has compiled since it was handed down now acknowledges the “importance of being realistic about small sole traders and their audit trails.”

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Written by Simon Moore

Simon writes impartial news and engaging features for the contractor industry, covering, IR35, the loan charge and general tax and legislation.
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