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Model Reporting Rules for Digital Platforms

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A BASIC GUIDE FOR FREELANCERS AND PLATFORM OPERATORS

 

OECD Model Reporting Rules

From January 2023, digital platforms that enable individuals to earn money by selling services through them will become responsible for reporting sellers’ income to HMRC. This is in addition to the self-employed individuals themselves continuing to submit this information to the tax office on their self-assessment tax return.

If there are any discrepancies between information provided by a digital platform and the individual, HMRC could have grounds to launch a tax enquiry. 

The government will introduce these changes in a move to ensure gig economy workers are paying the correct amount of tax. As a result, and because HMRC will soon have a record of a freelancer’s or gig economy worker’s earnings, those working through digital platforms must make sure they report the correct income via their personal tax return annually and maintain an appropriate record of expenses.

The implementation of the rules is currently under consultation until 22nd October 2021, with the government considering whether to include the sale of goods within the scope of these changes.

 

What are the Model Reporting Rules for Digital Platforms?

 

The Model Reporting Rules for Digital Platforms is an international framework introduced by the OECD for reporting on individuals selling their services via digital marketplace platforms and sharing such information with the relevant tax authority, in order to ensure the tax compliance of freelancers and gig economy workers.

Under these rules, by January 2023 online businesses that facilitate the selling of rental property and/or personal services (with a possible extension to the sale of goods) must:

  • Collect details about individuals earning over €2,000 per year (or those who have made 30+ transactions) from the platform and verify the seller’s information

  • Report the seller’s earnings to HMRC annually by 31st January

  • Share this information with the ‘seller’ (the worker)


The information will be used by HMRC to:

  • Obtain income information from overseas platforms for UK-resident sellers

  • To detect and tackle tax non-compliance of gig economy and freelance workers

  • Share income information with the appropriate international tax authority where the seller is a resident abroad

What is the OECD?

 

The Organisation for Economic Co-operation and Development (OECD) is an intergovernmental organisation which establishes international standards and information-sharing for its 38 member countries, including the UK, US, Australia, and much of Europe. It has a particular focus on economic policy and tax evasion.

 

Who do the reporting rules apply to?

 

If you are providing any of the following relevant services via a digital marketplace or online platform, software, or app, the reporting rules will apply and your income will be shared directly to HMRC (or relevant tax authority) by the platform under the new rules:

  • Rental of immovable property, such as holiday accommodation and parking spaces (excludes hotels).

  • Personal services, such as food delivery, private transport hire, freelance work such as bookkeeping and graphic design, offline services such as gardening, cleaning, dance instruction and seasonal work such as events or restaurant/bar work.

If you are a digital platform operator which connects sellers providing any of the above services to buyers, you may need to report to HMRC or the relevant tax authority information regarding these sellers. These incoming changes apply to a wide range of online businesses, softwares and apps, as the policy document outlines:

“A “Platform” means any software, including a website or a part thereof and applications, including mobile applications, accessible by users and allowing Sellers to be connected to other users for the provision of Relevant Services or the sale of Goods , directly or indirectly, to such users.”

This could therefore include the likes of Uber, Deliveroo, Airbnb, Upwork, Fiverr, Freelancer.com, TaskRabbit, Bark, and many more platforms on which individuals are able to earn a self-employed income, whether full or part-time.

The rules do not encompass businesses such as recruitment agencies, directories, payment services such as PayPal or hotel booking sites. Contractors engaged by these platforms to provide services for the platforms themselves will also not be included within these rules.

 

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Prime Minister announces NICs and dividend tax rise

PM breaks Conservative manifesto pledge, unveiling tax increases for 2022

The Prime Minister has controversially announced a 1.25% increase in National Insurance Contributions (NICs) along with a 1.25% rise in dividend taxation, both of which will be introduced in April 2022 in a move that will impact millions of self-employed workers. 

