HMRC want your view on changes in tax for the self-employed.

HMRC is seeking feedback and input on whether self-employed and freelance tax payers would find it beneficial for the rules to change to allow you to pay your tax bill earlier than the current timings with more regular, smaller payments spread out across the tax year.

Leapers spoke to the team designing this proposal to understand more about what it could mean and why they want to ask for our views.

Thanks for talking to us! What changes are HMRC exploring with regards to how the self-employed pay tax?

In March the government launched the Timely Payment of Tax call for evidence to start a conversation about the benefits and challenges of the current annual tax payment timings. 

It is exploring the opportunities and challenges of bringing the calculation and payment of tax closer to the point where the income or profit arises, paying tax based on the current year using, where possible, up-to date data. 

The call for evidence is looking in particular at the timing of paying income tax under self-assessment, and corporation tax for companies not already in the quarterly payment regimes. 

HMRC recognises that changes to payment timings would have a significant impact and as such, are keen to seek views early on at the start of the process. No commitment to any changes has been made, HMRC will consult fully ahead of any future potential changes. 

Why is it beneficial to pay tax more often?

Currently, taxpayers are required to pay their liability in large lump sums at set times. For the newly self-employed, their first tax bill could be up to 22 months after they have started trading. There are a number of benefits to timely payment, which are fully outlined in the call for evidence, but some of the key benefits are:

• Paying tax closer to the point at which the income arises would mean that the taxpayer is more likely to have the funds available. 

• External and internal HMRC research has found that some taxpayers struggle with the current time lag and would welcome paying tax more regularly in order to help them budget and prevent surprise bills. 

• The time lag between income and payment can also cause particular difficulties during challenging economic times, as tax bills are based on income earned in previous, more profitable years, or at times when taxpayers may no longer have the funds to pay them.

• Making budgeting easier could help prevent taxpayers getting into tax debt, which can also lead to taxpayers incurring additional interest charges and late payment penalties. This can clearly cause a great deal of stress for taxpayers. 

• Tax debt is also costly for HMRC to manage and diverts resources from providing other support. Some of this tax debt is never paid, contributing to the non-payment tax gap and taking revenues away from our vital public services.

Many freelancers have very irregular income, making it hard to plan ahead or forecast, does this approach make things harder?

This is what HMRC would like to hear from you about. The government recognises that many businesses experience fluctuating income, and as such the call for evidence outlines potential options on whether payments should be based on in year calculations, or whether it should instead be calculated based on the previous year liability. As stated above, no commitments to any approach have been made and different systems might work better for different groups of taxpayers and we are interested in exploring the benefits and challenges of introducing more than one calculation option to meet diverse taxpayer needs. 

Does this mean we will pay more tax?

Not at all. This is about paying tax earlier than the current timings with more frequent, smaller payments spread out across the tax year to help with budgeting and prevent surprise bills.  It would not change the amount of tax you owe or pay in a year. 

Many freelancers have to deal with late payments and overdue invoices, so if tax is due and the income isn't there, what might happen?

The government recognises that late payment of invoices could cause cash-flow issues, the impact of which will vary depending on a multiple factors including sector, business models and the regularity and levels of income and expenses. Whilst for some, timely payment of tax will enable them to more easily manage their cash-flow, for others this will present challenges. Again, we want to hear your views on how best to mitigate these types of cash-flow impacts. 

Freelancers already have a huge amount of administrative work to do, does this add even more work?

The government recognises that more frequent payment could increase administrative burdens on businesses. In order to minimise the burden on taxpayers, a digital solution would offer the most help. However, views are welcome on the challenges of facilitating that; particularly in terms of the digitally excluded and others for whom digital solutions are challenging or not available.  

Why are you asking for people to share their input and thoughts during the consultation?

As outlined by Rt Hon Jesse Norman (Financial Secretary to the Treasury) in the foreword of the call for evidence, the ‘government recognises that alteration to the timing of tax payments would be a major change’, and as such it is essential to seek views and work collaboratively across as wide and varied population of taxpayers as possible.

What would people need to share during the consultation?

There are a range of questions we are seeking views on within the call for evidence, some will be more relevant to you than others. Beyond this, we are happy to hear more general views on this. Please do email [email protected]. HMRC is also happy to arrange group meetings so that views can be discussed. If you prefer this option, please email the same inbox requesting a meeting.

Tell us a little bit more about why this work is important.

As outlined by Rt Hon Jesse Norman (Financial Secretary to the Treasury) in the foreword of the call for evidence, the governments vision is to create a tax system that’s ‘works closer in real time, allowing people and businesses to pay the right tax with ease as they live their lives and go about their business; one that is adaptable, resilient and responsive’.  

It’s important that the right amount of tax is paid and used to support our vital public services such as our hospitals and schools. We know that the majority of taxpayers want this as well, and pay the right tax at the right time, and we want to continue to look for ways to improve the tax system to make it as simple as possible for all taxpayers.   

How can I get involved and share my opinion?

It’s easy to share your views, simply email: [email protected], before the call for evidence closes on the 13 July, with any thoughts or queries. HMRC is also happy to arrange group meetings so that views can be discussed. If you prefer this option, please email the same inbox requesting a meeting. We are really keen to engage, collaborate and co-create any changes in payment frequency going forward. Please do email us on the address above if you would like to potentially get more involved going forward.

Thanks to HMRC for providing a little more detail on the call for evidence.
Please do take some time to get involved.

You can read more at https://www.gov.uk/government/consultations/call-for-evidence-timely-payment