Research and analysis

Understanding the potential impacts of Making Tax Digital on self-employed individuals with income between £10,000 to £30,000

Published 22 February 2024

Qualitative research with self employed individuals who earn between £10,000 to £30,000 per year.

HM Revenue and Customs (HMRC) Research Report 730.

Qualitative research conducted by Verian (formerly Kantar Public) in April 2023.

Prepared by Verian (formerly Kantar Public)v (Samantha Outhwaite, Alice Coulter, Richard Matousek, and Helen Kenney) for HMRC.

Disclaimer: The views in this report are the authors’ own and do not necessarily reflect those of HMRC.

1. Executive Summary

1.1 Background and objectives

In December 2022, the government announced a review of the needs of smaller businesses, and particularly those whose gross income was less than £30,000. The review would consider in detail whether and how the Making Tax Digital for Income Tax Self Assessment (MTD for ITSA) service can be shaped to meet the needs of smaller businesses and the best way for them to fulfil their Income Tax obligations.

HMRC commissioned Kantar Public to carry out research with self-employed individuals to feed into the review. This research aimed to build a detailed picture of self-employed individuals with a turnover of £10,000 to £30,000 and their expectations regarding the impact of MTD for ITSA. The research had three broad objectives, to explore:

• the financial circumstances of self-employed individuals at this turnover level
• how self-employed individuals at this turnover level manage their finances and tax obligations
• how MTD for ITSA may affect self-employed individuals at this turnover level

1.2 Method

To address the aims of the research, Kantar Public undertook a qualitative approach, conducting 40 in-depth interviews with self-employed individuals earning between £10,000 to £30,000. Interviews lasted up to an hour and took place either online (via Zoom) or by telephone. All interviews took place in April 2023.

A purposive sampling approach was used to ensure a diverse and inclusive sample reflecting key characteristics of this audience. The primary recruitment criteria were annual turnover (across four income categories within £10,000 to £30,000) and duration of trading (ranging from individuals that have been trading for less than five years, but have previously filed a Self Assessment return, to individuals that have been trading for more than 10 years). The sample also included a spread of different record keeping approaches, income streams, ages, genders and ethnicities to ensure a broad range of participant characteristics. Variations between sub-groups are outlined in the report where they were observed.

1.3 Key findings

Self-employed individuals at this turnover level

Among the participants, there was a great deal of variation in the types of self-employment individuals were undertaking at this turnover level. Key dimensions that differentiated self-employed individuals included the role of self-employment in their lives, the industry and types of work they engaged with, as well as the pattern of their self-employed work. These variations could be grouped into five categories of self-employment: a side-hustle, client-based ad hoc work, multiple short-term contracts, regular work with returning clients, and longer-term contracts.

Motivations for becoming self-employed also varied across the sample, and five underpinning reasons emerged: desire to be their own boss, flexibility to fit around their family, an industry or vocation norm, an opportunity to pursue a passion or side interest, and those who were compelled by circumstance (for example, redundancy).

The financial circumstances of self-employed individuals at this turnover level

The financial circumstances of this audience ranged from households that felt highly financially secure to those that felt extremely financially insecure. However, for all participants, self-employment income played an important role in their household finances. Participants’ views of their financial security tended to be impacted by five factors: their lifestyle choices, whether or not they had dependants or assets (for example, home ownership), the diversity of their household income and whether their self-employment led to consistent and reliable income or not.

The approach to financial management and tax obligations by self-employed individuals at this turnover level

Participants typically viewed management of their finances and tax obligations as simple, straightforward and rarely a significant burden. Overall, participants described a light touch approach to record keeping, using a range of practices, including paper, spreadsheets and software. Participants also reported a range of frequencies for record keeping (regular, ad hoc, annual) which were driven by habit and confidence in the simplicity of their accounts. Where participants reported using agents and other support, this was to lift the burden of worry, administration and time. These participants tended to be individuals with relatively low confidence and understanding in the management of their accounts and tax obligations.

Perceptions of MTD for ITSA for self-employed individuals at this turnover level

Initially, participants found the idea of MTD for ITSA jarring, triggering a pause and an ‘urm’ moment. Shock was largely prompted by the need for quarterly summaries. Following further information about what MTD for ITSA would involve, participants’ emotional response to MTD for ITSA ranged from opposition and indignance to pragmatism and positivity. However, most participants in the sample eventually adopted a pragmatic view of MTD for ITSA and were able to identify benefits. Despite this, there was a general perception amongst participants that MTD for ITSA was for the benefit of HM Revenue and Customs (HMRC) and not for self-employed individuals at this turnover level.

When exploring the four key elements of MTD for ITSA (MTD compatible software, digital record keeping, quarterly summaries and end of year declarations) participants were able to identify both benefits and disadvantages. Software was acknowledged to have benefits, particularly around record keeping and reducing errors. However, if individuals were required to pay for MTD-compatible software this was seen as a financial obstacle and barrier to meeting their tax obligations.

Participants were generally comfortable with the idea of digital record keeping, although some expressed resistance to adapting their current systems. Quarterly updates generated mixed responses amongst participants. However, many in the sample felt that being able to opt in to receiving tax estimates (forecasts) following their quarterly update was a key benefit. Lastly, the submission of ITSA via MTD software was felt by participants to be similar to the current online HMRC system.

