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As the first tax returns are being filed since HMRC introduced the dividend tax allowance in 2016, FCSA has learned that HMRC’s software is preventing the UK’s freelancers and contractors who work through Personal Service Companies (PSCs) from submitting an online tax return. HMRC’s software cannot compute how the dividend tax allowance interacts with other tax allowances and they are not planning to rectify the problem because HMRC say “it only affects a very small percentage of taxpayers”.
However, a very different view was put forward by HMRC when consulting on potential changes to IR35 estimating that there were 265,000 PSCs in 2012-13. HMRC suggested that this figure was an increase of 65,000 from the previous year, enough to warrant dedicating significant resources into developing legislation specifically to target this growing population. If HMRC’s figures are correct, and if the PSC population has continued to grow by 65,000 each year, then around 525,000 PSCs were in operation during 2016-17 and will be affected by the software malfunction. And it isnít just PSCs who will be affected, the problem will impact on anyone who receives dividend income and wishes to submit their self-assessment tax return online.
With nine months to go before the deadline to submit an online tax return HMRC is advising anyone affected to file a paper return, and they will accept paper returns from affected taxpayers until January 31st 2018. But those submitting a paper return after the usual October deadline must make sure that they accompany it with a reasonable excuse claim, which creates further administrative burden.
Julia Kermode, FCSA’s chief executive said: “Once again the UK’s smallest businesses are being hindered and it appears that HMRC has no intention of resolving the software issue. It is wholly unfair that individuals and their accountants will have to pick up the cost of this as HMRC’s failure will lead to an increased amount of admin, time, inconvenience and ultimately cost. While HMRC claims that this issue only affects a very small percentage of taxpayers, I put it to HMRC that its estimate is inaccurate and we will see a significant impact on PSCs as well as anyone who received a dividend payment in 2016-17. That is not a small number given that ONS indicates some 11.9% of shares on the London Stock Exchange are held by individuals, many of whom will have received dividends last year and will plan to submit their tax return online. If HMRC cannot get this simple change to dividend tax to work I would question their ability and competence to implement Making Tax Digital.
“It’s an absolute shambles and one cannot help but speculate if the reason that HMRC is unable to resolve the issue is due to a shortage of IT contractors which has come about since the IR35 changes were imposed earlier this month. Since then, we have learned that many contractors have been released from government projects or simply chosen to leave in pursuit of private sector roles rather than be deemed to be unfairly caught by IR35. I fear we will see more fallout in time!”