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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.

5th Sep 2019
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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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By Trethi Teg
05th Sep 2019 11:38

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!!!!

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By MissAccounting
05th Sep 2019 12:37

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.

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Replying to MissAccounting:
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By Trethi Teg
05th Sep 2019 13:01

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.

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Replying to Trethi Teg:
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By meadowsaw227
06th Sep 2019 10:09

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.

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Replying to meadowsaw227:
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By johnjenkins
06th Sep 2019 12:59

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.

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By adam.arca
05th Sep 2019 12:59

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.

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Replying to adam.arca:
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By Trethi Teg
05th Sep 2019 13:20

Thank you Adam for setting out some of my thoughts which I was too depressed to commit to paper. Agree 100%.

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Replying to adam.arca:
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By Trethi Teg
05th Sep 2019 13:20

Thank you Adam for setting out some of my thoughts which I was too depressed to commit to paper. Agree 100%.

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By SteveHa
05th Sep 2019 13:16

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.

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Replying to SteveHa:
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By meadowsaw227
06th Sep 2019 10:14

It would not be too difficult to set the tax rate at a level that was not too onerous ! .

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Replying to meadowsaw227:
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By johnjenkins
06th Sep 2019 13:03

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.

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By ireallyshouldknowthisbut
05th Sep 2019 17:33

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.

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By Andywho is fed up
05th Sep 2019 20:51

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!

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Replying to Andywho is fed up:
By ireallyshouldknowthisbut
06th Sep 2019 13:56

it already exists. You can pay as much as you like, when you like. Several of my clients pay monthly to help their budgeting.

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By GHarr497688
05th Sep 2019 20:59

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.

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By mumpin
06th Sep 2019 09:09

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.

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By SXGuy
06th Sep 2019 10:16

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?

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By why always me
06th Sep 2019 10:19

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:)

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Replying to why always me:
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By mumpin
06th Sep 2019 10:33

I said that an hour before you.

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By youngloch
06th Sep 2019 10:21

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.

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By richards1
06th Sep 2019 10:31

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

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Replying to richards1:
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By Dandan
06th Sep 2019 14:48

richards1 wrote:

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.

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Replying to Dandan:
By Wendy Bradley
09th Sep 2019 11:20

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?

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By Terry Hyman
06th Sep 2019 10:44

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 cert