Supporting a transition to MTD for ITSA for self-employed individuals at this turnover level

Participants felt that HMRC could support their transition to MTD for ITSA in multiple ways. These included providing a long lead time of over a year ahead of its implementation and a period of relaxed requirements regarding the quarterly summaries and offering advice and guidance.

2. Research design

This section outlines the background to the research, as well as detailing the objectives and methodology used in this study.

2.1 Background and context

In December 2022, the government announced a review of the needs of smaller businesses, and particularly those whose gross income was less than £30,000. The review would consider in detail whether and how the Making Tax Digital for Income Tax Self Assessment MTD for ITSA) service can be shaped to meet the needs of smaller businesses and the best way for them to fulfil their Income Tax obligations.

2.2 Research objectives

HMRC commissioned Kantar Public to carry out research with self-employed individuals to feed into the review. The overall aim of this research was to build a detailed picture of self-employed individuals with a turnover of £10,000 to £30,000 and their expectations regarding the impact of MTD for ITSA. The research had three broad objectives, to explore:

• the financial circumstances of self-employed individuals at this turnover level
• how self-employed individuals at this turnover level manage their finances and tax obligations
• how MTD for ITSA may affect self-employed individuals at this turnover level

2.3 Methodology

To address the aims of the research Kantar Public undertook a qualitative approach, conducting 40 depth interviews with self-employed individuals earning between £10,000 to £30,000. Interviews were one hour in duration and conducted either online (via Zoom) or by telephone. All interviews took place from 6 April to 27 April 2023.

The objective of the interviews was to explore participants’ reasons for self-employment, their broad financial circumstances, their perspectives of MTD for ITSA, as well as how it may affect them. The interviews were led by Kantar Public moderators and used stimulus to facilitate the discussions. The interview guide and stimulus are provided in the appendices (appendix 1 and 2).

A purposive sampling approach was used to ensure a diverse and inclusive sample reflecting key characteristics of this audience. The sample was sourced from recontact data from the Small Business strand of the Individuals, Small Business, and Agent (ISBA) Survey 2022 and Self Assessment Data provided by HMRC. All participants confirmed they had filed a Self Assessment return in the last 12 months for income from self-employment.

The primary recruitment criteria were annual turnover (across four income categories within £10,000 to £30,000) and duration of trading (from less than five years to more than 10 years). The sample also included individuals with different record keeping approaches (paper, spreadsheet, software), income streams, ages, genders and ethnicities to ensure a spread of participant characteristics. However, we note that the sample for this project had a slight skew to those aged over 35 years old. In addition, despite a broad range of characteristics, the findings were largely consistent across the sample. Variations between sub-groups are outlined in the report where they were observed.

Complete details of the sample frame can be found in the appendices (appendix 3).

Please note that throughout this report case study illustrations use pseudonyms.

3. Customer context

In this section, we consider the characteristics of self-employed individuals at the £10,000 to £30,000 turnover level, their financial circumstances and their approach to financial management.

3.1 Self-employed individuals at this turnover level

Across the sample of self-employed individuals at the £10,000 to 30,000 turnover level, there was a great deal of variation in the types of self-employment, from roofers and carpenters to disc jockeys. Key variations that differentiated participants included: the role of self-employment in their lives, the industry and types of work they engaged with, and the volume of their work.

Role of self-employment: The significance of self-employment in participants’ lives varied across the sample. Many participants pursued self-employment as their sole form of work and income, often considering it the primary avenue for their professional lives. Other participants were self-employed alongside other activities, for example, transitioning into retirement or using self-employment as a side hustle to a main career.

Industry and type of work: The participants in the sample worked in a wide range of industries, from entertainment to construction. Across the sample, participants were also performing a variety of roles including, for example, administration, copy-writing, IT support and tuition.

Volume of work: The volume of work among participants also varied significantly. This ranged from working only a few days a month to 50 hours per week in self-employment.

The pattern of participants’ self-employment varied considerably across the sample. Within the sample there was a spectrum of self-employment patterns, including: side-hustle, client-based ad hoc work, multiple short-term contracts, regular work with returning clients, and long-term contracts.

Side hustle: For these participants, self-employment was a part-time pursuit, conducted in leisure time, alongside their main Pay As You Earn (PAYE) work. These participants often sold goods, for example, one participant described making and selling homewares online in their spare time outside their full-time career as a youth worker.

Client-based and ad hoc: Self-employment for these participants was commonly the main source of income and their work consisted of ad hoc work for individuals. Participants, such as a mobile hairdresser, beauty therapist and a roofer, described having irregular or one-off clients and a dependence on a wide client base.

Short-term contracts: For these participants, self-employment was generally the main source of income and their work consisted of short-term contracts (for example, weeks or months at most in duration) with multiple corporate clients. Participants described working with a range of corporate clients performing irregular and variable work. This category included, for example, a copywriter who had short-term contracts with several clients, some new and others returning.

