HMRC started writing to some company owners from 4 February 2024 to inform them that they may have underdeclared dividend income. This is one of HMRC’s…
We are now in the 2021/22 UK tax year. This started on 6 April and runs until 5 April 2022. Self-employed individuals are assessed to income tax and national insurance on the profits shown by their accounts ending in this tax year and pay this tax in two instalments on 31 January and 31 July 2022. If accounts are prepared to 30 April 2021 then, in principle, the tax due on profits earned in May 2020 is being deferred for as much as two years. This is very beneficial where there are rising profits.
This system of assessment of tax by reference to self-employment status and a set of accounts ending in a tax year ending on 6 April, together with paying the tax in two instalments, is all very long established – but may not be the case in a few years’ time. On 23 March, the Government announced a number of consultations to once again consider:
- What fiscal year should we use?
- How should we define self-employment?
- Should tax be paid by reference to accounts ending in a tax year?
- Should tax be paid both more timely, and more frequently than twice a year?
Much recent focus has been on the likelihood of tax rates increasing (and they probably will) but what matters to a government is getting cash in its coffers and that isn’t just about the rate of tax charged. Two things are key:
- The Government’s manifesto commitment not to increase the rates of income tax, national insurance or VAT for the life of this parliament (which is due to end in May 2024), and
- The digital revolution sweeping the world
The first ties Rishi Sunak’s hands for the next few years, the second sets up possibilities to raise tax revenue. In any case, the next general election isn’t that far away.
The biggest change to the UK tax system in recent times was self-assessment in the late 1990s. This accelerated the payment of tax by the replacement of the prior year basis of assessment with the current year basis and forced rental businesses to have to prepare accounts on a fiscal year basis.
With digitalisation many self-employed taxpayers could be forced to pay tax in real time
There had been a desire by HM Treasury and HMRC (the Inland Revenue as it then was) to go further and force all businesses to prepare accounts in line with the tax year – but practical considerations made that unachievable. Two decades on and the digitalisation of our lives makes forcing the self-employed to pay tax on the actual profits earned in a tax year a practicable possibility – this is Making Tax Digital. Think of this like an extension of Real Time Information (RTI) for PAYE, which we have had since 2014. And with this, why stick to two tax payments a year, when PAYE is paid monthly, and quarterly payments were introduced for large companies in 1999?
Further confirmation of the direction of travel is provided by the change in the payment date of capital gains tax on sales of UK residential property. Since April 2020 this tax is payable within 30 days of sale rather than the historic payment date of 10 months after the end of the tax year in which the property was sold.
So, with digitalisation many self-employed taxpayers could be forced to pay tax in real time (quarterly or monthly) on their income for a year. In turn it makes sense to rationalise that year – perhaps to the calendar year like most of Europe or maybe more likely running to 31 March each year. That would get tax revenue in earlier and so improve the government’s cashflow without raising tax rates. The knock-on effect is on business cashflow. The cash is in the government’s bank account and not in your business.
Getting money in quicker is one idea. Another is to re-classify self-employed individuals as employees. Again, that raises tax revenue without upping tax rates. Who is in the frame? Well gig workers such as Deliveroo riders, Uber drivers and couriers, but also fixed share partners in an LLP.
Tax changes in 2014 set safe harbour limits for LLP members that are legally defined as self-employment. These are based on capital contribution and management involvement. These requirements could be made stricter bringing in more tax revenue as higher national insurance and earlier tax payment would apply. That looks a fairly quick and easy change without breaching the triple tax lock in the Conservative Party election manifesto. As far as gig economy workers are concerned then any changes are likely to be more fundamental and so take a bit longer – but still might not be far off.
Finally, as Rishi Sunak previously hinted when he introduced the Self-Employed Income Support Scheme during the pandemic – all of the self-employed can expect higher national insurance in future.
With the above in mind, you might want to take a look at the consultation documents on the government’s future tax strategy and to consider the potential cashflow impact on your business of any changes.
Read more from our head of tax, John Endacott: