Freelancers' Questions: Should I fear HMRC over undeclared income?

Freelancer’s Question: I’ve read and re-read guidance about registering as self-employed with HM Revenue & Customs, but am still confused about my tax position. I work full-time in a creative role for an established brand, but have sometimes taken on small projects, on the side and on the quiet.

To explain, I have never declared any of these small earnings. I was unsure about the registration process with HMRC, and when I tried to find information I just got more confused. Should I be worried about such non-declarations, or can any still be made?

In future, I would like to do everything by the book though I don't know where to start and, of course, I’d like to pay the least amount of tax possible without breaking the law. Is there an HMRC helpline that I can call to possibly get help trying to sort everything out, or is it better to approach an accountant?

Expert’s Answer: You are right that there are some very unclear guidelines for registering a new source of income with HM Revenue & Customs, as well as penalties that can be charged if you fail to notify. It’s not helped by the fact that tax and National Insurance have different payment deadlines.

It is likely that that there may be no NIC liability under your circumstances, but I have included the details, below, just in case. I have also assumed that you currently don’t need to complete a Self-Assessment Tax Return.

So you have until October 5th for tax andJanuary 31st for NIC following the end of the tax year in which you first started earning from small projects. For example, if you started on 1 May 2009, as that is in the tax year 2009/10 which ended on 5 April 2010, the deadline for tax was October 5th 2010 and for NIC it was January 31st 2011. If you have started since April 6th 2011, there’s still time to register for NIC purposes.

It is possible to register as self-employed online, over the phone or in person, and all they need is your National Insurance number, business details and the date self-employment started.

There are penalties for late notification. Assuming you have not deliberately hidden details of income then you can get rid of the penalty all together by having a ‘reasonable excuse’ for the whole period of non-notification. There is no standard definition for this, but bereavement, illness and relationship breakdowns have been accepted in the past. HM Revenue and Customs have some lee-way in determining the penalty, but if you own up then it will be somewhere between 0% and 30% of the tax due. If they catch you it will be between 10% and 30%. Concealing details of income can lead to penalties between 20% and 100% of the tax, yet you do have a right of appeal against the penalty.

I would strongly recommend that you talk with a tax expert, rather than call HMRC’s helpline; as such a person will be on your side and keep HM Revenue & Customs at bay. Think of HMRC as the police, rather than the courts then you won’t go far wrong!

The expert was Richard Bayliss, managing director of The Low Tax Group, a chartered tax specialist for freelancers.




13th December 2011

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