Tax Crisis Looming for Self-Employed

The self-employed face a New Year tax crunch that could cost them dear. 3.5m will be hit by the usual demands from Revenue & Customs for advance tax payments based on the previous year's earnings - but these make no allowance for the economic slowdown. They can ask for these payments to be reduced to reflect lower expectations by contacting their tax office.

But if business picks up again, they will have to pay interest on the difference - at a whopping 5.5%. And this interest is not tax-deductible. This is an issue well worth flagging up for self-employed people.

Mike Warburton, tax partner at accountant Grant Thornton, said: 'In January, self-employed people are liable to pay not only what they owe from their earnings on 2007-2008, but a down payment on expected tax due in 2008-2009. A second down payment is due in July.

'The Revenue assumes they will make the same profit as they did last year, without taking account of what has since happened to the economy.'

Whiting said: 'I am not sure the Revenue exactly highlights the fact people can ask for these estimates to be reduced. You can tell them it has not been such a good year as last year.

'But if you get it wrong, you have to pay interest. And there are also penalties available to the Revenue if you really frankly were trying it on. 'I would advise people to ask for a reduction if their circumstances have changed, but do not be silly about it.'