Could PAYE for the self-employed work?
The Office of Tax Simplification is scoping out a project to look at the tax reporting and payment arrangements for self-employed people and landlords of private residential property. Wendy Bradley investigates.
There's an urban myth that many small businesses fail in their second or third year because of a failure to pay their taxes. This is sometimes known as the rock star method, named after musicians who fail to hold back money to pay year one's tax bill that falls due in year two or three.
This urban myth seems to have gained traction at the Office of Tax Simplification (OTS), as the body is currently running two questionnaires: one for landlords and another for small businesses, which are open until 20 September 2019.
In their small business quiz, the OTS asks several times whether it would ‘help’ you to know your tax liability.
For example:
- Question 12: On a scale of 1 to 5 how easy do you find it to budget throughout the year to pay your tax bill?
- Question 14: Would more regular reporting of income and expenses make budgeting of your tax bill easier, so that you can see how much tax you owe at any point in time (closer to real-time)?
Evidence needed
The OTS is looking at possibilities which might lead to enormous structural changes in the tax system, so their evidence base needs to be as wide and deep as possible if we are to avoid another VATMOSS.
I would encourage you to complete the survey and share it widely on your networks.
PAYE for self-employed
The solution OTS is floating is essentially a form of PAYE for the self-employed, and it addresses these points over a range of questions in the survey:
- Would it help you if your engager deducted some tax before they paid you?
- Would it help if your bank deducted some tax before they paid you?
- Would it help landlords if the letting agent or Airbnb deducted tax before they paid you?
The underlying assumption is that it would make life easier if every earner were to be on something like PAYE.
It might, but what if you are a payer of the self-employed as well as a fee earner? Would it make life easier if you have to act as an employer rather than an engager?
The danger with the OTS questionnaire is that a lot of the questions show us the way their thinking is evolving – towards some kind of withholding tax or PAYE – rather than being a genuinely open attempt to take the temperature of the very smallest businesses.
Aside from the demographic questions (age, status, agented or not, cash basis, user of apps or software, possession of other sources of income), the questions seem to cluster into three groups.
Tracking payments
The first two broad forms of questions amount to:
- How do you track your expenses?
- How do you track your tax liability?
The combination of these two areas of concern falls in the same category as the reasoning behind the introduction of MTD: the belief that everyone needs to have a constant running total in their head of their profits and tax liabilities for the year.
Is that actually the case?
I know roughly whether I've made more money or less than I did last year so I am not surprised by my tax bill, but I am genuinely unconcerned by my lack of precise knowledge of my tax liabilities for the year to date.
Change needed?
The third grouping of the OTS questions seems to be:
- How do you want to change?
- Do you want the engager to deduct tax, or would you prefer it to be the bank?
- Do you want the deduction to be a flat rate or with some adjustment for expenses?
These are not open questions. It is disappointing that the OTS has chosen to use this cheap internet survey route rather than commissioning (admittedly expensive) research, using citizens’ juries and the like.
The only open question on the survey is the final one:
- Q24. If you earn enough to pay tax and national insurance, what changes, if any, would make the annual income tax return process simpler for you, and why? Please describe."
My answer would include prepopulated tax returns, a standing order system that works like utility bills, and an MTD that was voluntary rather than mandatory for which HMRC provided free software.
What about you?
Replies (42)
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Is there no end to the stupidty of people involved with the UK tax system. I could illustrate the reasons for my comment but I havent got two or three days to spare.
Time to retire to a cave in the mountains and contemplate the meaning of life!!!!
Isnt this what MTD was for?
I dont actually think it would be a bad idea if Im being honest, people are generally terrible budgeting for their tax so to pay it monthly or quarterly would probably make for a fairer system. It would have to be well thought out (which pretty much rules out a succesful role out in the UK) and apply to limited companies also which could possible help with the serial company liquidators too.
