IPSE briefing: a guide to upcoming tax changes for the self-employed

This week, as well as publishing legislation for the Finance Bill which contained the damaging IR35 provisions, the government announced some big upcoming changes to the tax system.

As the government states, it wants to create a “trusted, modern tax administration” fit for the 21st Century and the digital age. There were several measures that the self-employed need to take notice of and earlier this week, we gave the proposals a cautious welcome.

Below is some more detail on the key aspects of the government’s plans – and how they might affect you.

New roadmap for Making Tax Digital

The biggest announcement related to the extension of Making Tax Digital to more self-employed businesses, alongside a proposed timetable for implementation.

Since April 2019, businesses with a turnover above the VAT threshold of £85,000 have been required to keep VAT records digitally and submit returns electronically to HMRC, via new software. This was always designed to be the first step in a broader programme of digital reform.

Now, after a number of false starts, the government is proposing to extend the remit of Making Tax Digital:

  • from April 2022 Making Tax Digital will apply to all VAT-registered business for their VAT obligations
  • from April 2023, businesses and landlords with business income over £10,000 per annum which are liable for Income Tax will need to keep digital records and use software to update HMRC quarterly through Making Tax Digital
  • To ensure that the Making Tax Digital approach also evolves for those businesses that have incorporated to become companies, the government will be consulting later this year on the design of what the system should look like for Corporation Tax

In short, the government wants to bring MTD in for any unincorporated business (sole traders) with turnover above £10,000 from April 2023. IPSE will be keeping a close eye on when the consultation regarding corporation tax is announced and will submit a response.

As we said in our press release earlier this week, we accept the need to shift to digital record-keeping and it is positive that there is significant lead-in time for people to adjust, but we do have one or two concerns. Purchasing and using new software is – however small – an additional cost of time and money. Additionally, £10,000 is quite a low threshold for turnover, and may mean that many of those who have self-employed ‘side hustles’ will need to comply with the legislation once it is confirmed, which may reduce the incentive to set up innovative freelance side-gigs in the first place. The government will, above all, have to make sure people are supported through the changes and not be heavy-handed when it comes to non-compliance in the early months of implementation.

Changes ahead for reporting and payment of tax

The second big indication of changes announced by the government relates to its plans to introduce more regular reporting and payment of tax for those workers, like the self-employed, who are not on PAYE. This is an area where the government is much less committal in terms of specific timings, only saying they intend to “publish a call for evidence including ideas on how to make it easier for those who wish to pay their tax bill more regularly to do so on a voluntary basis”.

It is worth understanding the government’s direction of travel on this. Whereas employees on payroll systems pay tax monthly or weekly, deducted at source by their employer, the government states the self-employed “are generally required to pay their tax bill in 2 or 3 payments, with the first due 10 months into the tax year in question, and others falling later”. This time lag creates challenges for individuals and HMRC.

Interestingly, one of the justifications for this claim is that if government had had more real-time information, it would have been better able to target support at the self-employed as part of its emergency financial package (the SEISS) during COVID-19.

The government says it is open to views on whether the tax system could be adjusted for freelancers to report and pay more regularly – it could have benefits, but they recognise it is a major change. IPSE is instinctively wary about any sudden changes that will add more red tape and reporting requirements into freelancers’ lives, but there is evidence, such as from a recent Office of Tax Simplification (OTS) report, that particular groups within the self-employed community may be open to the idea.

A revised tax administration framework

Linked to the above, the government also states its intention to improve the overall tax administration framework - the “set of laws, regulations, processes and guidance that allow HMRC to administer the tax system”.

The government intends to publish another Call for Evidence later in the year to help identify the range of reforms that could be required. They state this will cover:

  • how taxpayers are identified and registered by HMRC
  • how tax liabilities are identified, amended and assessed
  • the obligations on HMRC and taxpayers
  • penalties and sanctions for failing to comply with obligations
  • taxpayers’ rights and safeguards, including appeals and dispute-handling

It is evident from the age and complexity of the tax system that it must be reformed – on this IPSE wholeheartedly agree. While we need to see the detail of the government’s specific intentions, we believe changes in this area could lead to basic improvements in the system. One, that the government recognises in their document, is that it could allow for earlier registration of self-employment to avoid those who are new to freelancing paying their first tax bill up to 22 months after they have started trading.

Avoiding another ‘Loan Charge’ scandal – reforms to disguised remuneration

One of the biggest stories in the contracting world in the last couple of years has been the anti-avoidance measures known as the ‘Loan Charge’, aimed at penalising those who made use of loan-based tax avoidance schemes. While IPSE always warned of the use of such schemes, the Loan Charge was in many respects a disproportionate and retrospective response which left many contractors facing enormous, unexpected tax bills.