Regular, returning clients: Self-employment was the main source of income for this group and consisted of regular clients. This included an IT support engineer who had several returning clients, and a personal shopper that maintained less than half a dozen regular clients with ongoing patronage.

Longer-term contracts: For these participants self-employment was, for the most part, the main source of income and their work consisted of long-term contracts (lasting for more than a year), often with just one to three clients. Examples in this category included a cleaner with long-term contracts with three clients, and an administrator with three long term clients.

Participants generally did not anticipate significant changes in the volume or pattern of their self-employment work. However, across this sample the pattern of self-employment work was not fixed, and some participants had transitioned from one category to another in the past, for example, as their self-employment evolved or they transitioned into retirement.

3.2 Motivations for self-employment

Five key influences on motivations for undertaking self-employment at this turnover level for these participants were identified: desire to be their own boss, flexibility to fit around their family, an industry or vocation norm, an opportunity to pursue a passion or side interest, and those who were compelled by circumstance (for example, redundancy). The five influences are considered in turn below.

These drivers were neither mutually exclusive nor fixed, with participants often expressing multiple drivers and a transition from one driver to another. This is demonstrated in the following case studies.

Working for oneself: A key driver participants cited for becoming self-employed was the perceived control it offered in their working lives. These participants valued the freedom and independence that self-employment offered, allowing them to live and work on their terms. Whilst drawbacks were highlighted, including no holiday and sick pay, the key benefit to working in this way was the flexibility it allowed for other commitments, including other work, family and better work-life balance.

Case study - Work ethos: Rosa

Age: 35 to 54

Self-employment income: £15,000 to 20,000

Time trading: More than 10 years

Rosa is a foot health practitioner with two rental properties. She lives with her partner, who works shifts, and her twin children who are 6 years old. Rosa had always wanted to be her own boss and wanted the independence and flexibility of self-employment. To become her own boss, Rosa worked to identify a career that would allow that and chose to train in foot health.

“[In self-employment] you can really do what you want.”

Over time, Rosa came to appreciate the flexibility that self-employment provided to fit work around the needs of her family.

“It’s better to be self-employed in a way, because I can work around my children.”

Flexibility for the family: Self-employment was described by these participants as being actively pursued to accommodate their caring responsibilities, most commonly for children. The flexibility self-employment provided was cited as a key benefit (over Pay As You Earn employment) with participants describing an ability to work around the needs of dependents, as well as partners’ working patterns.

Case study - Flexibility for the family: Jeremy

Age: 35 to 54

Self-employment income: £20,000 to 25,000

Time trading: More than 10 years

Jeremy’s self-employment started with him and his wife running a pub together more than 20 years ago, and since then he has always been self-employed. Past ventures have included catering, but Jeremy currently runs a cleaning service and a gardening service. Jeremy described his decision to remain self-employed was because of the flexibility it offered to meet the needs of his family. Over time, his family needs have included caring for his elderly mother, who became ill and required full-time support. More recently, he and his wife had a daughter and being self-employed meant that Jeremy could prioritise her care and work around her.

“There’s a bit of freedom about being your own boss.”

Career fit: Industry or vocational norms were a key driver cited by participants working in an area where self-employment was a popular form of work. Self-employment for these participants was motivated by a perception that it is was the best fit for their career. In this instance, self-employment often allowed participants to take on multiple contracts and clients leading to a portfolio of expertise and experience.

Case study - Career fit: Cathy

Age: 55+

Self-employment income: £10,000 to 15,000

Time trading: More than 10 years

Cathy is a fiction writer living with her husband who is a freelance photographer. She has some light caring responsibilities for her elderly mother including running her household and keeping an eye on her health and wellbeing. Writing started as a hobby for Cathy but gradually became a career. From her perspective, despite the inconsistency of work, self-employment was the only practicable working mode open to her, and other writers and novelists.

“You don’t get the continuity that you would get if you were working for a company. There’s no guarantees really.”

Opportunity: A key motivation for self-employment amongst participants was a perceived opportunity to either pursue a passion or earn more income than in Pay As You Earn (PAYE) work. Participants following their passions through self-employment frequently described transitioning to their self-employment over time. Working to build up experience in that career before going to self-employment full time.

Other participants saw self-employment as an opportunity to earn more income than would be possible through traditional employment in their line of work. These participants felt that they could leverage their connections and skills more effectively when self-employed, allowing them to charge higher rates than they would receive as employees.

Case study - Opportunity: Antonio

Age: 35 to 54

Self-employment income: £10,000 to 15,000

Time trading: Less than 5 years

Antonio is the father of a 4 year old girl and lives with his partner who works shifts. Antonio used to work in the hospitality industry. For many years he managed a public house but was made redundant. Whilst Antonio found new hospitality work quickly, he decided to take advantage of the opportunity to pursue a passion for writing and see if he could make a career in copywriting. Antonio took part-time Pay As You Earn (PAYE) hospitality work, to maintain a financial safety net, and started building work as a copywriter. After a couple of years, he had developed his copywriting portfolio to an extent that he felt able to leave Pay As You Earn (PAYE) hospitality and now pursues copywriting full time.

“[self-employment] was…more of a challenge.”

“I have complete flexibility of work, which is exactly what I need, given my hours are determined by my wife’s rota.”