I hope MissAccounting isn't in practice. I can't imagine her clients would be very happy that their accountant would be prepared to agree with such nonsense and disadvantage their businesses.
If not in practice do you really understand the issues?
Another use of the word"fair" in the context of tax when we know that the tax system is anything but fair.
I`m in practice and for all my financially illiterate clients this would help.
How is paying your tax nonsense ? .
No difference to CIS really which is easy to administer.
The self-employed can already pay their tax bill monthly if they want to. The whole idea of the self-employed is to tax on a basis of yearly figures. MTD will try to change this but it won't work. CIS is totally different and doesn't work properly for Limited Companies.
Once again, the OTS are forgetting what their name actually is and acting as if it were the "Office of Tax Change."
No, no and no again, let's not introduce whole swathes of new requirements but, instead, let's concentrate on simplifying what we've already got. Yes, I know that's not sexy enough for the pen pushers at the OTS but that is what they are there for.
And unlike MissAccounting, I do think this is a terrible idea. I agree that the overall thrust might well be helpful for the smallest and most inept taxpayers (nb I'm not saying that every small taxpayer is also inept, I'm just referring to the group who are both) but let's not turn the tax collection system into some sort of namby pamby, hand-holding "nanny knows best" exercise.
And let's look at it from the engager's point of view. Requiring deduction of tax at source introduces new and burdensome commitments to the average business which is currently outside CIS (so, most businesses), not to mention new and burdensome commitments to HMRC's systems which already can't cope with what they've got to handle. But let's say this new requirement came in: I can see the logic of deducting tax from Joe Bloggs (I just don't agree with it), but can anyone see the logic of deducting tax from say your United Utilities payment? And thinking about, what on earth would be the cash flow consequences for the larger companies of their customers withholding 20% from every payment?
Trying not to sound like Mr Angry here but, come on, an absolutely bonkers idea from a discredited organisation.
Thank you Adam for setting out some of my thoughts which I was too depressed to commit to paper. Agree 100%.
Thank you Adam for setting out some of my thoughts which I was too depressed to commit to paper. Agree 100%.
And kind of deduction at source system for the self-employed would, out of necessity, ignore qualifying expenditure or, in an attempt to mitigate that side effect, would employ an arbitrary rate of deduction that could not possibly apply across the board.
As a consequence, the majority of self-employed would likely overpay and have to spend months fighting HMRC to try to get a refund (assuming that the attendant cash-flow problems it would cause don't send them under first).
Marvelous idea - not.
It would not be too difficult to set the tax rate at a level that was not too onerous ! .
You're quite right it wouldn't. In practise that will never happen because for one business whatever figure comes up would be too onerous and for another, not enough. This can't be averaged out.
It seems an idea bourne out of a fantasy idea of how business works.
They want banks or customers to cut a slice out of all turnover and pay it over to HMRC?
or letting agents to take a slice of the rents? Its already a PIA for non-resident landlords, and the system never works for tenants who are supposed to pay it over.
It's just going to lead to a huge reconciliation issue for no net revenue gain, all wrapped up as "helping the tax payer" when its anything but. It seems like yet more "jobs for the boys".
its quite simple to pay taxes once or twice a year, or if you want, set up some regular payments. Turning that into a massive system of deductions would lead to massive cash flow issues and cripple small businesses.
Whilst I agree that the system envisaged would be a nightmare, wouldn't it be sensible to introduce a simpler "pay in monthly instalment direct to HMRC" plan? We are all used to paying gas, electricity etc in instalments based on guestimates of our usage and most times this seems to work. If you think its too much, you can ask for a reduction. If you think its too little, you probably keep quiet and suffer the consequences when you get found out.
If this was brought in as a voluntary scheme for the S/E or landlord tax payments, those who find it difficult to budget could "pay on account" based on their estimated liability. I'm not saying it would be easy or possibly popular but it makes more sense than the proposal by the OTS.
