Making sure MTD remains unmade
TAX AWFULNESS was on the agenda at July's London Freelance Branch, with particular attention on two alarming developments. There are imminent changes to National Insurance (NI) contributions paid by the self-employed. Then there is Making Tax Digital, a proposal ditched for the moment, but we need to be watchful to ensure it stays ditched.
Our speakers were financial journalist, NUJ trainer and Freelance Industrial Council member Louise Bolotin and Alex Redmond - an accountant for 35 years, a partner in Artisan Accountants, accountants to the creative self-employed.
Louise, currently working for a publication on tax, noted that there was "lots of stuff in the last budget at the beginning of March," including changes to National Insurance (NI) contributions, "a raid on our income". Chancellor Philip Hammond announced that Class 4 NI contributions payable by the self-employed would rise from 9 per cent to 10 per cent from April 2018, with a further rise to 11 per cent the following tax year.
U-turn on NI - for now
After the predictable outcry - the proposal turned out to break a manifesto commitment not to raise taxes - this was shelved. On 15 March, Hammond made a screeching U-turn and gave assurances "there will be no increase in NI rates in this Parliament." But the snap June election meant "this Parliament" is no more, so we may have to keep an eye out and eventually write to our MPs after all. It may re-emerge in the next budget, so be vigilant.
Also, Matthew Taylor's Independent Review of Employment Practices is due to report in mid-July. His recent remarks including those on a "fair tax system" lead the Freelance to believe it is not inconceivable his report may recommend changes to taxing the self-employed to take account of the rise in the proportion of self-employed people in the workforce and the hole this creates in public finances. Watch this space.
Making Tax Digital
Louise updated us on Making Tax Digital (MTD), a big plan to get everyone who runs their own business to file tax returns "quarterly".
The plan has been "bubbling under for a couple of years". MTD was going to be legislated in the 2017 Finance Bill, due to happen at around the time of this mid-June LFB meeting, but there is at the time of writing still no legislation in place: the snap election "ditched MTD" at least temporarily, Louise told the meeting, to applause.
HMRC (Her Majesty's Customs and Revenue, the tax people) are still "going ahead with the implementation" of MTD, Louise reported. The "Labour Party manifesto said they would not be implementing it" were it to end up in government - which the Party hopes to do after the dust settles on the "coalition of chaos" clinging to power at the time of writing.
There was no mention of taxation in the recent Queen's Speech (just after the LFB meeting), beyond a pledge that government "generates the tax revenues needed to invest in "public services" and a ominous (but standard) disclaimer at the end: "other measures will be laid before you."
Louise noted that "it's not a bad idea in principle to get people to file their taxes online... but the whole MTD plan "looks like it's been scribbled on the back of a beermat in a pub".
The Finance Bill's clauses on MTD were originally supposed to come into effect from the start of the 2018 tax year in April. The Finance Bill had to go for scrutiny before various Parliamentary Committees, who "ripped it apart" for being "so badly planned".
The Bill's authors want anyone earning over £10,000 to do quarterly accounts - the tax allowance is £11,000, way lower than the threshold at which VAT-registered businesspeople have to do quarterly VAT returns, which is a turnover of £85,000 a year. All accountancy organisations have been "lobbying for last five months or so to raise the threshold" for MTD - the Federation of Small Businesses, the Institute of Tax Technicians, the Chartered Institute of Taxation and the Institute of Chartered Accountants in England and Wales, to name but a few.
But HMRC "have made up their mind that people need to stop doing paper returns," reports Louise. "You'll only be able to file your accounts on HMRC software" online. The software platforms for MTD "haven't been built yet... they've only just started putting it out to tender".
HMRC seem to be working on the assumption that MTD "goes back into the legislation programme" at some point. There's currently only one pilot project for MTD software in progress, with only one volunteer tester we know of, although the government has put out a dozen tenders for the software. "You can imagine the number of bugs" there will be in a "not properly tested" platform.