After an independent review into the issue last year, the government has now launched two relevant consultations on tackling ‘disguised remuneration’ tax avoidance. A call for evidence will be looking at what is driving the continued use of DR tax avoidance; whether there are any variations of DR schemes not covered; and where the government can take further action to tackle DR tax avoidance beyond its planned approach. A second consultation will seek views on proposals to tackle promoters of schemes: this is something IPSE has particularly been calling for and we’re pleased to see it being taken forward.

The consultations close on the 15th and 30th of September respectively. IPSE will be providing a response but an important element of the consultations is to improve HMRC’s understanding of existing schemes and their operators: if you are aware of any DR schemes being marketed currently, either at your profession or sector, let us know or respond yourself.

Office of Tax Simplification (OTS) update and Capital Gains Tax Review 

Lastly, the independent Office of Tax Simplification (OTS) also this week published a stock-take of its recent work on corporation tax and taxation on the self-employed, which it hopes will be a useful contribution to the Chancellor’s thinking in the months ahead.

IPSE has fed into a number of recent OTS reports, and it’s good to see the agency’s continued focus on trying to simplify tax arrangements for the self-employed. In particular, we are keen to work with the OTS in exploring further three ideas outlined in its policy update: simpler tax for smaller companies (especially corporation tax), new models of incorporation for personal service companies, and the “possibility of a statutory definition of employment for tax purposes being developed”. IPSE has several ideas on these issues – from our Freelancer Limited Company proposal to our suggestion of a legal definition of self-employment – which we will be raising again with government over the coming months.

Finally, last week the Chancellor of the Exchequer also asked the OTS to carry out a review of Capital Gains Tax to identify simplification opportunities in relation to individuals and smaller businesses.

The call for evidence comes in two parts – the first focuses on high-level views on the principles of CGT (by 10 August 2020), while the second and primary section of the document invites more detailed comments on the technical detail and practical operation of CGT by 12 October 2020. The OTS are keen to hear about which aspects of capital gains tax are particularly complex and hard to get right, and to consider any suggestions for improvements. Again, IPSE looks forward to contributing to this.

It’s clear that big changes are afoot in the world of small business and self-employed taxation, and we hope the Chancellor and the Treasury are listening to the sensible suggestions put forward by the independent OTS. 

IPSE’s advice

In terms of practical steps, the key thing for the self-employed to do now is make a note of the above dates and start to plan for the transition to MTD accordingly.

The main consideration will be to look across your business and think about how you will start to adjust to digital record-keeping. For many self-employed people who use an account to prepare their returns, MTD will (hopefully) not cause too much trouble. It will likely be up to your accountant to ensure your compliance with the new rules – but it might be worth having an initial conversation with them about how to prepare your business.

Other freelancers will file their own returns. They will have to adapt to the new requirements once they come in. For many, VAT records are kept on a simple spreadsheet. You can continue to keep records on spreadsheets but the data will have to be inputted into the new software in order to send the report to HMRC. Some companies have designed ‘spreadsheet bridging software’ that will automatically feed the data from the spreadsheet to the new software.

Some small businesses are already keeping digital records and providing updates to HMRC as part of a live pilot to test and develop the Making Tax Digital service for Income Tax. If you are particularly keen and you are a self-employed business, you can voluntarily use software to keep business records digitally and send Income Tax updates to HMRC instead of filing a Self-Assessment tax return.

IPSE’s advice to members and non-members who want to submit their own returns is to seek some guidance from an accountant, at least in the first instance, to make sure you’ve got the right processes in place.

Next steps

The government has set out an ambitious vision for future tax changes across several areas that will affect the self-employed, in what amounts to a 10-year strategy. We will scrutinise the changes closely once more details emerge as part of the various consultations, and we will be engaging with government ministers and officials in the coming months to ensure these reforms work for the self-employed. Keep an eye on IPSE’s website and, if you’re not a member, sign up to our newsletter to be informed about the changes as they happen.

Thankfully, there were no immediate signs about tax rises amidst these announcements. However, IPSE remains concerned that this is part of the Chancellor’s plan as the quid pro quo for the Self-Employment Income Support Scheme (SEISS). As The Sun reported this week, such changes could leave self-employed sole traders £200 worse off. IPSE will be making our opposition to any such change loud and clear in the coming weeks and months, as well as campaigning to stave off any similar tax raids on limited company directors who have gone without support during the coronavirus crisis.

If you want to get involved and shape our response to these important future changes, then get in touch – and if you’re not a member, why not join today?

Useful links

Overview - Making Tax Digital

Building a modern, trusted tax system

Call for evidence: tackling disguised remuneration tax avoidance

Consultation: tackling promoters of tax avoidance

OTS Capital Gains Tax Review and Call for Evidence

Meet the author

Alasdair Hutchison

Policy Development Manager

More on