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New tax system for self-employed will 'seriously harm economy'

Philip Hammond: the Chancellor's announcement of higher NI rates for the self-employed resulted in a fierce backlash and retreat - PA
Philip Hammond: the Chancellor's announcement of higher NI rates for the self-employed resulted in a fierce backlash and retreat - PA

Plans to force millions of self-employed people to file multiple tax returns each year become reality from next week in the face of blanket opposition from taxpayers, business groups and senior political figures across all parties.

Worst-hit will be the self-employed with turnovers of more than £85,000, who from April 2018 will have to file at least five returns per tax year. That will be in addition to regular VAT returns.

Accountants predict that under the new regime - called "making tax digital" - those affected will face a tax deadline of one sort or other in most months of the year.

The scheme begins this April with a pilot "ramping up to include hundreds of thousands of businesses", according to the Treasury.

Individuals and landlords with turnovers lower than £85,000 were given a reprieve in the Budget earlier this month. They will only move into the system from April 2019, Philip Hammond said.

Groups representing creative arts, farmers, landlords and small businesses across other sectors have attacked both the plans and the rapid timetable of introduction, even with this Budget concession.

This comes in the wake of the Government's U-turn over its plans to increase NI rates for the self-employed.

Michael Grade, former head of ITV and Conservative peer, told the Sunday Telegraph: "The creative sector of our economy drives social mobility, jobs, exports and tax revenues. Now HMT has come up with the idea of making all their lives impossible with a new system for filing their tax returns on a quarterly basis. I can find no evidence from any informed source that this is anything but damaging to our creative population."

The National Union of Farmers, the Residential Landlords' Association and a number of representatives of the accounting profession are also among those objecting to the plans.

The Federation of Small Businesses says HMRC has "significantly underestimated the costs" to business and wants the new regime to be on an opt-in basis.

Earlier this month an influential House of Lords committee, whose members include former chancellor Norman Lamont, added its criticism, saying the Government's proposals were based on "fragile" and "inadequate" evidence.

Leftwing tax academic Richard Murphy, Professor of International Political Economy at City University in London, said this "attack" on the self-employed was the latest in a series of moves aimed at cutting costs at HMRC.

"HMRC has clung to a naive belief stemming from the Blair era that technology can solve all problems," he said. "This policy will be whacking those who are already complying with tax rules or at least partially complying, rather than going after that large population who aren't paying tax at all."

By Prof Murphy's calculations quarterly reporting will cost businesses several days of lost work per year. "This will deliver a hit to GDP with no benefits at all to the Exchequer," he said. "The tax authorities are entirely out of touch with how businesses work."

A leading accounting group, Smith & Williamson, put the cost per small business client at around £2,000 per year.

HMRC argues the shift will be coupled with software which will assist businesses make efficiencies.

The Treasury maintains Mr Hammond's delay by one year for 3m smallest businesses addresses critics' concerns.

It said  quarterly returns "will be light-touch, including only summary information, and will be produced direct from the business’ digital records."

It maintains the reason for implementing the change is to capture tax lost to errors made by small businesses, which it estimates would mount to £8bn per year by 2019-20.

A spokesman said: "HMRC published its impact assessment for the programme in January outlining that there will be an average one-off transitional cost of £280 per business, followed by small ongoing annual savings. This is in addition to the benefit to businesses  of having a clearer in-year view of their tax position and more confidence they have got their tax right."

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