On your side - Liberal Democrats back small businesses against tax grab on money they never earned during Covid

The Leader of the Liberal Democrats Ed Davey has called upon the Chancellor to be "on the side of the self-employed", as a million people face being slapped with a tax bill on money they never earned.

Income tax bills landing at the doors of the self-employed and freelancers of this country at the end of July will be calculated based upon their earnings in 2019-20 - neglecting the impact of the Covid-19 pandemic on business and trade.

In a letter to Chancellor Rishi Sunak, Davey sets out five urgent actions required of HMRC to take into account Covid losses on earnings, focused around clear and proper communication with taxpayers.

Leader of the Lib Dems Ed Davey MP writes in the letter to the Chancellor:

"Covid-19 has wrought havoc on the self-employed. Taxi drivers, hairdressers, cleaners, childcare providers and millions more have seen their incomes evaporate, as their businesses ground to a halt and people rightly stayed at home to save lives.

"Yet in a week's time, they face being slapped with a bill from HMRC that does not recognise this, because the calculation will be based on how much they earned before the pandemic.

The letter goes on to state:

"HMRC directed by you needs to show strong leadership by being on the side of the self-employed in this country. Placing the onus on a legion of sole traders and freelancers, who contribute so much to our culture and economy, to foot the Covid bill is the complete antithesis of strong leadership.

"No one must be left behind as we look forward to a green recovery from this pandemic. It's time to stop putting paperwork over people."

Ed Davey's full letter to Chancellor Rishi Sunak is below:

Dear Chancellor,

I am writing to express grave concern that a million self-employed are set to be overtaxed next week on earnings that never came to fruition.

Covid-19 has wrought havoc on the self-employed. Taxi drivers, hairdressers, cleaners, childcare providers and millions more have seen their incomes evaporate, as their businesses ground to a halt and people rightly stayed at home to save lives.

Yet in a week's time, they face being slapped with a bill from HMRC that does not recognise this, because the calculation will be based on how much they earned before the pandemic.

So HMRC's "payment on account" letters and processes need to be urgently amended to take account of this predictable impact of Covid losses on earnings and therefore tax bills.

So I would propose that you urgently require HMRC to take the following actions:

All letters and self-assessment demands sent to taxpayers for "payment on account" must show people very prominently that they are entitled to re-assess themselves in relation to what they did actually earn, reject the HMRC's tax estimate and pay instead a more accurate amount - potentially even claiming a refund.

While information about self-reassessment options is included normally, my plea to you and HMRC is that this year, this information must be far more prominent and far more taxpayer-friendly, with proper explanations, references to helplines and making it clear that a phone call may be all that is needed to avoid paying these inaccurate tax demands.

HMRC should state clearly in these letters, on its website and publicly via all available channels that it accepts estimates for "payment on account" may be seriously inaccurate this year and that HMRC is urging the self-employed and other taxpayers affected to get in touch if they have any questions.

HMRC should also drop any interest rate penalty for people who choose to pay a lower amount of tax on account for reasons related to Covid losses, but then discover their own calculations were themselves inaccurate.

HMRC should finally give much greater prominence to "time to pay" options too.

Serious consideration should also be given to HMRC unilaterally downgrading its estimates of what tax is due from self-employed at the first "payment on account" stage. The cashflow issues for the Government are after all far easier to manage than the cashflow issues that most self-employed people face at this time.

HMRC directed by you needs to show strong leadership by being on the side of the self-employed in this country. Placing the onus on a legion of sole traders and freelancers, who contribute so much to our culture and economy, to foot the Covid bill is the complete antithesis of strong leadership.

Finally, addressing the wider issue of the self-employed and Covid, can I re-iterate my longstanding call that you need to fix and extend the Self-Employment Income Support Scheme, to include the three million excluded from it on a similar administrative technicality. Neither the Treasury nor HMRC has provided a convincing rationale from excluding these three million people from support. Even at the late stage, I urge you to do the decent thing, and provide help, backdated as appropriate.

No one must be left behind as we look forward to a green recovery from this pandemic. It's time to stop putting paperwork over people.

I look forward to a response at your earliest convenience, and extend an invitation for a constructive dialogue on how to best support self-employed people in the months to come.

Yours sincerely,

Sir Ed Davey MP

Leader of the Liberal Democrats