PART VIINCOME AND CAPITAL

CHAPTER IVself-employed earners

Earnings of self-employed earners

30.  “Earnings”, in the case of employment as a self-employed earner, means the gross income of the employment and shall include any allowance paid under section 2 of the Employment and Training Act 1973(1) to the claimant for the purpose of assisting him in carrying on his business.

Calculation of net profit of self-employed earners

31.—(1) For the purposes of regulation 23 (average weekly earnings of self-employed earners) the earnings of a claimant to be taken into account shall be–

(a)in the case of a self-employed earner who is engaged in employment on his own account, the net profit derived from that employment;

(b)in the case of a self-employed earner whose employment is carried on in partnership or is that of a share fisherman within the meaning of the Social Security (Mariners' Benefits) Regulations 1975(2), his share of the net profit derived from that employment, less–

(i)an amount in respect of income tax and of social security contributions payable under the Social Security Act calculated in accordance with regulation 32 (deduction of tax and contributions for self-employed earners); and

(ii)one-half of any qualifying premium payable.

(2) There shall be disregarded from a claimant’s net profit, any sum, where applicable, specified in paragraphs 1 to 11 of Schedule 3.

(3) For the purposes of paragraph (1)(a) the net profit of the employment shall, except where paragraph (9) applies, be calculated by taking into account the earnings of the employment over the assessment period less–

(a)subject to paragraphs (5) to (7), any expenses wholly and exclusively incurred in that period for the purposes of that employment;

(b)an amount in respect of–

(i)income tax; and

(ii)social security contributions payable under the Social Security Act,

calculated in accordance with regulation 32 (deduction of tax and contributions for self-employed earners); and

(c)one-half of any qualifying premium payable.

(4) For the purposes of paragraph (1)(b) the net profit of the employment shall be calculated by taking into account the earnings of the employment over the assessment period less, subject to paragraphs (5) to (7), any expenses wholly and exclusively incurred in that period for the purposes of the employment.

(5) Subject to paragraph (6), no deduction shall be made under paragraph (3)(a) or (4), in respect of–

(a)any capital expenditure;

(b)the depreciation of any capital asset;

(c)any sum employed or intended to be employed in the setting up or expansion of the employment;

(d)any loss incurred before the beginning of the assessment period;

(e)the repayment of capital on any loan taken out for the purposes of the employment;

(f)any expenses incurred in providing business entertainment; and

(g)any debts, except bad debts proved to be such, but this sub-paragraph shall not apply to any expenses incurred in the recovery of a debt.

(6) A deduction shall be made under paragraph (3)(a) or (4) in respect of the repayment of capital on any loan used for–

(a)the replacement in the course of business of equipment or machinery; and

(b)the repair of an existing business asset except to the extent that any sum is payable under an insurance policy for its repair.

(7) The appropriate authority shall refuse to make a deduction in respect of any expenses under paragraph (3)(a) or (4) where it is not satisfied given the nature and the amount of the expense that it has been reasonably incurred.

(8) For the avoidance of doubt–

(a)a deduction shall not be made under paragraph (3)(a) or (4) in respect of any sum unless it has been expended for the purposes of the business;

(b)a deduction shall be made thereunder in respect of–

(i)the excess of any value added tax paid over value added tax received in the assessment period;

(ii)any income expended in the repair of an existing business asset except to the extent that any sum is payable under an insurance policy for its repair;

(iii)any payment of interest on a loan taken out for the purposes of the employment.

(9) Where a claimant is engaged in employment as a child minder the net profit of the employment shall be one-third of the earnings of that employment, less–

(a)an amount in respect of–

(i)income tax; and

(ii)social security contributions payable under the Social Security Act,

calculated in accordance with regulation 32 (deduction of tax and contributions for self-employed earners); and

(b)one-half of any qualifying premium payable.

(10) For the avoidance of doubt where a claimant is engaged in employment as a self-employed earner and he is also engaged in one or more other employments as a self-employed or employed earner any loss incurred in any one of his employments shall not be offset against his earnings in any other of his employments.

(11) In this regulation “qualifying premium” means any premium or other consideration payable under an annuity contract for the time being approved by the Board of Inland Revenue as having for its main object the provision for the claimant of a life annuity in old age or the provision of an annuity for his partner or for any one or more of his dependants and in respect of which relief for income tax may be given.

Deduction of tax and contributions for self-employed earners

32.—(1) The amount to be deducted in respect of income tax under regulation 31(1)(b)(i), (3)(b)(i) or (9)(a)(i) (calculation of net profit of self-employed earners) shall be calculated on the basis of the amount of chargeable income and as if that income were assessable to income tax at the basic rate of tax in the year of assessment in which the claim was made less only the personal relief to which the claimant is entitled under sections 8(1) and (2) and 14(1)(a) and (2) of the Income and Corporation Taxes Act 1970(3) (personal relief) as is appropriate to his circumstances; but, if the assessment period is less than a year, the amount of the personal relief deductible under this paragraph shall be calculated on a pro-rata basis.

(2) The amount to be deducted in respect of social security contributions under regulation 31(1)(b)(i), (3)(b)(ii) or (9)(a)(ii) shall be the total of–

(a)the amount of Class 2 contributions payable under section 7(1) or, as the case may be, (4) of the Social Security Act(4) except where the claimant’s chargeable income is less than the amount for the time being specified in section 7(5) of that Act(5) (small earnings exception); and

(b)the amount of Class 4 contributions (if any) which would be payable under section 9 of that Act(6) (Class 4 contributions recoverable under Tax Acts) in respect of profits or gains equal to the amount of that income.

(3) In this regulation “chargeable income” means–

(a)except where sub-paragraph (b) applies, the earnings derived from the employment less any expenses deducted under paragraph (3)(a) or, as the case may be, (4) of regulation 31;

(b)in the case of employment as a child minder, one third of the earnings of that employment.