These plans were unveiled on 7th September in Parliament by Boris Johnson, who was recently warned by several senior MPs not to break a pledge made in the 2019 Conservative Party manifesto that ruled out increasing either of these taxes.

However, Johnson defended the tax hikes which will fund a ‘Health and Social Care Levy’. He claimed that it will allow the government to invest around £36bn into the NHS and social care over three years as the Conservatives look to deliver the “biggest catch-up programme in NHS history.”

The PM explained: "I accept that this breaks a manifesto commitment which is not something I do lightly, but a global pandemic was in no one's manifesto."

Chancellor of the Exchequer, Rishi Sunak, also commented: “The new Health and Social Care Levy is the necessary and responsible thing to do to protect the NHS, sharing the cost between businesses and individuals and ensuring those earning more pay more.”

However, in response, Labour leader Sir Keir Starmer said that following these tax hikes, “the Tories can never again claim to be the party of low tax.”


Dividend tax increase to hit freelancers and contractors

Many national media headlines have focused on NIC, but arguably it is the dividend tax increase that matters most to freelancers and contractors who operate through their own limited companies. 

The 1.25% rise in tax payable on dividends drawn from a company above the £2000 tax-free allowance follows unpopular dividend reform rolled out in 2016, which saw the £5000 tax-free allowance slashed considerably. 

From April 2022, the amount freelancers and contractors are taxed on dividends will increase, as shown below:

  • Basic rate taxpayers will pay 8.75%, instead of 7.5%

  • Higher rate taxpayers will pay 33.75%, not 32.5%

  • Additional rate taxpayers will pay 39.35%, up from 38.1%

According to government estimates, this move is set to boost the Treasury’s coffers by around £600m annually. 

 

NICs rise affect sole traders impacted most by the pandemic 

In contrast, the 1.25% NIC rise should see tax receipts increase by an estimated £12bn every year. 

But while contractors operating outside IR35 tend not to pay NICs due to the way they extract money from their businesses, sole traders are now facing up to the reality of significantly bigger tax bills from as early as next April. 

As things stand, and for the 2021/22 financial year, sole traders pay class 4 NICs of 9% on profits made between £9,568 and £50,270, plus 2% on anything above this. In the 2022/23 tax year, which starts on 6th April 2022, this will rise to 10.25% and 3.25% respectively. 

These changes do not apply to class 2 NICs, which sole traders earning up to £6,515 annually are required to pay. This will remain at £3.05 a week. 


Rising costs make PAYE even more expensive for employers 

As a result of incoming changes to NICs, the cost of engaging workers on the payroll will also increase, with employers’ NI to jump from 13.8% to 15.05% next year. 

This means businesses that moved all contractors - regardless of their true IR35 status - onto the payroll in response to IR35 reform will pay even more to engage them as PAYE workers. 

So in light of the government’s plans, the argument that businesses should reverse PAYE-only working grows stronger.  


NICs hike is double-whammy for umbrella workers 

How changes to NICs will affect contractors working via umbrella companies has not gone unnoticed either. And the impact on umbrella workers is doubly worse than for sole traders. 

Umbrella workers are engaged under employment contracts, so they will soon pay more in employee NICs. However, as temporary workers engaged as contractors by an end client, they will also have employers’ NI deducted from their payslip, which could leave them much worse off. 

In conclusion, while greater investment in the NHS and social care is key, a number of experts have asked the question why it is the self-employed workforce that will be hit hardest by these reforms - particularly in light of the impact Covid has had on this sector.

This was a point made by Qdos CEO, Seb Maley, in The Express:

"Raising NICs and dividend tax is a move that directly impacts millions of people working for themselves - people who have arguably been hit the hardest by the pandemic. Once again, it seems that the smallest businesses are bearing the brunt of tax reform. 

“Yet still, it will be the flexibility, dynamism and skills of the independent workforce that the Government needs most to speed up the economic recovery."

 
Sign up to our monthly newsletter to keep up to date with relevant industry news and updates.
By:Benedict Smith
 
 

 

What do the rules mean for freelancers and gig economy workers?