I'm going to take cover now from the inevitable flak coming my way!
it already exists. You can pay as much as you like, when you like. Several of my clients pay monthly to help their budgeting.
I would have a online form that fills in income and expenses estimate in the first year and then base a monthly tax payment on that. You would have a facility to up or down the payment in year one. Then when the year end is done you adjust the payment up or down and pay what's due . The second year is based on the first year but you pay monthly instead of half yearly but you can up or down the payment. To avoid abuse you could give an incentive in the first year to encourage people not to reduce the payments . Having said all this if the SA system is used properly and the Return produced three months after the 5th April you know what needs to be paid. Maybe in the first year of trade accounts could be produced three and six monthly on a pay as you go basis . The MTD system will not work I guarantee it and HMRC will just receive incorrect figures.
I would scrap Payments on Account but make the tax return and the payment due by 30th September.
Then, if the tax payer had a good year, there would be less chance of her spaffing the tax on a subsequent bad year.
Not many taxpayers understand PoA's and having the tax due 10 months after the end of the tax year (which may be 21 months after the end of the period of account if its an April year-end) is just asking for trouble.
As most small landlords have other income how does operating paye help them? I can see a situation where they are either stopped to much or pay too little. What's more simpler than working out the tax due in April and paying it by the following January?
Why not just make tax payments 6 months after the year end and POA 3 months earlier, government gets money sooner and not unreasonable for taxpayer.
80% of our clients have there tax bills easily in 6 months and the other 20% will always come in the last month no matter when it is.
Or spend x millions on various studies, change everything to a system that wont work, ignore agent pleas for common sense and fine the hell out of taxpayers for non compliance:)
I said that an hour before you.
The Office of Tax Simplification..... suggesting that perhaps anyone paying a self employed person should deduct tax and then report it to HMRC and pay it across so that the individual that suffered it can claim it as an offset against their tax later.
It's a roadmap towards MTD for Self Assessment with more regular submissions - probably starting with VAT registered businesses who already have the data at hand (if they have any idea what they, or for those unrepresented using a brain reading software package, are actually declaring)
Call me Mystic Meg.....
Perhaps a better idea would be to offer a system where you can pay your taxes up front voluntarily as you go in advance of payment deadlines and actually get some kind of decent interest rate in return! Carrot and not stick.
The French havce fixed this problem. They have a couple of methods.
Cheque Emploi- This is where an end user can "buy" a set of cheques from the authorities and pay handymen gardners etc with the cheque. The benefit for the worker, tax and NI paid. The advantage for the "employer" is they get a tax offset their income.
Auto Entrepreneur - This is for small bsuinesses . self employed, where they agree up front likley turnover and pay a fixed amount of tax and NI based on this estimate and can reconcile at the YE
Cheque d'emploi is for mostly domestic staff, I think
Auto entrpreneur is only for turnover below a certain limit , close to the VAT threshold in UK (for trades)and ever lower threshold for services
None would work over here.
The cheque d'emploi idea sounds like a boon - I was once set up as a PAYE Employer scheme because I foolishly asked my local tax office how to pay a cleaner I'd just engaged for a couple of hours a week. A tax paid bank account that you could use to pay domestic workers or that people with disabilities could use to pay carers directly would be an excellent idea provided it was made simple enough to operate. Let's suggest THAT to the OTS?
They should be called The Office of Tax Complication! This is a preposterous idea the implications of which are so wide-ranging. I shall use as an example one of my past accountancy practices in which my partner and I had about 1400 clients. We were both self-employed. Is the OTS really contemplating that 1400 assorted clients deduct tax at source on their payments of professional fees? They would need to know our tax reference (both partners, with different profit shares). The equivalent of a P60 or CIS certificate would have to be issued, digitally, I suppose. Even if it were the bank who had to make the deduction just think of the complications that would bring.
By the end of year one we would be out of business, the suggested 20% deduction having a destructive effect on our cash flow.
Surely the OTS have better things to do than pursue this idiotic idea.
