Better HMRC self-employment guidance must result from tax simplification

The UK has come quite far in making tax less taxing for freelancers, but there’s still a long way to go for sole traders, so a pledge back at Spring Budget 2023 to review HMRC forms and guidance must deliver, writes Meredith McCammond, technical tax officer at LITRG.

Here, exclusively for FreelanceUK, I will pinpoint what the self-employed need tax simplification to mean for them. But before exploring the chancellor’s pledge (made at chapter 4.92 of his full Budget report), let’s first recap on how far we’ve come.

Tax being less taxing for freelancers is no longer a pipedream

A decade ago, freelancers would have had to make do with merely imagining a universe where the smallest of businesses like them could manage their taxes quickly and easily. Back then, accounting for their income and expenses in any one particular tax year on a cash-in/cash-out basis, in a way that reduces the costs of compliance and leaves them free to concentrate on their business, was a pipedream.

Today, in 2023, the self-employed have to imagine no more! Largely promoted by one of the Office of Tax Simplification’s first reports in 2012, there have been a range of reforms and developments to help ease the tax and administrative burden on small business.

Top three tax simplifications for small businesses so far

Three in particular stand out:

• The cash basis

A simpler cash accounting system for tax is available to some businesses which don’t need or want to prepare traditional accruals accounts, saving them the time and expense having to make accounting adjustments and doing other calculations designed for larger or more complex businesses. Even more positively, there is now a government proposal to extend the cash basis scheme to allow more businesses to take advantage of it (see 4.93 of Spring Budget 2023, ‘Expanding the Cash Basis’).

• Simplified expenses

Easier to follow rules can now be used by small businesses when calculating some business expenses, such as business mileage and working from home.

• Basis period reform

Complicated rules around basis periods, which often caused confusion and worry for many small businesses, will become obsolete from April 2024.

From April 6th 2024, tax will be based on profits in the tax year – including for anyone that doesn’t have a March 31st /April 5th year-end. Freelancers wanting the latest guidance from us on this, including on the transitional rules, can click here.

Ministers, it’s HMRC processes, not just legislative improvements which matter

But simplification is not just about making legislative improvements to existing tax law.

It is about making process improvements. For example, creating digital services that are easy to use, convenient and personalised.

It is about dealing with the structural complexities that can sometimes distort hiring decisions or decisions on legal form -- for example, whether to be a sole trader or limited company.

And it is about different government departments working in a joined-up manner. The difficult and technical interactions between Universal Credit and Making Tax Digital (MTD) were always going to be tricky, for example.

In all these areas, there is still a long way to go.

What Spring Budget 2023 pledged on tax simplification

So we welcome the government’s pledge at 4.92 of Spring Budget:

The government will collaborate with businesses and representative bodies to undertake a systematic review of tax guidance and forms for small business over the next 24 months to make it easier for small businesses to interact with the tax system as they set up and grow.

“The government will ensure guidance is clear, simple and easy to find, introduce step-by-step interactive guidance and modernise HMRC forms to improve the customer experience.”

Simplifying taxation in a world where we’ve disbanded the Office of Tax Simplification...

Given the demise of the Office of Tax Simplification (OTS), simplification now lies in HMRC/HMT’s hands.

While that might not inspire reams of confidence in the eyes of some small traders, the new Single Customer Account and the pledged-review now being underway -- before the mandating of Making Tax Digital -- means there is perhaps reason to be hopeful.

Freelancers should be aware -- there is also something to be said for recognising that in order to have a fair tax system, some complexity is inevitable and in this regard, better help, support and guidance is as valuable as simplification.

There are some very useful HMRC resources available for small businesses, but our organisation has some concerns about GOV.UK guidance and to group them for policymakers’ attention, we compiled a report in April.

HMRC self-employment guidance falls short, because it’s old hat

In particular, current GOV.UK guidance on ‘self-employment’ does not yet recognise the diverse nature of small businesses in this space. In fact, all businesses, whether tradesmen, professional freelancers or Deliveroo riders, are expected to use and apply the same one-size-fits-all self-employment guidance.This traditional approach, and the traditional guidance within, just won’t do.

We believe that people sourcing ‘on-demand’ work through online platforms in the gig economy may face unique challenges in understanding their positions and meeting their obligations, given that the concepts, talking points, and terminology specific to the gig economy do not really feature in the government’s ‘self-employment’ guidance.

Don’t wait on simplification for two years -- get clued up now

So, of course, we will be inputting into the government’s 24-month exercise in an attempt to try and further help shape forms and guidance, so both are as simple as possible for self-employed individuals to read, navigate, and understand.

In the meantime (because let’s be honest, two years isn’t a short wait if you’re a freelancer seeking guidance), we do offer some resources for those working in the gig economy. That’s because we know such self-employed individuals struggle with having multiple trades; correctly using the trading allowance, registering for Flat Rate VAT, expenses and not falling behind on your taxes -- among other areas. It’s therefore fair to say that, as far as we’ve come on freelancer tax simplification, the government agenda to help such tiny traders more than has its work cut out.