Self-employed and small businesses are set to benefit from simpler tax reporting rule
As part of the Government's draft legislation to be included in the Finance Bill 2021-22, announced changes mean that businesses will be taxed on profits arising in a tax year, rather than profits of accounts ending in the tax year. The government believe this will help them spend less time filing their taxes, aligning the way self-employed profits are taxed with other forms of income, such as property and investment income.
These changes are due to come into force by 2023 and have been drawn-up alongside representatives of small businesses.
Financial Secretary to the Treasury Jesse Norman said:
"These complex rules lead to thousands of errors and mistakes in self-employed tax returns every year.
Simplifying them will allow self-employed people to spend less time doing tax admin and more time growing their business and creating jobs.
Under the current system, tax returns filed by the self-employed, sole traders and partnerships are based on a business’s set of accounts ending in the tax year (5 April). More complex rules apply when a business starts and draws up its accounts to a date different to the end of the tax year.
In those cases, taxpayers pay tax for their first tax year on the period to the end of the tax year, and then in subsequent years on the basis of their full accounting year, meaning profits are taxed twice and complex rules apply to relieve the double taxation when the business finishes.
These rules can be confusing to understand, particularly for new businesses, leading to thousands of errors and mistakes in tax returns. More than half of those affected do not claim relief they are entitled to and could pay tax twice.
The new system is easier for businesses to understand and will prevent thousands of errors every year.”
In line with the Tax Policy Making framework, the government is publishing draft legislation to be included in Finance Bill 2021-22. This allows for technical consultation and provides taxpayers with predictability over future tax policy changes. The consultations on the draft legislation will run until 14 September, with measures included in the next Finance Bill.
The change to the time periods against which businesses report their tax will also reduce the number of times those with several sources of income will need to report their income under MTD for Income Tax.