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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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Thinking of becoming a sole trader?

Everything you need to consider when becoming a sole trader and how to start the process

What is a sole trader?

A sole trader is a self-employed individual that runs their own business as its exclusive owner. For sole traders, there is no legal separation between the business and the individual meaning that a sole trader is personally liable for the debts of their business and as such they face unlimited liability. This is unlike with a limited company where the business and individual are two entirely separate legal entities.

Sole trading is seen as one of the most accessible ways to enter self-employment. It is quick and relatively easy to get set up as a sole trader, among some of the other benefits, sole traders have less statutory obligations and don’t have any shareholders to split the earnings amongst.

 

How to become a sole trader

The process to get set up as a sole trader is straightforward:

  1. Decide on a name for your business. For many sole traders providing a personal service, such as graphic design services, simply using your personal name can be sufficient. There are some guidelines to be aware of when choosing a name. For example, it should not be the same as any pre-existing trademark or include words such as ‘Limited’, ‘LLP’, or ‘PLC’.
  2. Register for Self-Assessment tax return before the 5th October after the end of the tax year you began trading. For example, if you began trading on 1st January 2021, you will need to register by 5th October 2021. However, if you began trading on 1st May 2021, you will not need to register until 5th October 2022.
  3. You may also be required to register for VAT if you go over the VAT registration threshold (£85,000 a year).

You will only need to officially set up as a sole trader if you earn over £1,000 from self-employment within any given tax year.

 

What will your responsibilities be as a sole trader?

  1. Annual self-assessment tax returns

 Any sole traders who, over the past tax year, have earned over £1,000 will be required to complete a self-assessment tax return (SATR). Self-assessment tax returns are a system used by HMRC to collect income tax. It is an annual responsibility that follows strict deadlines and must be completed either online or by post.

When you complete a tax return, HMRC will calculate the relevant income tax and National Insurance owed, which you must pay by 31st January each year.

To help you get the self-assessment ball rolling, we provide every Qdos customer with 30% off the self-assessment tax return service with GoSimpleTax. Their tool automatically calculates the amount of tax owed and makes it easier to keep track of income and expenses throughout the year. When January comes, all you need to do is submit to HMRC and pay your tax bill!

Not a Qdos customer but still wish to try the free version of their service? Click here.

For more information about self-assessments, key dates, and to learn about payments on account, visit our self-assessment information page. There you will also find more information about the service offered by GoSimpleTax.

 

  1. Keep records

As the only member of their business, it is a sole trader’s responsibility to keep an accurate account of any business incomings, outgoings, and expenses.

Keeping a clear record of your business activities will help to make your annual self-assessment tax return easier. Sole traders should keep all receipts and invoices organised and filed away.

 

  1. Consider setting up a separate bank account

Whilst sole traders are not legally required to have a separate bank account for their businesses, ensuring banking is kept separate and clear may help to keep track of business spending. A sole trader may also want to consider engaging an accountant to help effectively manage their finances.

 

Associated risks and how to combat them

As mentioned previously, sole traders face unlimited liability. As such, a sole trader is liable for any debts, damages, or losses that their business faces.

Because of this, business insurance is an invaluable resource. Here are three of the top insurances trusted by sole traders to protect them from loss.

  1. Professional Indemnity

This insurance policy is popular among all self-employed who provide advice, design or consultancy and is designed to react where an alleged error or omission in the services provided leads to third party financial loss.

Whilst having Professional Indemnity insurance in place is not a legal requirement, it might just prove vital for a sole trader. Mistakes sometimes happen. Without adequate PI coverage, a sole trader who is financially tied to their business opens themselves to unnecessary risk.

It is not only the losses of the client that sole trader’s have to think about, but the legal expenses that defending an investigation could incur. Negligence claims may involve a dispute going to court and legal fees soon mount up. The safety net that professional legal representation provides could prove invaluable.

  1. Public Liability

 Public Liability insurance provides cover in instances where legal action is brought against you by a third party in respect of physical injury or damage to property caused by you during the provision of services.

In the instance of an injury to a third party, there are plenty of impacting factors that could see the cost of claimant damages rise. For example, if the injured third party required time off work, rehabilitation, or medical expenses. In addition to this, the length of time an injury persists must be considered. Limits of indemnity for Public Liability tend to start at £1m.

It is no wonder then that this cover remains a go-to for many self-employed. In fact, 64% of 400 self-employed professionals surveyed by Qdos in 2019 held Public Liability insurance for their business.

  1. Tax Enquiry Insurance

Tax Enquiry Insurance provides you with an expert defence in the event of a range of HMRC enquiries. As a sole trader facing unlimited liability, the risk of investigation by HMRC poses quite a financial risk.

In the event of an enquiry, HMRC have the right to investigate into previous tax years and regularly exercise their right to do so. Sole traders are personally responsible for any errors in the calculation of their tax.

When you consider the cost per hour for professional representation, having adequate Tax Enquiry Insurance in place could prove more economical whilst also providing a level of technical expertise that may just nip a claim in the bud, minimising time a sole trader would spend dealing with HMRC instead of fee earning activities.

At Qdos, we provide a service that covers the entirety of the tax enquiry process. This insurance offers access to tax advice from in-house experts with claims handled by former tax inspectors.

We specialise in award-winning insurance for an industry of flexible workers. Our insurance policies can be quoted and purchased entirely online within minutes, see here for more details. If you wish to discuss your options give us a call on 0116 269 0999 or email us at [email protected].

By:Alice Hickling
 
 

 

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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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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