Is the self-employed workforce managing its finances properly?
Over the last ten years alone Europe has seen its self-employed workforce expand by 82 per cent, according to The Boox Report 2014. What’s more, the Professional Contractors Group (PCG) showed that in 2011 businesses without employees accounted for eight per cent (£202 billion) of turnover in the UK private sector, further emphasising the positive impact self-employed workers have on the economy.
This increase of self-employed professionals also means a rise in the amount of those who must account for their own business finances. The report from Boox highlighted a number of interesting features regarding this topic, but just how well do the self-employed manage their finances and should they seek out help to do so?
Perhaps one of the most significant findings from the recent Boox Report is that the majority (68 per cent) of the self-employed (including contractors and freelancers) manage their own finances. Boox found that half of freelancers put aside money with a view to use it for future taxes, and the industries most likely to set do this are IT (66 per cent) and the banking and finance sectors (60 per cent).
Despite this, some 710,000 self-assessment forms were not returned on time this year, according to the HM Revenue and Customs (HMRC). This figure was down from the previous year’s deadline however, which saw 850,000 people fail to submit their forms on time, the BBC reports.
Considering that self-employment in the UK has seen rapid growth since the economic crisis in 2008 -– the Office for National Statistics (ONS) states that more than 200,000 people started working this way in 2011-12 alone -– it could be argued that self-employed workers are improving when it comes to managing their finances.
The deadline for the 2012-13 tax year slammed shut at midnight January 31st this year. Two days before this, HMRC announced that around 2.5 million self-assessment tax forms were still outstanding, which could be attributed to a lack of preparation on the part of those who are required to fill out the document.
However, the findings from specialist contractor accountants, Boox, highlighted that some of these late returns may not stem from a lack of preparation, but from error on the part of the freelancer. In the report, 34 per cent of freelancers admitted to making bookkeeping errors at some point in their career. The nature of the mistake varied, with 17 per cent stating they had paid too much tax in the past, six per cent not paying enough tax and a further ten per cent admitting that at they had missed a payment deadline altogether.
Errors of this nature are becoming less frequent, however, and Boox found that freelancers and contractors are making less mistakes with regards to paying tax, year-on-year. These findings do suggest that those who work in a self-employed capacity are getting better at managing their own finances, but that still leaves the question of why so many missed the deadline again this year?
Taking into account Boox’s findings that 50 per cent of self-employed workers aged 18 to 34 found the process to be a stressful affair, does HMRC need to offer more support to those people who are filling these forms out for the first time, or is it a question of freelancers and other self-employed workers not fully understanding their general finances?
The Boox Report certainly makes a case for both questions. It found that almost all of the people it asked (nine out of ten) did not know what percentage rate of National Insurance Contributions (NICs) they had to pay on taxable profit. Boox attributes this to the complex nature of the NIC system, as opposed to any lack of knowledge or negligence on the part of the self employed workforce.
Conversely, there are some areas that point to a lack of organisation on the part of freelancers. For example 33 per cent did not know the current level of VAT. While this is certainly a minority, it is a large number for people who work through their own business.
Uncertainty over figures like this could also explain why a third of contractors find filling out tax returns a stressful affair, and therefore why so many still miss a deadline that they are aware of at least six months in advance.
Recent changes to the self assessment tax form legislation could also explain why so many people missed the deadline this year. In 2013 a number of significant changes were made to self-assessment forms, mainly regarding child benefits. As a result of these amendments to the legislation, parents who earn over £50,000 are now required to pay back some of their benefits via the self-assessment tax return system.
What’s more, the Association of Chartered Certified Accountants (ACCA) had argued that the growing number of self-employed people in the UK meant that there were many people filling out the assessment form for the first time this year, some of which would need more time to do so properly.
It is these changes that have left many people confused this year, argues ACCA. Before the deadline, the body appealed to HMRC to extend the date, but this was to no avail. Hundreds of thousands of people will now receive fines over their failure to submit the correct tax form on time.
“When it comes to filing returns and paying tax, there’s good news and bad. The good news is that, on average, freelancers are making fewer mistakes, with errors down in all categories year-on-year,” said the report. “The bad news is that freelancers’ knowledge of tax affairs, specifically tax bands, National Insurance and VAT, remains surprisingly low.”
“Whether this is due to a lack of education, or symptomatic of an over-complicated tax regime for the self-employed, is up for debate. The most likely explanation is that it is a bit both and there is a lot more that HMRC can do to make tax more easily understood and much less taxing,” the report concludes.
It seems then that there is room for improvement from both parties. Although the number of late returns has dropped this year – self-employed workers cannot be held accountable for all of these late returns – many still left it to the last minute, suggesting that more organisation could be needed on the part of the freelancer.
However, as The Boox Report and the ACCA pointed out, it could be time for the HMRC to simplify the legislation on self-assessment tax returns.