Pay-as-you-go income tax system will burden small businesses, experts warn

Government plans for a new “pay-as-you-go” income tax system for the self-employed will burden small businesses, UK experts have warned.

Pay-as-you-go income tax system will burden small businesses, experts warn

Freelancer bodies have highlighted a number of “early concerns” after the Treasury said it was reviewing options to make freelancers pay monthly or quarterly income tax bills to help recover some of the £3.1bn lost every year through its outdated system.

Some said they feared a “vilification” of contractors as tax dodgers could lead to new rules where the self-employed regularly ended up overpaying.

Experts have called for a cautious approach to any new regime that must take the irregularity of self-employed earnings into account to avoid huge disruption.

The news comes as the Treasury published a series of tax documents and consultations in a move to strengthen policymaking and help create a more “trusted, simple and modern tax system”.

Options for the new system include a Swedish-style model that would require the self-employed to pay monthly income tax bills in advance, based on their tax bill from the previous year, according to government documents. Similar setups are already in place in France, Norway, Australia and America.

The self-employed in the UK pay tax in a series of lump sums two or three times a year, while 30 million employees pay income duties weekly or monthly The Daily Telegraph reports.

Another option would involve quarterly tax payments based on more dynamic estimates that can change throughout the year, similar to how energy bills work via a system of credits and debits. This is the UK Government’s preferred option, as it would provide a better picture of how much a sole trader owed with more up-to-date estimates.

However, self-employed earnings tend to fluctuate wildly, meaning this could create numerous overpayments or underpayments that would need to be sorted out at the end of the year, the documents said.

Mike Cherry of the Federation of Small Businesses, said direct debits for utility bills had caused many to deposit far more cash with their providers than they had ever intended.

“Transposing that model to the business world risks a similar buildup of cash in HMRC accounts – cash which should be out there in the economy, spurring investment, job creation and growth,” he said.

Andy Chamberlain of the freelancer tradebody IPSE said modernisation was a good thing but the move could leave some individuals with serious cash flow problems. He also expressed concern that the Government appeared to suspect the self-employed of paying less tax than they owed.

He said: “We have early concerns that in-year tax payments simply won’t be practical for many self-employed businesses as it is not clear how the system would account for their volatile incomes.”

The self-employed spend 20 days a year chasing late payments on average.

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