Compelled by circumstance: The sample included participants that had been driven to self-employment by circumstances, as opposed to actively choosing this way of working. Amongst these participants, redundancy was frequently reported as the catalyst for becoming self-employed. Participants described struggling to find employment after being made redundant and turning to self-employment as an alternative solution. As such, for these participants self-employment was a more passive choice.

Case study - Compelled by circumstance: Grace

Age: 55+

Self-employment income: £10,000 to 15,000

Time trading: 5 to 10 years

Grace is a special needs foster carer living with her partner, daughter and two foster children. Both Grace and her partner previously had corporate careers. Their self-employment was initially driven primarily by an inability to find employment in the mainstream workforce following her withdrawal from the workplace to care for their children, and his late career redundancy.

“I have absolutely no intention of not doing something [for work].”

Grace also highlighted that whilst self-employment in foster caring was initially driven by a need to earn an income, it has become a career that she and her partner are passionate about.

“The special needs world is a wonderful world to be in… it brings a quality to my life, and I want to get up every day for them just to see what they can or cannot pull out the bag.”

3.3 The financial circumstances of self-employed individuals at this turnover level

The financial circumstances of the participants in the sample varied, from those reliant solely on low self-employment incomes to those with multiple income streams supporting the household. Despite this variation, most participants in the sample claimed their self-employment earnings played a significant role in household finances and perceived themselves as being reasonably financially secure. This was underpinned by confidence in the longevity and reliability of their income streams (whether solely self-employed or having multiple income streams, across levels of turnover from £10,000 to £30,000).

Although most participants considered themselves reasonably financially secure, the sample comprised a spread of perceived security. This included individuals at either end of the spectrum, from households who felt they were highly financially secure to those who felt extremely insecure.

“It’s a bit of a tough situation for us.” (Less than 5 years trading, turnover £10,000 to £15,000)

“I make enough to live quite nicely, to not panic, and I certainly don’t have to choose between food or heating.” (Trading for under 5 years, turnover £10,000 to £15,000)

Participants’ perceptions of financial security tended to be influenced by five factors: lifestyle choices, dependants, diversity of household income, assets and the flow of self-employment income.

Lifestyle choices: The sample included individuals who had made certain lifestyle choices to feel financially secure at their income level. This included living a relatively frugal or simple lifestyle, minimising luxury purchases, or choosing not to have children.

Case study - Lifestyle choices: Ada

Age: 18 to 34

Self-employment income: £20,000 to £25,000

Time trading: 5 to 10 years

Ada is a forensic psychologist living with her partner and their pet dog. Ada and her partner met 5 years ago when she was training, and he was a taxi driver. Since then, her career has progressed, and he has trained to be a multi skilled engineer and is employed. They have recently bought a house together and contribute equally to the household. In the past they felt financially insecure as they were both on low incomes and saving to buy a house whilst renting. They now feel financially secure, having bought their first home and progressed to higher incomes, but they have a habit of living prudently.

“We’re not super affluent, but we live quite frugally, and we don’t have many outgoings. So, I think we’re OK. “

Dependants: A key factor in individuals feeling less financially secure at this income level was whether they had dependents, such as children or other family members they cared for. Participants described having dependents as placing a weightier demand on the household income and a greater chance of unexpected outgoings.

Case study - Dependents: Karl

Age: 35 to 54

Self-employment income: £25,000 to £30,000

Time trading: Over 10 years

Karl is a self-employed gardener who lives with his wife and their two disabled children. His wife works in a school, and they also receive disability allowance for their children. Karl has found that the cost-of-living crisis has impacted his work. He rarely takes holidays because he is worried he might miss out on work. The weather also impacts demand for work, and he feels financially uncertain about the future.

“It has got tougher over the past 6 months.”

Diversity of household income: Participants with multiple household income streams reported a greater sense of financial security than those relying solely on their self-employment income. Those with multiple household income streams described feeling able to offset risks in their finances, whilst those reliant on their self-employment were not. For example, one participant described being able to flex how much their self-employment income contributed to the household finances. This participant was able to rely on other household income if their self-employment income was low one month and contribute more to the household finances in another month.

Case study - Self-employment as sole income: Naomi

Age: 55+

Self-employment income: £20,000 to £25,000.

Time trading: More than 10 years

Naomi is a freelance administrator currently working for three organisations and volunteering for two. She also considers herself as a self-employed artist but described not having had much time for art in the last 20 years, prioritising earning a living instead. Naomi lives with her retired partner in a small one bedroom flat and feels that she cannot afford to retire. Her self-employment income is needed not just for the basics, such as food and fuel, but also for her mortgage. She reported struggling with the energy crisis and described turning off the heating in her home except for one room this winter.

“I can imagine I’ll just work or do something to earn money until I drop.”

Assets: Participants with assets, such as outright homeowners or landlords, reported a greater sense of financial security compared to those without, such as those with mortgages or renting. Those who owned their home outright described having a lower burden on their household finances with no mortgage or rent to pay. Those with other assets, such as rental properties, described feeling that they had additional streams of income which provided a greater sense of financial security.

