8 March 2017
As the Government pushes ahead with major changes to the way tax for self-employed people is calculated and reported, we are very concerned about the impact these changes will have on our members.
We’ve prepared a template letter for you to download, adapt and send to your local MP, to help raise awareness of key concerns that have been raised about the changes. It is vital that as many politicians are made aware of the issue as possible.
Finance Bill 2017
The Finance Bill 2017 will contain two pieces of draft legislation which, in their current form, will hit authors particularly hard:
- Making Tax Digital (MTD), with its demand on businesses and self-employed people with turnovers more than £10,000 to file a quarterly tax return.
- The abolition of Class 2 National Insurance contributions, which will lead to a fivefold increase in the cost of pension contributions for self-employed people earning (at present) less than £5,965 per year.
A third piece of draft legislation – the proposed increase of Class 4 National Insurance contributions for the self-employed, announced in the Spring 2017 Budget – has already been withdrawn following an outcry from self employed individuals and politicians.
There is currently a great deal of uncertainty about exactly how or whether the MTD regime will work, and the chair of the Treasury Select Committee has said that the proposed timetable “looks unachievable”.
In the meantime, we know that many of you have been left in limbo, unable to prepare for the changes.
We understand that oral evidence on the impact of the Finance Bill 2017 is still being collected by the Economic Affairs Finance Bill Sub-Committee, so we urge members to ask their MPs to raise these concerns with fellow MPs, ministers and civil servants.
The current timetable for implementation is widely viewed as too short. As recommended by the Treasury Select Committee, we believe that the current timetable should be extended to 2019 to ensure that any new regime can be properly piloted, and its potential implications understood, with no penalties until it is shown to work.
MTD will oblige any business or self-employed person whose annual income exceeds £10,000 to file quarterly returns. This was the threshold that was originally announced but is being re-considered, with a view to increasing it. Given that the average UK author income is £12,500, this threshold is far too low and is likely to put a disproportionate administrative and expense burden on lower paid self-employed people. Remember that this is based on turnover, not the profit that remains after expenses have been paid. In line with Treasury Select Committee recommendations, we believe the minimum threshold should be brought in line with the VAT registration threshold of £83,000.
The FSB estimates that the changes will cost the average small business an average of £2,770 a year, in addition to the amounts that we already spend on tax advice. The Government has estimated this is more likely to be “a one-off transitional cost of £280 per business”, but with authors already struggling to make a living from their work any additional expense is likely to cause hardship to many.
We understand that HMRC is considering exemptions to the proposed changes. Many authors have variable work patterns and an unpredictable income, which means that some years they may earn significantly more than the threshold but other years significantly less. We believe this will lead to confusion about which years those authors are obliged to file quarterly and when they are not.
Many members of the Society of Authors, although earning from their work, do not possess the digital skills or equipment necessary to engage with MTD, and at this stage in their careers are unlikely to do so. It is unclear what advice, training or additional assistance they will receive to ensure they do not incur unnecessary penalties. We hope that those who are digitally excluded through a lack of skills or equipment will not be treated detrimentally, for example with shorter deadlines as happens with self-assessment.
Abolition of Class 2 National Insurance
While MTD is set to affect authors earning more than £10,000 per year, those earning less than £5,965 per year will be affected by the abolition of Class 2 National Insurance contributions. These lowest earners currently pay £2.80 per week in contributions that count towards their state pension, opting in to a system that allows them to contribute towards their retirement at an affordable rate despite their modest means. From April 2018, the contributions needed to secure a future pension will increase to £14.10 per week – representing at least 12% of their annual income.
The Tax Gap figures from HMRC report a loss of £8.7bn from mistakes caused by failure to take reasonable care. That is a lot of money, but the numbers for the hidden economy, evasion and criminal attacks add up to £16.2bn. That is almost twice as much due to criminal activity as arises from honest businesses struggling to make ends meet in a complex tax system.
The Government must consider whether these measures are the best way to narrow the Tax Gap and whether small businesses will be shouldering an unfair burden.
Given that these changes are likely to place a considerable burden on many self-employed workers, in particular those on lower incomes, this is a good opportunity to raise awareness amongst our politicians of the impact the changes will have and for an increase in the MTD registration threshold to £83,000.
This article was amended on 16 March 2017 following the Government’s u-turn on proposed increases to Class 4 National Insurance contributions.