7.24. What is my income if I trade as self-employed? (1999-07-28)

Your income is essentially the profits of the business, apportioned if you are in a partnership. There are special provisions for childminding, board and lodging and share fishing.

Unfortunately the rules for calculating those profits are neither the same as conventional accountancy nor the Inland Revenue.

The CSA recalculate the profit, normally using the profit and loss account prepared for the Inland Revenue. If VAT is shown on these accounts then get another accountant!

The CSA start with the total sales then deduct the usual expenses but not:

* Asset costs
* Depreciation
* Set up and expansion costs
* Losses from an earlier period

There is nothing like the Inland Revenue's "capital allowance" to put the depreciation back. This means it is possible for a business to make a loss as far as the Inland Revenue is concerned but a profit under CSA rules.

Tax and NI relating to the period of the accounts is then deducted. This should be actual payments but is often calculated. We do not know if anyone has ever disputed this.

Half of pension plan payments made in the period of the accounts is then deducted. They often get this wrong.

7.25. Which self-employed accounts do they want? (1999-07-28)

They want a profit and loss account for a period of between 6 and 15 months, ending in the two years before the effective date of the assessment. If there is more than one, they want the latest.

Where no such profit and loss account is given they calculate the income based on the previous 52 weeks or as long as the business has been going if less. They need documentary evidence of income and expenditure.

This means you do not have to submit accounts. It is legitimate to submit a shoe box of invoices etc.

7.26. What if I've only just become self-employed? (1999-07-28)

Any periodic payments (start up grants?) made under the Employment and Training Act 1973 or the Enterprise and New Towns (Scotland) Act 1990 are included in the sales figure.

See above for how your income will be calculated if you do not have any accounts yet. If you have been trading for more than 6 months then you could provide a set of accounts.

7.27. What if my business partners don't want the CSA to see the accounts? (1999-07-28)

Ask the CSA for an indemnity for the partnership against any loss resulting from the disclosure of any of the partnership information to unauthorised third parties before you provide it. Your business partners can insist on this.

Let the agency have the information in heavily qualified terms - not to be used, disclosed, provided, extracted ... to anyone other than the CSA case officer without explicit permission.

7.28. What if I trade as a Limited Company? (1999-07-28)

Presumably the Limited Company is registered + incorporated and you are both a director and a shareholder.

While the CSA single out the self-employed for special treatment there is little or no special treatment for Limited Companies, even when there is only one employee.

The CSA have been known to ask to see the accounts when their client is a director.

There has been a suggestion in the newsgroup that such arrangements are treated by the CSA as self-employed cases but there has been no example to substantiate this view.

If the CSA write to the Limited Company in its capacity the response should meet the normal Companies Act requirements - state directors, registered address, registered number etc. and be signed by an authorised person.

The CSA will want to assess the income you derive from the Limited Company. This will be one or more of:
* Dividends
* Salary
* Loan interest

There should be no need for the CSA to see the Limited Company's accounts. Their only duty is to assess your income; they are likely to ask your accountant for confirmation of income for proof. If you pay yourself a wage the CSA will get the details via the Contributions Agency.

7.29. What is the legal position of a Limited Company? (1999-07-28)

In law a limited company - even if there is a sole director and shareholder - has a separate legal identity. It is as if it were another person, and if you are employed by such a company - even if you are the shareholder and sole director - it is as if you are employed by another person (i.e. the company). You should therefore be treated as an employee of the company and not as self-employed.

The Child Support (Maintenance Assessment and Special Cases) Regulations 1992 allows the CSA to treat a parent as possessing income which he does not have.

Paragraph 26 of Schedule 1 allows the CSA, in certain circumstances, to treat a person as possessing income if they perform a service for lower remuneration than is normally paid for the service. In one newsgroup user's opinion that could apply where a limited company does not properly pay a parent and the company is solely owned by that parent. If that paragraph is applied the parent would remain an employee, but would be treated as receiving more income than he or she was actually paid.

Paragraph 27 allows the CSA to treat a parent as possessing income or capital which they have deprived themselves of to decreasing their assessable income. A commissioner held that this paragraph cannot be used in relation to income deriving from employment (in that case we think the parent had not taken on employment that was paid at a higher rate). That decision does not necessarily extend to limited companies and another commissioner might not follow that decision.

There was a tribunal case in which the parent was treated by the tribunal using this paragraph as possessing several thousand pounds in income because the limited company that he owned and which employed him had not paid dividends for a particular year. Again the parent is still an employee but is treated as possessing additional income for CSA purposes.

There are also 2 departure regulations that should be noted. Regulation 24 of the departure regulations allows a departure direction to be granted where a parent has the ability to control the amount of income that they receive, including income from employment and dividends from shares, and the parent has in the opinion of the CSA unreasonably reduced the amount of income that they have received by diverting it to other persons or for purposes other than the provision of income for themselves. This could be used where a limited company is being used to unreasonably reduce a person's assessable income.

It is not clear how this ties in with the other powers in Schedule 1 of the main regulations. Departure directions are discretionary; if the CSA or a tribunal finds that the provisions of Schedule 1 apply they must apply them. A departure direction also has to be applied for by the other side - the CSA cannot grant them upon their own initiative. Again if such a departure direction is made the parent remains an employee but is treated as possessing additional income by the CSA.

Additionally, regulation 25 of the departure regulations allows a departure direction to be granted upon the ground that a parent's income is inconsistent with their lifestyle.

Finally, under the general law, although a limited company is normally treated as a separate legal entity there are some cases where the courts have performed what they term "lifting the corporate veil" and instead treated the company as being the same person in law as its sole shareholder/director. There are numerous examples in legal case law in the last 100 years, such as where a company was just a front to defraud a person's creditors. It is just possible that the same could be done where the CSA or a tribunal was of the opinion that the sole or main purpose of a company's formation or continued existence was to improperly escape or reduce liability to pay child support. If that happened the parent would be treated as self-employed and assessed as if he and the company were one and the same person in law.

As there hasn't been a court or commissioner case dealing head on with the issue of single person limited companies it is impossible to give a definite answer upon how they will be treated. The above sets out principles and regulations which are available for the CSA and the tribunals and commissioners to apply. Generally, at least as far as tribunals and commissioners are concerned, they will apply them to produce what they consider to be a fair and just result.