Case study - Assets: Alexandria

Age: 35 to 54

Self-employment income: £20,000 to £25,000.

Time trading: More than 10 years

Alexandria is a self-employed hairdresser and beauty therapist and has been for 21 years. She lives with her partner, adult daughter and shares the care of a 5 year old foster child. She and her partner own their home outright, and he owns a limited company, through which he receives dividends and pays himself a salary. Alexandria described feeling very financially secure because they have low outgoings and high income within the household, as well as savings.

“We can afford to have nice holidays.”

“I would never go back into a salon. I think once you’ve gone self-employed your money is your money.”

Flow of income: Perceptions of financial security often reflected the flow of income, specifically whether or not income was reliable and consistent. Participants in the sample with ad hoc clients or short-term contracts recognised that their income could be unpredictable. These participants reported feeling vulnerable to economic fluctuations, such as the cost-of-living crisis, inflation and the COVID-19 pandemic. In contrast, participants with regular clients or long-term contracts perceived their income to be stable and felt more financially secure.

Case study - Flow of income: David

Age: 35 to 54

Self-employment income: £10,000 to £15,000.

Time trading: More than 10 years

David lives in a multi-generational household with his partner and parent, who are all working and contributing to the household finances. David is an IT technician and programmer working with a portfolio of clients. In the past, he enjoyed a wide range of work. Since the cost-of-living crisis, David reported a change in the type of work coming in from clients. He has had a reduction in high value contracts, and a greater focus from his clients on lower value, reactive, problem-solving work. As a result, David feels less financially secure and is relying on the wider household income.

“I feel the split in terms of what kinds of stuff I’m getting, [it] has skewed now very much towards the trouble shooting and problem solving.”

It is worth noting that perceived financial security did not impact participants’ attitudes toward MTD for ITSA. The factors influencing participants’ attitudes toward this are explored further in Section 3.

3.4 The approach to financial management and tax obligations by self-employed individuals at this turnover level

Participants expressed confidence in the management of their finances when considering their approach to record keeping and meeting tax obligations. This confidence was underpinned by a view that their finances were relatively simple and straightforward, typically with low volumes of transactions they found easy to record and monitor. Most participants reported having few or no expenses to record and as such were primarily monitoring their income. Furthermore, participants reported using digital transactions, rather than cash, to facilitate the tracking of their income and where necessary expenditure.

“It’s simple, just income and expenditure.” (More than 10 years trading, £20,000 to £25,000 turnover)

“My set up is mercifully simple, and that’s why I keep it that way, because it isn’t difficult for me to do.” (5-10 years trading, £10,000 to £15,000 turnover)

Overall, participants felt that their accounts were not particularly onerous and only required light formal record keeping. Across the sample, participants’ account management systems varied in terms of approach. Those keeping paper records (including paper ledgers, diaries and files) tended to have been trading for more than 10 years and were over 55 years old.

Where individuals were using excel spreadsheets, these were typically deemed ‘simple’, although some described managing more advanced and complex spreadsheets. For those using accounting software to manage their accounts this was usually on the basis of a recommendation from an accountant. Importantly, software was widely seen as ‘over the top’ by participants (for themselves and others self-employed earning £10,000 to £30,000).

“I have the same way doing it for 20 odd years, with my little Simplex D book.” (More than 10 years trading, £20,000 to £25,000 turnover)

Record keeping also varied in terms of frequency across the sample, ranging from regular and frequent record keeping to ad hoc and annual record keeping. Each of these is explored below.

Regular and frequent record keeping: Participants that reported completing regular and frequent record keeping often described the practice as driven by external requirements, such as the submission of records for Universal Credit or VAT. For some participants, past record keeping requirements had led to a habitual practice of record keeping. For example, one participant described previously being required to maintain monthly accounts for a hospitality business and now, despite only having three clients to invoice and no expenses to track, they continued their habitual monthly accounting.

“When you’re doing it on a regular basis, every three months, it becomes like a doddle in the park.” (Less than 5 years trading, £10,000 to £15,000 turnover)

Ad hoc record keeping: Where participants completed intermittent or ad hoc record keeping, this was linked to an absence of external pressure to drive more frequent action. Record keeping was not a priority for these participants and there were no external requirements, other than the end of year declaration, to drive a more frequent approach. Yet they had an aspiration to maintain up to date records and therefore tried to focus on it when they could or remembered to do so.

“I try to do it every month, but I often don’t get to it.“ (More than 10 years trading, £20,000 to £25,000 turnover)

Annual record keeping: Annual record keeping was often driven by a confidence amongst participants that their accounts were straightforward and easily completed in a short space of time, ready for their tax declaration. However, for a small number of participants this annual approach was driven by an aversion to completing record keeping and other accounting tasks.

“I don’t really love doing it… it’s something that at some point…in that kind of lull week between Christmas and New Year, I’ll get the chance to sit down and get everything in order.” (Less than 5 years trading, £10,000 to £15,000 turnover)

Participants’ overarching approach to their account management was often a matter of habit and confidence in the simplicity of their accounts. In addition, for the most part, participants did not anticipate changing their approach to record keeping, nor moving over to the use of software.

