Today (20 July 2021) the government announced changes to tax reporting that will come into force by 2023. The changes will mean small businesses will be taxed on profits arising in a tax year, rather than profits of accounts ending in the tax year.
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.
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.”