 

The government want to make sure that the rise in the digital economy does not result in a tax loss to the Treasury. It is clearly stated in the consultation that the information will be used “to ensure that sellers are complying with their tax obligations and to tackle non-compliance if they are not”.

This increases the risk of a tax enquiry for freelancers and gig economy workers, particularly if information provided by a digital platform differs from that submitted by the individual.

 

How can individuals manage these changes?

 

Because digital platforms will begin sharing the income of ‘sellers’ to HMRC, it’s crucial that the individual also ensures the correct amount is reported via their self-assessment tax return.

It is important to note that the platform is required to provide you with the same information that will be reported to the tax office.

Additionally, given the risk of a tax enquiry is increased, freelancers and gig economy workers are encouraged to protect themselves with Tax Enquiry Insurance to mitigate these risks.

Freelancers and gig economy workers using digital platforms should:

  1. Maintain adequate records of earnings and expenses
  2. Distinguish between earnings obtained through digital platforms and via other means

  3. Protect against a HMRC enquiry with Tax Enquiry Insurance

  4. Ensure the correct tax is paid on time to HMRC via self-assessment

 

What is Tax Enquiry Insurance?

Tax Enquiry Insurance provides individuals with expert defence should HMRC launch any range of enquiries. With this policy, an experienced Qdos tax consultant will handle all correspondence from HMRC throughout the duration of the enquiry. This offers policyholders reassurance that a trusted specialist with a proven track record is representing them. 

Irrespective of whether a person is operating with tax compliance, HMRC can open a tax enquiry at any given time, which can be time-consuming, stressful and potentially very costly if  not handled correctly. Qdos’ Tax Enquiry Insurance protection covers the cost of defence and support needed to manage the enquiry appropriately.

 

 

What do the rules mean for digital platforms?

 

Digital platform operators may face penalties for not complying with the reporting rules as required. This penalty regime is yet to be defined, however, will likely be based upon the due diligence taken to comply with the rules, and the timeliness and accuracy of reporting.

 

What do you need to do as a digital platform operator?

 

By January 2023, digital platform operators which connect sellers of relevant services to users, should:

  1. Identify all relevant and excluded sellers, ensuring a mechanism for ongoing checks for new sellers using the platform.
  2. Collect and verify information from relevant sellers including:
    1. Name
    2. Address
    3. Unique Taxpayer Reference (UTR) or National Insurance number*
    4. Date of birth or company registration number if applicable
  3. Determine the jurisdiction of residence for each relevant seller (based on the home or registered office address provided).
  4. Maintain adequate records of above information and checks made.

From January 2023, operators will need to:

  1. Complete the above for any new relevant sellers and maintain a record of changes (e.g. change of address/jurisdiction).
  2. Report relevant sellers’ information including earnings, payment account information, any deducted charges/fees, and further information if the service is for the rental of properties to HMRC by 31st January each year. HMRC will likely provide an online service for submitting this information.

*HMRC are consulting on the most relevant taxpayer identification number (TIN) to use for the reporting rules and so is subject to change.

 
 

 

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The Company

 

About Us

Why Qdos?

 

Qdos Contractor are one of the leading providers of specialist contractor insurance services in the UK. Our online application process takes only a matter of minutes with all documentation issued instantly. Unlike many other brokers, we don’t hide our premiums until you've provided your details, as we are confident that our premiums, service and product are the best in the market. In addition, Qdos Contractor is one of the leading authorities on the IR35 legislation and have handled well over 1,500 IR35 enquiries on behalf of UK contractors.

 

Our History

 

Qdos began in 1988 as a tax consultancy business and has grown significantly over the past two decades, providing expert business services, products and advice. Over the years, Qdos has grown in both size and reputation as a trusted contractor insurance broker as well as an expert tax advisor. Our aim is to provide UK contractors with the assistance and service with IR35 issues they need as well as sustaining excellent quality and competitive premiums in the contractor insurance market.

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