HMRC has been proposing introducing Making Tax Digital (MTD) for individuals, under which they would upload financial information and pay tax more frequently throughout the year, more in line with employees under PAYE.
Choice
A self-employed person has no-one else to answer to and the ability to choose working hours; but in reality, of course, customers are the demanding bosses of the self-employed.
A self-employed person can theoretically work from wherever they choose. This can reduce the length of commute and allow more time for family life.
Of course, recent events have had a significant impact on the way in which traditional office work is undertaken and future expectations of employees may well be quite different to what they have been in the past.
An employee who does not like their employment can leave and find another job. It is much more difficult for a self-employed person to walk away from their livelihood.
The self-employed can decide how to structure their business: working alone as a sole trader; working with others in partnership; or trading through a limited company.
They may also be able to structure their affairs to enable them to split profits with family members who also work in the same business - potentially saving tax.
HMRC would probably scrutinise such arrangements closely unless there is a genuine commercial reason for structuring in this way.
Sole traders, or those working in partnership with others, will pay tax on the profits earned in a given tax year.
An individual trading within a company will pay tax on the profits drawn from the company.
However, the company will have to pay tax too. A corporate trading structure gives the business owner the opportunity to decide how to extract profits and this can result in tax savings.
Clearly, a self-employed person has more choices than an employee, but with choice comes responsibility.
Dealing with HMRC
The responsibility for paying tax on an employee’s salary lies with the employer. If the employer gets it wrong, they face potential penalties and sanctions, not the employee. The employed will have limited dealings with HMRC.
The self-employed must deal directly with HMRC. If a self-employed person gets it wrong, they must deal with the consequences.
Ignorance of tax law is not an excuse HMRC readily tolerates.
It is not uncommon for an unwary self-employed person to fall foul of the VAT rules.
Many will be aware of the need to register for VAT if turnover reaches £85,000.
The discipline required to maintain records to identity the point at which turnover reaches this level can escape a newly self-employed person.