Most participants in the sample were managing their accounts and tax obligations themselves. Where participants reported using tax agents and other types of support (such as family) they were doing so primarily to complete and submit their tax declaration. These participants tended to be less confident in their understanding and management of their tax obligations, perceiving tax management as ‘tricky’ and requiring expertise. Where tax agents and other types of support were used, it was to lift the burden of worry, as well as reduce perceived administration burden and time.

“It’s quite difficult to understand, and it’s scary because you think ‘I don’t want to miss anything, I don’t want to put anything wrong’, but you just don’t know.” (5-10 years trading, £15,000 to £20,000 turnover)

“It gives me peace of mind, because they know their stuff.” (5-10 years trading, £10,000 to £15,000 turnover)

Notably, some participants in the sample reported having used a tax agent in the early years of self-employment to learn from them and have since taken on the work themselves.

3.5 Perceptions of Income Tax Self Assessment

Overall, participants in the sample had a pragmatic view of the Income Tax Self Assessment declaration and a concern to get their declaration right first time. Meeting their tax obligations and completing the Income Tax Self Assessment declaration was viewed as something that had to be done. Where this had become habitual, it was not seen to be particularly onerous or viewed in an especially negative way by participants in the sample. In addition, participants reported feeling comfortable with their systems and confident that their approach worked for them and to meet their tax obligations.

“If there’s no major changes, you’re literally whizzing through it.” (More than 10 years trading, £20,000 to £25,000 turnover)

“When it’s your own money and your own time, you don’t want to get it wrong.” (More than 10 years trading, £10,000 to £15,000 turnover)

4. Making Tax Digital for Income Tax Self Assessment (MTD for ITSA)

In this section, we explore reactions to, and perceptions of MTD for ITSA for self-employed individuals at this turnover level.

5. Overview of reactions to MTD for ITSA

Prior to engaging with the research, participants were largely unaware of MTD for ITSA. In the first instance, participants found the idea of MTD for ITSA jarring. This reaction included shock about the need for quarterly summaries, which prompted individuals to pause, sit back and utter ‘urm’. Following the immediate shock, participants expressed a range of emotional responses, from opposition and indignance to pragmatism and positivity (outlined in more detail in section 3.2).

“It just seems a bit of a sledgehammer to crack a nut.” (More than 10 years trading, £20,000 to £25,000 turnover)

After some consideration, participants’ emotional responses gave way to a general acceptance of the idea of MTD for ITSA. Across the sample, participants commonly took a pragmatic view, stating that they would do what they need to do to meet their tax obligations and because they have to in order to be tax compliant.

“You have to go where the future is.” (More than 10 years trading, £15,000 to £20,000 turnover)

“I’d learn how to do it and get on with it while gritting my teeth.” (More than 10 years trading, £20,000 to £25,000 turnover)

MTD for ITSA tended to be seen as being for HMRC’s benefit, rather than participants, or other self-employed individuals at this turnover level. There was not a strong sense of how MTD for ITSA would benefit HMRC beyond ‘making things easier’ in terms of monitoring and identifying non-compliance (be that intentional or accidental). However, across the sample participants felt that the requirements of MTD of ITSA would create more work for individuals (compared to the current system) than be of benefit to them.

“I feel like this is more about the Government’s benefit than my benefit. I feel like this is more about keeping track on me, rather than on me keeping track on myself.” (More than 10 years trading, £25,000 to £30,000 turnover)

5.1 Emotional reactions on first hearing about MTD for ITSA

Participants expressed a range of emotional reactions, from the strongly negative to the highly positive, to MTD for ITSA as a whole (all four components together, those being MTD compatible software, digital record keeping, quarterly summaries, end of year declaration). Four categories of emotional responses were identified amongst participants: opposition, indignance, pragmatism, and positivity.

Opposition: Participants who expressed opposition tended to have a strong emotional reaction to the idea of MTD for ITSA. There was a perception amongst these participants that it was excessive for self-employed individuals at this turnover level like themselves. This included a view that HMRC should be focussing on big tax evading companies instead of ‘small fry’ like this audience. For some participants, this emotional response appeared to be underpinned by a ‘political’ or ‘value’ standpoint, perceiving MTD for ITSA as intrusive and/or as a form of state monitoring.

“It just sounds like an exercise in money making and control. It’s an intrusion - trying to get as much access to individual’s private lives as possible.” (Less than 5 years trading, £10,000 to £15,000 turnover)

Indignance: Where participants expressed indignation about MTD for ITSA, this was because it was perceived as highly unnecessary. These participants viewed MTD for ITSA as an additional administrative and bureaucratic burden and were unable to identify a reason for the change. In addition, participants questioned what HMRC would do with this additional information.

“It feels unnecessary, the whole thing.” (More than 10 years trading, £10,000 to £15,000 turnover)

Pragmatism: At the centre of the pragmatic response was a view that participants would adapt because they had to in order to be tax compliant. For those who responded pragmatically, this was underpinned by a sense of optimism and confidence that adaptation was personally achievable. Despite this optimism, there was some concern for others’ ability to adapt (such as the digitally excluded).