Isn't this what MTD was always about....? The acceleration of tax payments.... the two are linked. .....RTI, Auto enrolment, MVD and the reverse charge all land on my desk as quite frankly simplification it is not....my clients just do not understand and do not want to understand... they just want to earn a living... Office of Simplification should be changed to how much can an accountant take?
I think many small businesses (including companies), and others with non payroll income, do struggle with planning for tax payments. There is therefore some merit in having a system of provisional payments being made during the tax year. However - I would strongly disagree with applying a witholding process - this will surely be hugely complex. I thought one of the main drivers of the Making Tax Digital initiative was that it would - in time - include quarterly submission of profit data by all. This would allow quarterly calculation of tax, which would allow quarterly payment - all managed by the business owner/landlord, and with the annual tax return being a final tax reconciliation. Surely this would be the better way to go ?
I think that all invoices should be issued to/via HMRC.
HMRC will then [having enabled themselves] raid the payers bank account for whatever they choose.
That amount will then be paid to the payee less whatever tax they are in the mood for taking that day.
In this way they will have
control of all relevant tax records, so that issue vanishes
eliminated the possibility of not paying 'the correct tax'
eliminated the need for the office of tax simplification
What nonsense! We have had all this before. HMRC systems need to work, not get changed. The DWP does not provide the right information to pre-populate the online tax return (and then will not reply to ask why the amount they have put in is more than the taxpayer received). Information from third parties about withholding tax will be a similar mess. Landlords having tax deducted up front when they need the cash for an urgent major repair (lift, etc.). When will OTS learn how business works.
What is so difficult about these people putting a percentage of income on deposit each month to cover their future tax bill? It can be done within a few minutes using online banking. That way the taxpayer has control of their money and not HMRC. There are much better ways to simplify tax but they don't appeal to Governments who like to use the tax system to influence financial behaviour by encouraging or discouraging certain expenditure or certain types of income. Also, the simpler the tax system, the simpler it is to avoid tax.
it always seemed to be the logical conclusion to MTD that it was the Revenues way of getting anybody with untaxed income paying tax in a PAYE way....
Time to abolish the OTS. Name one thing they've actually simplified.
Great article.
HMRC (and everybody else, it seems) forgets that your income is yours in the first place. Then , through legislation, you are supposed to contribute a percentage to the state coffers. If you don't pay your tax , you are simply not complying with the law that says you must give a cut to the state.
For that reason , a tax evader should never be considered a thief. You simply cannot steal from yourself. Yet HMRC used terms such as embezzler , thief and criminal when you do not pay over a chunk of what is rightfully earned.
The problem I have with this move towards PAYE for the self-employed it that HMRC wants its cut even before you have established if you have made a profit or not. They are behaving like a dog sniffing something tasty and and going for it.
In order to illustrate how business people ,who stick their neck out and go into uncharted territory to earn money and create jobs, are treated like criminals , I often play a scenario in my head. It goes like this :
An entrepreneur is negotiating a deal that will earn the business £100,000 profit. It involves a lot of negotiations , stamina and focus but chances are very high. They go ahead smoothly but at the point of concluding the deal, the director steps back and gets an uneasy feeling that the state will take £50,000 of it despite all the personal effort that made it happen. Out of disgust they pull out and exchange some emails about the reason for pulling out. HMRC stumbles upon email and taxpayer gets early morning raid for evading £50k tax.
The above might seem farfetched but is not far from the truth. Not long ago we were warned that using cooking oil instead of diesel to run the van would lend us in prison. It made me think what would happen if we ditched the car for a bike just to avoid the tax on petrol or diesel. Not surprisingly there are different rules for big companies. Macdonals boasts ,through markings on their lorries, that they use their cooking oils to power their lorries .
Coming back to the article , it is a bad idea to think of PAYE for the self-employed. They should continue to enjoy some of the privileges (like no PAYE). The government (consisting of people who have never had a proper job) should recognise the good that self-employed people do and remember that all businesses (big or small) started out as a self-employed business. Stop treating them like potential criminal.
