Due to the rise in self-employment in the UK, the Office of Tax Simplification (OTS) has decided to start a project examining the pros and cons of simplifying tax reporting and payment arrangements for self-employed people.
The tax system has not always kept up with this rapid change in working practices and so the OTS is to be commended for looking at the tax return process for those who no longer work in traditional ways.
The OTS has previously suggested that “some of those working freelance or in the gig economy, would welcome the option to report information and pay tax to HMRC periodically or on the completion of work assignments, rather than only through self-assessment.”
Support from AAT members?
A desire to make tax payments after the completion of sales, work assignments, rentals and so on appears to be a logical assumption to make but it wasn’t supported by any of the 100 AAT licensed members who were recently surveyed on this issue.
Of those that responded, there was uniform agreement that such a change was not necessary, that it would result in considerable complexity, additional work for both clients and agents and that few if any, practical benefits would flow from such changes.
Does this harsh reality presented by AAT members accurately represent the wider views of the business world or is it simply that the type of clients many of our licensed members represent are very different to the intended audience?
Making users aware of their responsibilities
Many users of digital platforms remain unaware that they have to file a self-assessment tax return and often wrongly believe their platform income is not taxable. That situation is unlikely to be changed by changes to reporting and payment schedules but instead requires greater efforts by platforms to make their users aware of their responsibilities.
Perhaps the most significant benefit from such a change would be a likely reduction in the tax gap – £9bn of which is attributed to avoidable errors – and increased compliance.
The same arguments have been put forward in support of Making Tax Digital, given more frequent interaction and checking is likely to make mistakes, omissions and surprises less likely and/or reduced in impact given they will not be hidden for a year.
Similarly, more frequent interaction with the tax authority in itself is logically likely to lead to a reduction in errors over time.
Here the assistance of tax/accountancy agents will again be crucial given the need for the supply of accurate information and for clients to understand exactly what is required and when.
There has often been a misplaced assumption that quarterly or more frequent reporting requirements/options empower small businesses and the self-employed to undertake their own tax affairs without recourse to any form of agent assistance.
Time and time again all the available evidence suggests that agent assistance proves more rather than less necessary in such circumstances. This view has been expressed by members of the AAT Tax Panel, focus groups, member forums and numerous AAT licensed accountants. It has also been expressed by numerous SMEs especially self-employed individuals.
Lessons from abroad
Other countries already offer the self-employed different tax reporting and payment options and may prove good case studies for the OTS to consider before making any recommendations.
In the USA, the self-employed generally have to make estimated tax payments if they expect to owe tax of $1,000 or more when their return is filed. Estimated tax is for the payment of income tax, a specific self-employment tax and alternative minimum tax. Such payments are made on a quarterly basis.
Reflecting on the OTS concerns about different options for different industries, in the US, the estimated tax requirements are different for farmers and fishermen in recognition of some of the unique features of those industries.
Anyone seeking more information about how and when such payments are calculated and payable should have a look at Form 1040-ES.
This new found focus on different reporting and payment requirements, whilst well-intentioned, may be unnecessary given wider policy developments.
Making Tax Digital will eventually be compulsory for those below the VAT threshold and for income tax, meaning more frequent tax payments are likely to follow.
As a first step, the groups identified by the OTS as being likely to welcome the option to report periodically would probably be well advised to take-up the existing MTD offer. This would negate any need to radically overhaul current tax reporting and payment systems whilst better meeting their particular needs.
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Phil Hall is AAT's Head of Public Affairs and Public Policy.