“I will do what I will have to do…and I am sure it will be fine.” (More than 10 years trading, £20,000 to £25,000 turnover)

Positivity: A minority of participants easily identified benefits of MTD for ITSA for themselves. For these individuals, MTD for ITSA was viewed as a mechanism to improve record keeping, meet tax obligations and support financial planning. It was especially welcomed by participants who perceived themselves as disorganised, where MTD for ITSA was seen as the necessary push they needed to become more organised in managing their accounts.

“You [will] know where you’re coming from… where you’re going… I can only see positives emerging from it, not negatives.” (Less than 5 years trading, £10,000 to £15,000 turnover)

6. 3.3 Perceptions of the components of MTD for ITSA

Set out below are participants’ responses to each of the four components of MTD for ITSA: Making Tax Digital compatible software, digital record keeping, quarterly summaries, end of year declaration.

Making Tax Digital compatible software: In principle, the use of software was seen to have benefits across the sample. However, a requirement to purchase software was seen as unreasonable and a barrier to meeting their tax obligations.

There were two key benefits highlighted by participants. First, participants felt that software may support record keeping, by having all files and records in one place. Second, it was hoped that the software would facilitate the completion of the end of year ITSA declaration by flagging incorrect entries and auto filling some fields.

“These softwares are designed to make your life easier.” (More than 10 years trading, £20,000 to £25,000 turnover)

The key drawbacks identified by participants regarding software were threefold. First, there was a perception software should be free, as the requirement to purchase was seen as a barrier to meeting their tax obligations. Furthermore, there was a sense that the benefits of software would not outweigh the costs for self-employed individuals at this turnover level due to the simplicity of their accounts. Second, the introduction of the use of software would lead to a time burden for participants as they learned to use it. Third, participants expressed concern around digital security and the risks of sharing personal and sensitive data online.

“If I’ve got to pay for something in order to satisfy this, I might object to it.” (Less than 5 years trading, £10,000 to £15,000 turnover)

Digital record keeping: Participants were generally comfortable with the idea of digital record keeping. Despite a generally relaxed view of going digital, there was a degree of reluctance amongst participants to adapt current record keeping approaches. This resistance was particularly strong amongst those currently maintaining paper records who had been trading for more than 10 years.

Two key benefits of digital record keeping were identified by participants. First, digital record keeping was seen as largely accessible, perceived as similar to maintaining excel spreadsheets, and as such, familiar to most participants. Second, it was felt that the requirement for digital record keeping might encourage greater organisation and more frequent record keeping (particularly among participants that saw themselves as disorganised).

“If I had to keep digital records throughout the year, then maybe I would be more on track, more on top of where I was up to, at any given point.” (More than 10 years trading, £25,000 to £30,000 turnover)

In terms of drawbacks, participants felt that digital record keeping may lead to increased administrative burden, particularly for those keeping paper records. In addition, there was a concern amongst participants that a transition to digital record keeping might be particularly challenging for the digitally excluded.

“This is a bit of a hassle, as it’s an extra thing I haven’t had to do before.” (More than 10 years trading, £10,000 to £15,000 turnover)

Quarterly summaries: This element of MTD for ITSA evoked the strongest reactions and prompted a range of responses from anger and opposition to appreciation.

Quarterly updates were perceived to have a number of key benefits by participants. The central benefit observed was the potential to opt into receiving tax estimates following the submission of a quarterly update. The option to receive tax forecasts was the most highly appreciated element of MTD for ITSA overall across the sample. Participants viewed tax forecasting as a supportive tool that would help them in their financial budgeting and planning.

Other perceived benefits included a potential for reduced burden at the end of the tax year, with accounts being managed at quarterly intervals. It was also highlighted that quarterly summaries might encourage more frequent record keeping.

“26 weeks of work is a lot, but if you kept it down to 12 weeks, it’s not as much.” (More than 10 years trading, £15,000 to £20,000 turnover)

“If you’re trying to scratch your way through, trying to remember how you did it last year… that’s a lot more stress than doing it four times, while it’s still fresh in your memory.” (Less than 5 years trading, £10,000 to £15,000 turnover)

On the flipside, participants felt that the key drawbacks of quarterly summaries included increased administrative and time burden. Indeed, participants in the sample felt that quarterly summaries had the potential to quadruple the burden of accounts management.

“If they’re making you do it four times a year, then it seems like almost four times as much work, which seems a bit tiresome.“ (More than 10 years trading, £25,000 to £30,000 turnover)

Where participants were using tax agents, they raised a concern about the potential impact of quarterly summaries in terms of increased agent fees. There was concern that quarterly summaries would mean a potential quadrupling of the work required from an agent, leading to increased annual fees; an additional cost burden that participants would rather not incur, or may struggle to afford.

Participants also raised concerns about quarterly updates being unnecessary and excessive for self-employed individuals earning £10,000 to £30,000 with simple and straightforward accounts. Moreover, a small number of participants felt strongly that quarterly summaries were an inappropriate form of state monitoring.

