Taxi drivers and scrap metal dealers – prepare for tax checks
From 4 April 2022, if you are renewing a taxi, private hire or scrap metal licence in England and Wales then you will need to complete a ‘tax check’ first. The rules are expected to be extended to Scotland and Northern Ireland from April 2023. This article explains what you need to know.
⚠️ We only cover the position here if you are a sole trader (self-employed) or an employee. If you operate your business through a limited company, the changes will also apply to you but there are some differences. We are expecting more detail in January 2022.
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Why are HMRC introducing these new rules?
HMRC want to ensure that everyone, including taxi drivers and scrap metal dealers, declares their income and pays their taxes properly.
Who needs to do a tax check?
You will need to do a tax check if you are renewing a licence on or after 4 April 2022 in England and Wales for the following activities:
- driving a hackney carriage;
- driving, or operating, a private hire vehicle (this will include drivers for Uber, Lyft and similar platforms); or
- carrying on business as a scrap metal dealer, either at a site or as a mobile collector.
You will need to carry out a tax check before you apply to renew your licence. This applies even if you do not need to send HMRC a tax return.
What if I am applying for the licence for the first time?
You do not need to carry out a tax check if you are applying for a licence for the first time – for example, if you are just starting your business. This is because you do not need to register for tax until after you have started your business.
Instead, from 4 April 2022 the licensing authority (the body who issues your licence) will have to draw your attention to guidance on what you need to do to meet your tax obligations. You will also need to confirm to them that you are aware of the contents of that guidance.
You would then need to do a tax check before renewing that licence.
How do I complete a tax check?
HMRC are developing new systems to allow tax checks to take place. We do not yet know the full details of how the tax check will work.
However, the tax check should be a quick and simple three-stage process:
- Before you renew your licence, you will need to request a tax check from HMRC. HMRC will advise you what information you need to provide to them. For example, if you are self-employed then in most cases you would need to provide HMRC with your Unique Taxpayer Reference.
- Once HMRC are satisfied that they have received the information required, they will give you a 9-character code. You should provide this to your licensing authority when you renew your licence.
- The licensing authority will then verify that code with HMRC and be able to go ahead with your licence renewal application.
HMRC are making an online system for people to use and are encouraging you to carry out the tax check online if you can. If you want to use the online service, you will need a Government Gateway ID and password.
HMRC say they will give extra support to anyone that needs help with doing the tax check. There will also be a telephone service which you can use if you would prefer.
What exactly are HMRC checking?
The tax check is not checking if you have paid the right amount of tax. It is a check to make sure you are registered for tax as you should be. There are restrictions on the information that HMRC can ask you to provide.
HMRC should only ask you for information about the most recent tax year that ended more than 6 months before you start your tax check. The tax year ends on 5 April, so the 2020/21 tax year is the year from 6 April 2020 to 5 April 2021.
For example, if you start your tax check on 1 May 2022, then HMRC should only ask you about the 2020/21 tax year. If you start your tax check in November 2022, then HMRC should ask you about the 2021/22 year.
There are three things that HMRC may ask you to provide:
- Information that helps HMRC determine if you need to send a tax return for that year – and if you do, that you have told them so by the relevant deadline.
If you are self-employed, this will include things like when you started trading and whether your turnover exceeds the trading allowance.
The request for information must be reasonable to allow HMRC to check this. For example, this will include information to allow HMRC to identify you, such as your name, date of birth, National Insurance number and Unique Taxpayer Reference (you get this when you register to file a tax return). If you do not think the information requested by HMRC is reasonable, then you may challenge the request.
- If you have already completed a tax return for the year HMRC are checking, then you will need to confirm to HMRC that you have included your income from the licensed trade on the return. The tax check process does not require HMRC to then check that return, though they may do so.
- HMRC may also make ‘reasonable’ requests of you for information that helps them better understand how people work in these sectors. This may include, for example, confirmation of the type of activity you are carrying out, and details of existing licences you hold (or previous licences you have held) for similar activities.
What if I do not need to send a tax return to HMRC?
Not everyone who is self-employed needs to send HMRC a tax return.
You may not have registered with HMRC to send a tax return because you have not needed to. In this case, if you need to renew a licence for an activity covered by these rules, you would still need to complete a tax check to explain why.
For example, this would include where:
- you pay your tax as an employee under PAYE; or
- if you are self-employed but your total turnover from the licensed trade does not exceed the trading allowance (currently £1,000) and you have no other trading income or reason to file a Self Assessment tax return.
It may also apply if you are self-employed and your total trading income exceeds the trading allowance, but you do not have any tax or National Insurance contributions to pay because:
- your total taxable income, including from the licensed trade, is within your available personal allowance for the tax year (£12,500 for 2020/21 and £12,570 for 2021/22); and
- your total trading profits could not exceed the relevant thresholds for National Insurance contributions (or you could not be liable to National Insurance contributions).
In this case, it is usually a good idea to file a tax return anyway – but we do not believe HMRC should refuse a tax check in these circumstances if you have not registered.
When do I need to do a tax check?
You must complete the tax check in the 120 days (about four months) before the licensing authority verifies the completed tax check code provided by HMRC.
For example, suppose your licence is due to expire on 30 June 2022 and you apply to renew your licence on 3 May 2022. The licensing authority processes your application a week later, on 10 May 2022, and they try to verify the code you have provided to HMRC on this date. You will need to make sure that you complete the tax check in the 120 days ending on 10 May 2022 – that is, in the period 11 January 2022 to 10 May 2022.
In practice, it will not be possible to work out in advance exactly when the 120 period starts. Therefore, you should complete the tax check as soon as possible in the 120 days prior to the expiry of your existing licence.
What should I do to prepare?
If you are already sending HMRC tax returns to report your income from the licensed trade and you don’t have a Government Gateway ID and password, you should apply for one unless you would prefer to undertake the tax check using HMRC’s telephone service. You should also check your contact details with HMRC are up to date. You can find more details on GOV.UK.
If you have not told HMRC about any income from the licensed trade and you should have done, then you should seek advice on the best way to bring your tax affairs up to date as soon as possible. Our Getting Help page provides more information on who to contact. If you do not do so, then your licensing authority may be unable to process your licence renewal application which means you may not be able to work.
There is still time to bring your tax affairs up to date before the changes come into force. Note that by coming forward to tell HMRC about income you have not told them about, you are likely to face lower penalties than if you wait for HMRC to come to you first.
If you have not told HMRC about your income because you are worried that you cannot afford to pay your tax bill, you should be able to arrange a payment plan on affordable terms. The charity TaxAid are familiar with these cases and you should contact them if you are on a low income and you would like free, independent advice on the matter.
Where can I find more information?
Further guidance is on GOV.UK. We expect this to be updated in January 2022 with more details about how to complete the tax check.
You can also find tax check factsheets on GOV.UK which have been translated into Arabic, Bengali, Gujarati, Punjabi and Urdu.