As we are all aware, there are considerable pressures on the Government to spend more whilst not raising headline taxes. No doubt expect developments over the next few months on both these areas, but there has already been some research into whether HMRC can either collect more of the money to which they believe they are entitled (and which sometimes disappears into the “tax gap) or collect money from the self-employed more quickly. Neither of these initiatives will breach manifesto commitments nor require much in the way of new legislation.
Whilst employees pay their tax as they earn, it is more difficult to tax the self employed in the same way since their income flows are irregular and their true income may not be determined until well after the end of the financial year. For a cash strapped chancellor, though, the possibility of accelerating the payments is an attractive one. This was first raised in the 2025 Budget when proposals were made to tax self-employed income under PAYE where taxpayers have income from both sources.
Three papers exploring this area were issued by HMRC on 23rd June:
- We were told that the “tax gap” (the difference between what HMRC think they should be getting and what they actually receive) is some £59.2 Bn. This is only 6.4% less than they think they should be seeing. But it is still an attractive figure and despite the fact that the gap has been reducing in recent years, they would clearly like it to fall further. We have already seen proposals to tighten up on reporting by those running Close Companies.
- The report adds that Corporation Tax accounts for a 35% share of the total tax gap, small businesses continue to represent the largest customer group of the tax gap (62%), and failure to take reasonable care (35%) – due to carelessness or negligence - remains the largest behavioural risk to the tax gap, followed by error (16%) and evasion (12%). It is expected that in total, measures to close the tax gap, announced by the government since Autumn Budget 2024, will raise a further £10 billion a year by 2029 to 2030.
- In a further paper issued the same day they are opening a consultation on whether businesses should be legally required to make their VAT and PAYE contributions solely by direct debit, with penalties where businesses fail to do so. This would both speed up the receipt of funds but would also have some effect on whether the money is received at all, because in some cases a business defers paying over the deductions because of tight cashflow but eventually finds it is simply unable to pay them at all (and becomes insolvent) . Making the contributions collectable by direct debit might help HMRC in some cases, but in others might push such businesses into insolvency at an earlier stage.
- A third paper took up the intention to accelerate the collection of tax payments by the self-employed. The proposal is that payments will be forecasted, based on past Self-Assessment returns, with taxpayers able to update their forecasts. Taxpayers will report their actual liability and reconcile their payments with a Balancing Payment, or repayment from HMRC, when they complete their Self-Assessment return, as they do now. The consultation seeks views on the proposed design of these reforms, including how and when to set payments, the appropriate safeguards to protect taxpayers, how the transition towards the reformed systems could work, and what support and guidance taxpayers will require.
It would appear that this would largely supersede the existing “payment on account” (POA) system by charging the tax in equal monthly instalments rather than by half yearly POAs. The paper also explores the possibility of introducing monthly POAs during the year of assessment for those who do not also have a PAYE source of income and would therefore lead to a considerable acceleration of tax.
These are, of course, all proposals at a consultation stage, but it seems clear that HMRC are looking to accelerate tax collections and extract a sizeable sum from the self-employed without actually increasing tax rates (though of course that may also follow). Since the proposals are not scheduled to go live until 2029, there will be plenty of time to think about them. Given that they would potentially take place just before the next general election. It is also not inconceivable that there might be some delay between now and then. What is certain though, is that an already complicated taxation system for the self-employed will become even more tortuous.
*the views expressed are the author’s and not ICAEW’s
