If you’re a freelancer, you’re probably already familiar with the requirement to complete an Income Tax Self-Assessment (ITSA) each year. This is where you submit information about your freelance income, expenditure and any other earnings to HMRC – the government body that regulates taxation – each financial year. It can be an arduous task, and one that many freelancers put off….and put off…and put off.
What you might not be aware of, however, is that there are new rules on the horizon that seek to completely overhaul and digitise the way that freelancers and small businesses keep records and submit their tax returns. These rules, called Making Tax Digital, were due to be introduced for sole traders with a turnover of more than £10,000 and landlords from April 2023. However, towards the end of last month, the government announced that it is delaying the introduction of Making Tax Digital by a year so that businesses have more time to prepare. Businesses which are VAT-registered already need to comply with Making Tax Digital rules.
What do I need to do to prepare for Making Tax Digital?
The announcement is good news for freelancers already struggling with the impacts of COVID-19. It may be that you want to focus first on getting your business back on track and worry about the tax changes later. This delay gives you the space to do that.
However, if you are keen to get prepared, sole traders who run one business are being invited to sign up for the pilot scheme for Making Tax Digital. This means you can be among the first businesses to use and test the new system for reporting your finances. If you can get on board with the scheme now, it’ll save you from having to make big changes to the way you keep your records in the future. According to the government, over 30% of businesses and landlords are already voluntarily using the new system.
How do I sign up for the Making Tax Digital pilot?
If you sign up for the pilot, you’ll be asked to use compatible software to keep digital records of your business accounts. You then send Income Tax updates to HMRC every quarter – including details of your income and expenses – through the Making Tax Digital online system. In some ways, this might seem more onerous than an annual return. However, it does have some advantages for small businesses. It works more closely to “real-time” updates, meaning that you’ll be able to see and plan for how much Income Tax you owe “as you go”, rather than calculating a lump sum for the year. This is good if you’re the type of person that usually puts off these admin jobs and then is stung by a larger-than-expected tax bill at the end of the year.
Trying out the system now means you have time to get used to keeping records in this way before the changes become compulsory. HMRC are proposing to expand the pilot next year, and move to “larger-scale testing” by 2023-24. This means that it’s likely that more and more businesses will move to the new system before the deadline. Reporting through the system also removes the need to fill in an Income Tax Self-Assessment form. Instead, you submit your final report for the year through the Making Tax Digital system and any allowances and reliefs are calculated at this point. So if you’re someone who really hates that form and has to be dragged kicking and screaming to the computer to fill it in each year…it might be worth signing on to the pilot.
What if I choose to wait for Making Tax Digital?
Even if you’re not ready to jump over to the new system, it’s a good reminder for freelancers that you should be keeping records of the financial affairs of your businesses, including all income you earn, and any expenditure related to your freelancing work. Now might be a good time to explore using digital record-keeping software, test out a few different systems and see which you find easiest to use and which suits the needs of your freelance business best. Packages for accounting vary in features, complexity and price, but most of the major players are likely to be compatible with the requirements of Making Tax Digital for freelancers and sole traders when they come into force.
While you’ve got your head in the numbers, here’s another financial prospect that makes good business sense: business insurance for freelancers. Because insurance is a necessary business expense, you can factor it into your profit calculations. It’s also there to save you money in the long term. Should an accident happen or you make a mistake in the course of your freelance work, freelance business insurance from Dinghy will step in to provide legal support and cover any costs arising. What’s more, all policies come with Freelancer Assist as standard, which includes a tax helpline and expert tax assistance to help you get your head around changes like Making Tax Digital. Find out more or get your tailored quote on our website.