With the government pressing on with the introduction of Universal Credit where tax credits will be updated in real time, the process has already begun with Real Time Information (RTI) already starting to be phased in to modernise the way payroll is being processed. RTI will not affect how people are paid, but it does affect how employers and payroll departments report the wages they pay to their employees. Under RTI, employers and payroll departments will need to report online to HMRC every time an employee is paid. If you would like more information, please see our payroll page.
The government have now begun to look at how people who are not on PAYE report their earnings (self-employed people).
At present, self-employed people report their earnings by completing a tax return each year and these details are used to determine tax credits they can receive. This process will not report information on a timely enough basis for Universal Credit to work for this category.
Under proposals set out by the government:
- self-employed people will have to submit monthly reports of their earnings.
- they will be required to report their earnings to the DWP (Department for Work & Pensions) online within seven days of the end of the month (each month is called an ‘assessment period’).
- ‘self-employed earnings’ will be calculated on an adjusted cash basis.
This is a completely different way to the method used at present where trading profits are used for tax returns. HMRC are proposing to bring in a ‘simplified’ cash basis for periods from 6 April 2013, but the adjusted cash basis proposed is completely different again to the ways you will be able to report to HMRC on your tax return.
Problems with the proposals:
- time limit far too short - a time limit of seven days to report earnings after a month end is almost impossible for most businesses to meet. Failure to comply with the time limit will result in payments of tax credits being suspended - a very harsh penalty.
- reporting earnings in an completely different way - calculating earnings on an adjusted cash basis will force self-employed people to report 12 times a year to the DWP on a completely different basis to the basis at present to HMRC once a year.
- additional administrative burdens - extra reporting and very short timescales gives small businesses additional administrative burdens. This completely goes against the government’s plans to reduce administrative burdens and reduce red tape. If the self-employed people are also VAT registered, not only will they have their usual VAT returns to HRMC to complete by the end of their VAT period (usually quarterly), but they will also have the new reports to complete too.
- seasonal businesses or fall in profits - there are proposals to introduce a floor of assumed income from self-employment (Minimum Income Floor MIF) and it does not look like this will be altered for the self-employed who see a fall in profits, who run a seasonal business who have periods of high and low profit or for businesses who are reinvesting to expand, take on more staff or have large expenditure which exceeds trading receipts for the period.
This appears to be a very disappointing regime for the self-employed if it comes into force, putting additional burden and cost on small businesses (especially if they want their accountant to complete the reports if they already carry out their bookkeeping) and increasing stress for the people who own the businesses creating such a short time frame to report in.
It does not appear that the government are trying to help the self-employed with this scheme and there has been serious backlash over the proposals.
We will keep you informed with the changes in the proposals and how it will affect the self-employed.
C & GB Associates - Accountants
8-10 Millgate, Thirsk, North Yorkshire, YO7 1AA
Tel & Fax: 01845 525502