“Part of what I like about self-employment is the degree of freedom - I don’t want someone coming to me every four months or three months saying how much money have you made? You don’t need to know - you need to know at the end of the year, so I can pay my tax.” (Less than 5 years trading, £10,000 to £15,000 turnover)

End of year declaration (Income Tax Self Assessment via Making Tax Digital): The Income Tax Self Assessment via Making Tax Digital (MTD) submission prompted very muted reactions from participants. Most in the sample felt that the submission of the end of year declaration in this way was similar to the current online system. However, participants highlighted, again, that a requirement to purchase software in order to submit the end of year declaration was a key drawback of MTD and a barrier to tax compliance.

“Whether I fill it in on a bit of paper here, or put it in, in a bit of software, it’s not going to take me loads of time.” (More than 10 years trading, £20,000 to £25,000 turnover)

“My gripe would be, why would I have to buy probably a fairly expensive bit of software, for what I’m doing?” (More than 10 years trading, £20,000 to £25,000 turnover)

7. Supporting a transition to MTD for ITSA for self-employed individuals at this turnover level

This section outlines the key suggestions to support a transition to MTD for ITSA for self-employed individuals at this turnover level.

When considering how HMRC could support a transition to MTD for ITSA for self-employed individuals earning £10,000 to £30,000, participants had multiple suggestions. These could be classified as two types of support: programme structure, and guidance.

7.1 Programme structure

In terms of programme structure, participants had three key suggestions for HMRC to support this audience in a transition to MTD for ITSA.

First, it was suggested that HMRC could provide self-employed individuals at this turnover level with a long lead in time of over a year. Participants felt that being provided with at least a year’s advance notice would allow time for adaptation, such as transitioning to digital record keeping in advance of a roll out of the new requirements.

Second, participants felt that HMRC could consider relaxing some of the requirements, specifically with regard to the quarterly summaries. The quarterly summaries, as has been outlined, were seen to be excessive administration for this audience by many participants. In addition, participants spontaneously suggested HMRC could relax compliance penalties for this audience. The prospect of fines for not completing quarterly summaries was felt to be excessive for this audience given the low volumes of funds and simplicity of accounts. Participants also suggested that HMRC might consider flexibility and allow for summaries to be provided at a time that aligns with other accounting requirements (for example, Universal Credit or VAT).

Third, it was proposed that HMRC could incentivise the transition to MTD. In this respect, participants were keen to see free software made available to ensure that access to software was not a barrier to meeting tax obligations. In addition, it was suggested that HMRC could financially incentivise quarterly summary completions in the first year.

7.2 Guidance

In terms of guidance, participants outlined three key ideas for HMRC to support this audience in a transition to MTD for ITSA.

First, participants felt that HMRC could provide information on the software available with guidance on which software would be the right fit for this audience.

Second, it was suggested that HMRC provide dedicated support, such as a telephone line, for the first couple of years following the introduction of MTD for ITSA for this audience. To be useful, it should be available at a range of times available to fit this audience, including outside normal working hours, evenings and weekends.

Third, participants spontaneously suggested that HMRC could provide instructional videos (for example, YouTube). These participants reported having used HMRC YouTube videos in the past for support and guidance.

8. Conclusions

In this section we will outline the key insights and implications emerging from the research.

8.1 Concluding insights

What are the financial circumstances of self-employed individuals at this turnover level?

There was a great deal of variation in the types of self-employment individuals are undertaking at this turnover level across the sample. Five drivers underpinned participants’ decision to be self-employed: working for oneself, flexibility for the family, career fit, opportunity and compelled by circumstance.

The financial circumstances of this audience ranged from households that felt they were highly financially secure to those that felt they were extremely financially insecure. However, for all participants, self-employment income played an important role in the household finances.

How do they currently manage their finances and tax obligations?

Participants viewed the record keeping and accounting element of their self-employment as a separate obligation and not part of their day-to-day work. No matter the approach to record keeping adopted, most participants in the sample felt that record keeping and accounting was light touch and neither complex nor difficult. Reflecting this, completing, and submitting their tax return was not seen to be particularly onerous.

How is MTD for ITSA likely to affect this audience?

MTD for ITSA was initially jarring for participants. Many participants in the sample felt that MTD for ITSA for this audience was excessive bureaucracy, reflecting a perception amongst participants of this audience being ‘small fry’ in the wider tax landscape. It was perceived as a change solely for HMRC’s benefit.

However, after some consideration, participants became more accepting of the idea of MTD for ITSA and took the pragmatic view that they would work with MTD for ITSA because it was what would be required of them. At an individual level, participants did not have plans in the short term to stop their self-employment activities and did not expect MTD for ITSA to change this. This acceptance may also reflect this audience’s confidence to adapt to a new approach given the simplicity of their accounts. In some cases, it may also reflect their willingness and ability to adapt to change. However, despite this confidence, change may still be burdensome for this audience.

The pain points anticipated were the need to use software and to complete quarterly summaries. In particular, any requirement to purchase software was seen as an unnecessary barrier to meeting tax obligations. Whilst many participants could see benefits of software if it could support accuracy, it was viewed as a needless expense; not supporting their work and only required to meet their tax obligations. Many participants also felt that the requirement to submit quarterly summaries was excessive bureaucracy and administration for this audience, which would lead to additional burden. The potential for tax forecasting, however, was seen as a particularly useful benefit.