As for those who agree to PAYE for the self-employed, perhaps they ought to learn to manage their finances better.
Dandan, nice defense but not all self employed are honest (one for you one for me) or maybe the black economy doesnt exist?
Equally so
Accountants, tax/men/ladies/non-specific-gender-personages, politicians, priests ... you name them.
So your point is ...?
Perhaps, like the oldest profession, the black economy will always exist.
I do feel that targeting Self-employed people for PAYE is morally and practically wrong.
As I have said in another post, all big businesses employing thousands of people started out as a small self-employed business. Given the risks involved , the self-employed should always have the ability to pay after results are known.
It is a nanny attitude to try and suggest that money should be taken from hard-working self-employed under PAYE because they supposedly don't know how to save money. Systems are already in place to collect debts (you can lose your home) and HMRC need to treat taxpayers as adults.
Always bear in mind that someone who can create wealth(and jobs) by offering a service or product has to be treated with respect.
This takes me to what actually happens when the money is in the coffers of the government. I know, £62 billion spending on hS2 to reduce travel time by 15 minutes!!! This is in spite of the fact that rail , bus and tube companies always upgrade their vehicles and trains in the normal course of business .
The fact that politicians do not know what it is like to make money (or how hard it is) is one of the main problems with HMRC.
I sometimes have to amuse myself by thinking of an imaginary movie scenario (perhaps a Tarantino film of the future) that goes like this :-
In some distant future, HMRC does not exist anymore and has been replaced by the mafia. Taxes are replaced by some kind of protection money. However the Godfather is business-minded and leaves businesses and individuals with a lot more money to retain than the tax authorities would (he understands business better). In return , the taxpayer (sorry, protection-money payer) including all citizens gets fast service. If a burglar should attempt to raid their property, help is at hand within just minutes and the burglar may well end up swimming with the fishes. Same with a mugger. If one is sick the ambulance arrives pronto (all part of the good service to keep everyone happy).
Sorry, letting my imagination run wild here.
This would be a nightmare scenario. It would rely on a Cis type reporting system being operated by any business who used a self employed person. We all know how difficult it is if the Cis reclaim doesn't agree with HMRC systems. It's putting the emphasis on businesses reporting the deductions correctly. Self employed people can work for lots of different people and could potentially end up with hundreds of deductions each year. How would the deduction work Paye deduction on the whole invoice or just on the labour element? How would people earning less than their personal allowance be treated? All this working alongside the benefits system isn't considering the individuals. It's just making sure HMRC has first dibs on people's income. It will cause hardship due to cash flow, people will still have legitimate business expenses and their personal allowance. It's putting unnecessary burdens on business. We all know that HMRC systems won't cope with the level of complexity that the scheme would bring.
So when I pay the gardener for cutting the grass at home do I deduct tax etc or is it just business to business. In which case another two tier system.
Crazy idea, just enforce the rules we have already.
Perhaps the OTS is fed up of having their ideas (get rid of IR35) turned down so they have come up with this crap.
I think the most important point is that, if you have strong opinions on this, the time to share them with the OTS is now, while it's still an idea and not a concrete proposal. The OTS are, quite rightly, calling for evidence. Give them your evidence (and your better ideas) and maybe we can turn this around.
What hope is there if the OTS consists of academics who have never had a proper job and have no idea what the real world is like.
Being a landlord, who has had to deal with trouble tenants who don't pay, I do not know where I would start when trying to illustrate to the OTS the inherent problem of PAYE for self-employed and landlords. Even more difficult would be to try and explain to them the benefit of cash flow when trading. Running a business is not the same as being an employee on a regular salary who also has the protection of redundancy money (guaranteed by the govt)
If the current CIS for limited companies rebate problems are anything to go by, this idea should be shelved immediately.