Killing small business: why Hungarian freelancers are angry

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Budapest, Hungary – A businesswoman’s opinion on the Hungarian government’s sudden tax reform.

On July 11, more than 300,000 Hungarian small business owners and freelancers woke up to the news that the popular “KATA” tax system would undergo major structural changes in the middle of a tax season – in less than 50 days.

When I saw the news it was around 10am and I was just beginning to make sense of the day. I put my slices of bread in the toaster while reading the news. When I saw the headlines, I lost my mind: I just couldn’t believe it. I quickly read and re-read the short paragraphs as my toast grew colder and colder.

What is KATA?

“KATA” is a simplified form of taxation for independent entrepreneurs in Hungary. Subjects pay a small fixed monthly fee and have a fair limit on their annual income. It was a great option as simplified taxation meant less administrative costs, so with a little work anyone could have a scramble even without consulting and paying an accountant.

Among other changes, the most important is that KATA subjects will only be able to invoice individuals, so they will not be able to invoice B2B.

For example, a plumber, from September 1, can no longer go to a beauty salon to repair his pipes. Are you a crafty person who sells personalized diaries? No more selling them to office workers next door if the company pays.

As a self-employed person with 9 years of experience myself, I consider myself lucky because my business model and my income are sufficient to be able to switch to a more conventional form of taxation while making a profit. But I am in the minority.

More than 300,000 people are affected by this change. We are forced to make an undesirable choice regarding our business in less than 50 days. A significant portion of us will close. What will the others do? Raise prices by at least 25%. This happens during a global economic crisis, when the Hungarian forint hits historic inflation. This may seem strange at first.

Why the need for change, and why now?

Over the past few years, the government has repeatedly communicated that it is not satisfied with the KATA system. Although it helped many people pay taxes instead of working under the radar, the monthly KATA tax was considered too low: individual entrepreneurs and businesses began to take advantage of it.

Companies began to hire KATA subjects as “freelancers”, but in reality treating them as employees has become the norm in some industries – the creative field being one of them. You could say it was a win – almost win – lose situation: the company had to pay much less tax after a self-employed employee, the entrepreneur earned more but lost the possibility of taking a pension, and the government canceled a big loss of income. .

Therefore, making changes to the KATA system was reasonable, and many of us looked forward to an improved system.

We happily participated in the survey the government released on the subject, only to drop its tax change bombshell two days later – giving us absolutely no say.

The government considers that the simplified tax regime was created for hairdressers, nail salons and service providers hosting “ordinary people”.. But this change means that a talented hairstylist or makeup artist cannot go to work at a fashion show because that would count as a B2B transaction. Going back to my question from the beginning: why is the Hungarian government killing small businesses?

According to financial analysts, the reason the law is changing now is because Hungary needs to close its budget deficit and incentivize people back into the traditional labor market to solve the labor shortage. If, for example, 100,000 people leave their freelance careers and small businesses and start looking for jobs, they will drive down the average monthly salary due to increased competition for specific positions.

This brings us back to lining the government’s empty pockets, as employers will pay more taxes on their new hires than they previously paid for freelancers. Lower wages and higher fees for services provided by those who remain in self-employment will cause the economy to slow down – which is one way to deal with economic crises.

Killing dreams and entrepreneurship

You have to suffer today to regain momentum in a few years. If I must be a cruelly logical being, I understand it. But I am not.

I’m a freelancer helping other freelancers kickstart their entrepreneurial careers. I am someone who is happy to see a new small business open on my street. I am the cheerleader when my friends tell me about their projects. They are people with dreams and goals but on July 11 they were downsized by our leaders. I am a number. I am one of those almost half a million people.

A study conducted by Upwork – an independent site – indicates that in 2021, 36% of the American workforce was doing some kind of freelance work. Estimates consider that in Europe, 1/4 of highly skilled digital talent worked freelance. The KATA system in Hungary meant that young freelancers had an advantage and could monetize their knowledge in the international labor market. Anyone can start a business with a small starting budget but big hopes and big dreams.

On July 11, the government shattered those dreams and erased the competitive advantage we had. Stay-at-home moms are closing their small online shops and new Gen Z entrepreneurs feel disqualified from the “game” as most of them lack the funds and knowledge to start their businesses with a tax system. more complex and more expensive. .

On July 11, the Hungarian government killed the small business. And we had no say.

By Fanni Friedrich

Fanni Friedrich is a marketing strategist and copywriter who lives out of her suitcase as a digital nomad. She teaches other freelancers to grow their business and currently has more than 34,000 friends on TikTok. This article was first published by Lazy Women, a Kafkadesk partner.

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