Empowering the Freelance Economy

Making Tax Digital: “not fit” for Freelancers

Photograph of the outside of the HM Revenue and Customs main office
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The ‘Making Tax Digital’ for Income Tax programme will be delayed from 6 April 2023 until 6 April 2024. But the basis period proposals of the programme, additional costs and not-fit-for-purpose software could make things very unattractive to international service firms and millions of self-employed. The Freelance Informer reports.

IPSE (the Association of Independent Professionals and the Self-Employed) has welcomed the government’s decision to delay the roll-out of Making Tax Digital for Income Tax by one year, saying it is “welcome breathing space” before “another painful hit to the self-employed.”

The self-employed members’ group has warned that after the financial impact of the pandemic, many freelancers are not ready to make the shift to Making Tax Digital and that the quarterly reporting under the new system would be a “serious and heavy admin burden”.

IPSE has argued that government should raise the threshold for MTD above £10,000 to exempt the smallest businesses. Some 1.5 million businesses have signed up for MTD since 2019, according to HMRC’s MTD team.

Andy Chamberlain, Director of Policy at IPSE (the Association of Independent Professionals and the Self-Employed), said of the delayed roll-out of the MTD initiative: 

“It is very welcome that the government has decided to delay the roll-out of Making Tax Digital for Income Tax. This will provide much-needed breathing space before another painful hit to the self-employed. After the financial impact of the pandemic, many freelancers simply are not ready to make the shift to Making Tax Digital.

“Although we can see the benefits of digital record-keeping, we continue to have reservations about certain aspects of the change. The shift to quarterly reporting will be a serious and heavy additional admin burden for many freelancers. We continue to call on government to raise the threshold for MTD so the changes do not apply to the smallest businesses,” said Chamberlain. 

Andy Chamberlain, Director of Policy at IPSE

MTD costs to consider

The Institute of Chartered Accountants (ICAEW) has welcomed the clarity on the timing and phasing of the introduction on MTD for income tax self-assessment (MTD ITSA) and urges businesses and practitioners to use the additional time wisely to plan for the change.

However, the ICAEW remains unconvinced on the basis period proposals warning in its consultation response that they are likely to “increase costs, complexity and uncertainty for those businesses affected and could damage the UK’s attractiveness as a place for the location of international service firms”.

Businesses that file VAT returns are already operating under the MTD rules, but those that are not will be in for quite an upheaval when the new rules come into force is accountancy firm Mazuma.  Those rules require affected businesses to do the following:

  • File returns to HMRC 5 times per year (instead of just once as they do currently)
  • Undertake digital record keeping

Lucy Cohen, Co-Founder of Mazuma, said the firm wanted to understand the extent of the problem that is looming, so they decided to look into what they saw as potentially one of the worst affected groups – construction.

41% of plumbers not aware of MTD


In a survey of 200 plumbers in the UK, Mazuma discovered that:

  • 83% of plumbers do not use any software or apps to keep track of their sales income and costs
  • 46% of plumbers do their tax returns themselves
  • 20% of plumbers have a friend or family member complete their tax returns on their behalf
  • 41% were not aware of Making Tax Digital by HMRC

It is estimated that there are 120,000 – 150,000 plumbing and heating engineers registered in the UK, a large percentage of which will be self-employed.

“If you extrapolate our figures, that means that we could be looking at over 124,000 plumbers who are currently falling foul of the new legislation from HMRC.” said Cohen.

“And that’s just in plumbing. It doesn’t bear thinking about if you extend that data across the rest of the construction industry or out into the wider micro-business community,” she said.

Will the MTD software be freelancer fit-for-purpose?

According to Azuma, the HMRC has left much of the communication about MTD to software vendors.

“And the largest software houses have gladly taken on that role – which, given that it’s those companies that are set to benefit greatly from the introduction of Making Tax Digital, it’s not all that surprising that they’ll happily spend their advertising budgets on it,” said Cohen

“The problem is that a lot of those vendors have software products that just don’t work for micro-businesses,” says Cohen.


📅 SAVE THE DATE

The ICAEW’sTax Faculty will be hosting a free webinar on MTD ITSA on 30 November 2021 to cover the regulations in detail and explain the development of the policy and pilot and what taxpayers and agents can do to prepare. 

Book here to attend


💬 What do you think about MTD? Is the frequency of reporting too onerous for freelancers and small businesses?

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