Wednesday, 25 June 2014

Self-employed time declarations and potential hour credits

Another use for potential hour credits is for those who are self-employed. This could be very useful as accounting hour credits for the self-employed is one of the biggest challenges for hourly averaging.

There are two areas in which potential hour credits can be useful for self-employed individuals and start-up enterprises. The first is similar to the proposal for creative activities while the second applies to longer established self-employed individuals who are doing relatively poorly compared to their previous income and that of others in their field.

Those starting an enterprise could be given the option of registering a certain number of potential hour credits for their activities up until the point where they receive outside investment or generate revenue. There would again be a maximum number of hour credits of this kind that people could claim in a given period, of—say—five per person per week. They would also have to provide some evidence or at least a detailed description of their activities. If the business later became successful the potential hour credits could be upgraded to real ones.

The second area in which potential hour credits could be useful is linked to the above proposal. However, it would apply to small businesses which have been worthy of hour credits in the past but are doing relatively poorly in the marketplace. Since sales are taken as a sign of activity there would be a strong reason for the authorities to limit the hour credits received by businesses which suffer a drop in revenue. However, the drop in revenue may occur for legitimate reasons such as time spent building a new client base, developing new skills or developing a new product.

If people are not able to receive hour credits for the above activities then it would give smaller businesses a disadvantage over larger ones which may not have their revenues scrutinised so closely. The self-employed and very small businesses would be closely scrutinised due to their greater potential for hour credit fraud. It would be possible to utilise market discipline in order to provide the self-employed with an incentive to work hard for their hour credits by limiting hour credit powers only to those who do sufficiently well in their industry.

Small businesses and self-employed contractors could be split into types and their revenues could be compared to those of the same type. Those who drop below their previous levels of income or who are below the average could have their self-validated hour credit powers revoked. However, the potential hour credit approach allows much greater flexibility in the treatment of such businesses.

It would be possible to apply rules which would only allow self-employed workers to claim the maximum amount of hour credits if they earn more than the mid-point between the median and mean revenue for a business of the type in question. Those who fall below could receive a proportion of their claimed credits as only potential hour credits. For example, someone might receive 140 hour credits for the month and a further 30 potential hour credits (to add up to whatever the maximum is for the month in question, assuming that they claim the maximum). If their business later exceeds the average level they could convert these past hour credits into full ones.

Using potential hour credits in this way would avoid the alternative binary approach whereby people either obtain the hour credits they claim or are refused them. This binary approach might be overly generous to some while over punitive of others whose business might have temporarily low revenue.

Furthermore, these businesses could even claim some of their activities as potential hour credits where they involve activities that do not immediately generate revenue such as retraining. This would make it simpler for them to claim the hour credits for their billable activity while still getting some (potential) credit for their other activities.

Using potential hour credits as part of the process for very small businesses—particularly the self-employed and start-up enterprises—would add valuable flexibility into the hourly averaging system. This would enable greater use of market discipline while reducing the risk of penalising self-employed workers who have a temporary drop in fortune. 

1 comment:

taxwelluk said...

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