A recent report proposes benefits for the self-employed which may make it easier for HMRC to tax them as employees. Every silver lining has a cloud. The report suggests that there are now some 4.6m self-employed people in the UK. That’s around 15 per cent of the work force, with self-employment accounting for nearly half of the increase in total employment since the recession.
The report by Julie Deane OBE, CEO and founder of The Cambridge Satchel Company, makes interesting reading. Among other things the document, published under the auspices of the Department for Business, Innovation and Skills, calls for the removal of government discrepancies in the treatment of the self-employed and employees.
High on the list of recommendations are enhancing the level of maternity allowance provided to the self-employed and introducing a new adoption allowance for self-employed adopters. Although tax is explicitly outside the scope of the report, there are recommendations for simplification and clarification of definitions, with a single definition being used for tax and employment law.
While not going into detail on the tax side, the report identifies that the big problems facing the self-employed include understanding how to do paperwork, such as tax rules and reporting. Pensions auto-enrolment also featured high in the list of concerns. This led to the suggestion that auto-enrolment ought to be extended to the self-employed. Although BIS is happy to publish that recommendation, the report’s author herself noted that this suggestion has not been well received by the self-employed whom she interviewed during the course of her review. Notwithstanding the Chancellor’s continuing review of the pensions tax regime, the report identifies a more workable and less bureaucratic pensions solution for the self-employed, requiring pension products to be created specifically for this group.
Independent financial advisers might be hard pressed to identify what other offerings could be brought to market, which are better at meeting the needs of the self-employed than the range of policies and plans currently available.
And so to tax. The idea of having a single, harmonious definition of self-employed status which would meet the needs of Employment Appeals Tribunals and HMRC seems sensible. But many Tribunal cases and tax appeals over the years have failed to come up with a single, workable definition. This partly relates the intractable nature of some of the issues which are specific to the facts of an individual self-employed person, and partly because the needs of the users – for example the Employment Appeals Tribunal and HMRC – are so widely different. This is an area where it may be necessary to accept that differences will always exist. By definition a self-employed person is, well, not an employee. Having said that, of course, HMRC’s challenge to self-employed members of limited liability partnerships makes it clear that the taxman would be delighted to tax more self-employed people as if they were employed.
This brings me to my last point. Although HMRC’s attitude to the newly self-employed has improved over recent years (it’s not so long since the taxman would dish out an arbitrary £100 fine if you didn’t tell HMRC that you were self-employed, notwithstanding that no tax return or tax payment was yet due) the tax system for the newly self-employed is still not particularly user-friendly. For example, if you commenced self-employment on 1 February 2015 but hadn’t told HMRC, filed your tax return and paid the tax due by 31 January 2016, then you might face a penalty of up to 70 per cent of the tax at stake. It looks as though contributors to the report were rightly worried about taxes.
If you would like to discuss any of these issues further, please contact George Bull or your usual RSM contact.