Will the new tax system catch you out?

Watching people react to change can be endlessly fascinating, particularly when the changes are announced by the tax office.

First reactions might be muted, as only the nerds have noticed. Then word gets around, and rumours start to fly. Then people panic, engage, and slowly get used to the changes as they’re forced to catch up.

HMRC Making Tax DigitalWith the new Making Tax Digital (MTD) project this pattern has been disrupted as the government has changed its mind at the ‘rumour and panic’ stage.

I’m now meeting people who know quarterly reporting for sole traders has been delayed – it was meant to come in in April 2018 – but haven’t realised it’s still going to happen perhaps as early as 2020.

Two key elements of MTD are starting to dawn on freelancers I talk to:

  1. You’ll need to report income and business expenses every 3 months.
  2. You’ll need special software to do it, and you’ll probably have to buy an annual subscription from a commercial software provider.

It’s difficult to know how to prepare for this, as so much is left to be decided. For example will every sole trader have to do this? Or just sole traders with high turnover?  And how high is high? Will it really be 2020? Or later?

However, I think there are things you can do now so that you don’t get caught out when implementation begins.

1. Get used to keeping your income and expense records as you go along, preferably every week and preferably in a simple spreadsheet or free app. It will take typical freelancers about 10-15 minutes a week to do this, and if you turn this into a habit you won’t even notice you’re doing it.

This will be great training for doing it under Making Tax Digital when it arrives.

I’ve been doing this for 12 years using a spreadsheet like the one I give trainees on our courses. I tend to do it at the same time every Friday morning, usually with a cup of tea and the wonderful Lauren Laverne on BBC 6 Music to keep me company. (Slight downside: I now associate Lauren Laverne’s voice with doing my bookkeeping.)

2. Freeagent screen shotKeep an eye open for the type of software which is being developed for small businesses and sole trader freelancers. Don’t rush into buying a subscription yet, but ask around and find out whether any of your freelancer friends are already using a particular package. There are quite a few coming on the market.

Use the free trial periods and see how easy it is to add income and expense information using your phone, iPad or whatever you normally use. Most will also automate things like invoices, and allow you to upload photos of your receipts instead of keeping them in a shoebox. Some even do VAT and company payroll reporting.

I’ve been road-testing Freeagent for the last few months and it’s relatively simple to do the basics. I’ve been impressed with their support (friendly and prompt; the company is based in Scotland), but I’ve not tried all the features yet, so I’m not quite at the stage of unconditional recommendation.

What about the cost?

I have no fundamental problem with the idea of digital tax, as long as it’s done securely and slickly. In fact it could get rid of a lot of paperwork. Some might even be able to dispense with an accountant.

The big concern is the cost. HMRC will be approving software that meets the MTD requirements. But it won’t provide any free software and says there will be free options provided by the commercial suppliers.

Unfortunately the suppliers themselves don’t seem to agree. At a recent press briefing, the boss of one software firm said:

‘It’s an expensive business running a software company, and speaking to some of the other vendors I’m not sure they want to [provide free software].’

In other words; ‘We’re a business. We don’t give stuff away.’

Freeagent is costing my business more than £300 every year (a bit less for sole traders), which is even higher than the HMRC’s predicted “transitional costs” of £280 per business.

And I’ve reached the point where I’m thinking: why should I be forced to pay for software, just so that I can pay my taxes.

Posted on 30 September 2017

What do you think?