The UK Government announces simplified tax reporting for self-employed and small businesses
Reforms to the tax system that will make it easier for small businesses to fill out their returns have been announced by the government today (20 July 2021).
The changes, which will come into force by 2023 and have been drawn-up alongside representatives of small businesses, will mean businesses will be taxed on profits arising in a tax year, rather than profits of accounts ending in the tax year. It should 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.
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.
As part of this, the government has today also confirmed plans to make changes to the tax system to make the UK a more attractive location for asset holding companies (AHCs), which are used by certain types of funds. A response to the second stage AHCs consultation, which sets out the detail of the proposed regime, has been published, as well as draft legislation.
The change announced today aligns with the government’s plans to provide self-employed business owners with a more modern, digital, integrated service through the implementation of Making Tax Digital (MTD) for Income Tax. This will help reduce errors and ensure self-employed businesses get their tax right first time.
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.
Posted in English on Jul 20, 2021.