Self-employed could face exaggerated tax bills

2 February 2010

Self-employed business owners could end up with inflated tax bills, it has been claimed.

A downturn in earnings during the recession could affect the balance of some self-employed business people's tax bills, the Federation of Small Businesses (FSB) has said.

Stephen Alambritis of the FSB, said: "The problem is that the HMRC's assessment of what tax is due for the current year is based on earnings for previous years, but we reckon that most self-employed people will earn less this year than they did in previous years."

The FSB has suggested that eight out of ten self-employed people experienced a fall of ten per cent in taxable income during the current financial year.

Based on average UK earnings of £25,000, that would deliver a decline of £2,500 in income for 2.4 million self-employed business owners.

Mr Alambritis continued: "If HMRC assumes these people will earn the same in 2009/10 as they did in 2008/09 then it could be overestimating their income by £6 billion. At a 20 per cent tax rate that would amount to an excess tax bill of £1.2 billion."

A spokeswoman for HMRC said: "We usually base our estimate of an individual's current year's earnings on their previous year's earnings. But we will take into account any evidence that these earnings are lower this year."