Up to a million self-employed people could soon face tax bills bigger than their annual earnings because the coronavirus pandemic has shredded their livelihoods and they do not know about government support measures, the Treasury has been warned.
A large proportion of the UK’s 4.5m freelance workers pre-pay their income tax bills in instalments twice a year, in amounts based on the previous year’s earnings.
However, groups representing the self-employed have warned that the rules could lead to many people facing unaffordable bills for the 2020-21 tax year ending next April as a result of dramatic drops in their income compared to 2019-20. The first of the so-called payments on account falls due in January and the next is in July.
These groups say concessions introduced by HM Revenue & Customs to soften the financial shock of the pandemic by allowing tax payments to be delayed or reduced are hard to navigate in a fast-evolving economic crisis.
“Most years, payment on account is not a problem, but this year so many people and their business have been so badly impacted — particularly those groups who haven’t been able to access the Self Employment Income Support Scheme [SEISS],” said Andy Chamberlain, director of policy at IPSE [the Association of Independent Professionals and the Self-Employed].
Under SEISS, launched in the spring, the self-employed were initially paid 80 per cent of their previous income but that is dropping to 40 per cent over the winter.
IPSE has estimated that about 1.5m people working for themselves were unable to claim support under SEISS, including limited company directors and people who were newly self-employed when the pandemic hit.
Mr Chamberlain said the gaps in support have already had a detrimental impact — citing figures from the Office for National Statistics, which reported a drop in the number of self-employed from 5m at the start of the year to 4.6m in August.
TaxScouts, an online self-assessment tax service provider, estimated 1m people would probably face bigger tax bills than their earnings.
Mart Abramov, the company’s chief executive and co-founder, said: “We believe it’s unfair that the government is planning to go ahead with collecting advance tax payments when we’re all aware that the self-employed have been some of the worst-hit financially in this pandemic.”
He urged the government to make payment on account optional this year to give people more “breathing space”.
HMRC has said that in response to Covid-19 it has allowed self-employed people to defer their payment on account and to request a reduction in their tax bill if they are facing financial difficulty and know their earnings will be down.
Since the start of October, people have also been able to set up an online payment plan to spread their tax bill, up to £30,000, into monthly direct debit payments.
Latest coronavirus news
Follow FT’s live coverage and analysis of the global pandemic and the rapidly evolving economic crisis here.
One government official said: “We’re not the monsters people think we are all the time.”
However, Mr Abramov argued that the government’s measures still required self-employed people to navigate a complex bureaucracy to get help rather than HMRC offering simple measures that are applied automatically.
“The onus is on the self-employed to try and figure out how the ‘opt-out’ process works,” he said. “Only 50 per cent of self-employed people have accountants, despite how insanely complicated the system is for them, so there’s a significant proportion of people who will probably overpay next year.”
HMRC said: “HMRC stands ready to support any taxpayer in financial distress as a result of Covid-19 and we would urge anyone who may struggle to pay their outstanding tax liabilities to contact us as soon as possible.”
Meanwhile Ed Miliband, the shadow business secretary, on Friday accused the government of leaving half a million self-employed people “in the lurch” after capping SEISS at 40 per cent of previous earnings.
Labour calculations suggest this amounts to just £450 a month for the average self-employed person working in the arts or hospitality industries.
Mr Miliband pointed out that during the first lockdown the self-employed received “parity” with employees, with both getting 80 per cent of their usual income.
“Ministers are leaving self-employed people in the lurch,” Mr Miliband said. “Almost half a million self-employed people work in industries either partially or fully closed. They’re in deep choppy waters with many desperately worried about their future . . . the business secretary must stand up for them and ensure they are given a fair deal.”
Labour reached the £450 monthly figure by taking the average three-month grant payment for the arts and hospitality sectors under the first tranche of the scheme, at £2,700, and dividing it by three to produce a monthly figure of £900. That figure will now be halved.
In response, the Treasury said the government’s support scheme for the self-employed was “among the most generous in the world”.
“It is not true to say SEISS is the only support available to these groups. Depending on their circumstances they might qualify for grants worth up to £3,000 a month, tax write-offs, deferrals and support through the reinforced welfare safety net.”