Self-employed individuals are experiencing difficulties completing their self-assessment tax returns, according to a new report commissioned by HMRC.
Many people have trouble with their tax reporting duties because of "confusing terminology, ambiguity around allowable business expenses and uncertainty transferring figures to HMRC's system," according to the report.
Undertaken by Kantar on behalf of HMRC, the data and insights company found a consensus among the self-employed that the first year of business was the most challenging.
Many emphasised the level of complexity and stress when figuring out what they needed to do with their taxes when starting out, which was compounded by their fear of the potential financial repercussions of making a mistake.
Allowable expenses and transferring figures
According to the survey, the ambiguity around business expenses and the difficulty calculating the amount that can be claimed for "was raised as a common issue, even among those with strong knowledge of the tax system" when it came to self-assessment tax returns.
Many expressed uncertainty about what is classed as a business expense for tax purposes, especially if the item purchased could be used both for business and personal purposes.
Even those who consequently sought advice online or from an accountant to gain clarity nevertheless had "ongoing uncertainty".
Difficulties in completing tax returns was also said to stem from taxpayers' personal spreadsheets, as the methods they use to track their income is different from HMRC's.
For instance, some business owners said it was a challenge to input the monthly information required for the online tax return form from the quarterly information they had.
This issue led to some people saying they did not feel confident inputting the information correctly when transferring to their tax return.
Why do people find tax complicated?
The complexity of the self-employed experience is primarily down to their personal capability, Kantar said.
Several variables appeared to influence individuals' experience and confidence in their abilities, including their financial organisation, technological ability and access to support.
People in the creative sector especially felt less confident in their tax abilities, while fear of getting things wrong is hurting confidence further, according to the report.
The research reads:
"Many customers, regardless of level of income or sector, felt they had a lot to lose by getting their tax wrong.
"This was particularly the case for those who had previously made a mistake or had low confidence in their tax management capabilities."
Kantar also found that variations in peoples' income complexity can influence their experiences with financial and tax management - in particular the number of roles/jobs and the number or length of contracts.
Those with a total income below the tax threshold were more likely to perceive their self-assessment as easy to complete as they did not need to worry about a bill.
Regardless, some low earners said they would want help from an agent for reassurance, imagining that an agent could "help them understand confusing terminology and ensure boxes are ticked and figures are input correctly."
Kantar found that the self-employed who were not confident in correctly completing their tax obligations were the most likely to have ideas on how to improve their experience with their tax affairs.
"This was particularly important for hybrid customers with multiple, irregular PAYE income streams who were more likely to experience tax errors and have greater difficulty resolving them", according to the report.
One suggestion of note was for the introduction of real-time self-assessment inputs so taxpayers could update their tax returns throughout the year, rather than just at the end.
Most wanted this to be flexible and suggested inputting information monthly or quarterly.
The report also found support for:
- flexible tax payments: the ability to pay tax more frequently to avoid large bills
- downloadable spreadsheets: to ensure personal record keeping processes align with the format required by HMRC.
- starter packs: for those in their first year of being self-employed
- individual support: for example, through in-person, telephone or web chat support.
Survey respondents gave much of their advice to improve the experience of those with greater income complexity, according to the report.
"For example, real-time inputs and flexible tax payments could help those with multiple roles and irregular incomes better manage their finances and tax liability", it reads.
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