The latest intelligence that Louise has been able to gather is that we are now supposed to be starting with MTD in April 2019, which would mean it would have been postponed for a year. If MTD goes go ahead, Louise expects it to get pushed through "really hard and really fast".
After that "If you don't file you will be fined... They're not giving grace to anybody during the initial period... It's mandatory." Clearly, "we have to fight it if goes ahead... HMRC is going ahead as if it will happen."
Will we able to still use accountants to do our tax returns for us in an MTD world? We might be looking at paying accountants "two or three four times as much a year for their services" to do four returns a year instead of one... plus the "massive time burden".
Louise has been tracking developments, but in the past six months she's not seen anything about how digital receipts will work in the MTD universe - scans? Photographing them? Alex noted that smartphone apps in this area are "one of the drivers for MTD - the idea is that you can press a button in your accounts and send it to HMRC. It's now quite common for the self-employed to photograph receipts on their smartphones and it goes into your accounting app, the software can read the receipt."
Alex observers of MTD that there is currently "very little information... a lot of scope for lobbying." HMRC has a history of "launching these things" only for them be "pulled back by parliamentary committees" or lobbying. This happened to a change in PAYE from annual to monthly a few years ago.
Artisan have already developed a free MTD app, being tested now, revealed Alex. You'll be able to do the whole MTD exercise on your phone, send it to Artisan and they verify it. "You can be certain that everyone will bring one out" that does the same, he added. Artisan has a free ebook on expenses forthcoming: see here. Alex expects that HMRC will eventually "find a way to allow to use you to use Excel" within MTD. (Other accountants are available - HW Fisher has a free tax helpline for self-employed NUJ members.)
While the current tax return just wants to see your totals, now apparently "they want to know everything you've done to arrive at this figure... it's incredibly intrusive." HMRC will learn who our clients are. There are in some cases Data Protection implications to revealing who've we've worked for, especially given how careless government are with their data. Louise urged members to write to their MPs asking them to ensure MDT stays stalled for good.
Whether or not MTD is implemented, it's always a good idea to take out insurance against the cost, timewasting and stress of a random HMRC investigation into your tax affairs. Those who are also members of the Society of Authors can get a tax protection policy for well under £20.
There are, unfortunately, some developments in tax that are definitely going ahead. Measures passed implementing announcements by George Osborne two budgets ago, these affect NI contributions.
So farewell, then, Class 2s...
If you're staff on PAYE you pay Class 1 NI contributions. Freelances pay either Class 2, Class 3 or Class 4. Up to now, explained Louise, we've mostly paid Class 2, £2.85 a week. But on your tax bill in January there won't be any more Class 2s. These will definitely be abolished as of April 2018. Now you'll be charged mainly Class 4. If you make a profit of more than £8164 a year, that's 9 per cent of your profits.
In other bad news, the National Insurance Office (NIO) and HMRC have between them massively screwed up the record-keeping of many random self-employed people. Recently, accountants discovered that some self-employed people had their Class 2 contributions that they'd paid to date "removed" - overwritten from their records automatically, even though they'd filed contribution payments correctly. This was down to the NIO and HMRC having different databases that didn't communicate with each other properly.
If this has happened to you, you might lose out on future state pension entitlements, based on NI contributions. National Pensions Service data seemed to get "overwritten" by HMRC and National Insurance Office software. Louise stressed that this "hasn't happened to everybody", it's "random and isolated".
Check now with your tax office, or via the Future Pension Centre that your Class 2 payment record is up to date. Class 3 NI contributions - voluntary, to fill any gaps in your pension contributions history - are at £14.25 a week. You can backdate this to up to six years of contributions from the moment you decide to pay these. Branch Treasurer Jenny Vaughan pointed out that anyone who - even after ensuring their contributions are up to date - can survive on the state pension of just under £7000 has to be very frugal indeed.
It's not all bad. LFB Equalities Officer Magda Ibrahim reports that since April self-employed parents have been able to get £2000 in tax relief for every £8000 we spend on childcare.
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