Simplified tax reporting – what will it mean for your clients?

29 Jul 2021

Changes to the tax system that will make it easier for small businesses to fill out their returns have been announced by the government. The changes, which will come into force by 2023, will mean businesses will be taxed on profits arising in a tax year, rather than profits of accounts ending in the tax year.

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. When a business starts and draws up its accounts to a date different to the end of the tax year, complex rules apply.

In complex 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. This means that profits are taxed twice, and complex rules apply to relieve the double taxation when the business finishes.

Taking a look at the new system

The government believes that the current system can be difficult to understand, and leads to thousands of errors and mistakes in tax returns. According to the government, more than half of taxpayers affected do not claim relief they are entitled to and could pay tax twice.

The new system should help taxpayers 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.

The government also announced new measures to clamp down on promoters of tax avoidance, including supporting taxpayers to steer clear and new powers that will allow HMRC to stop offenders.

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.'

The announcement of the new system came alongside a number of documents that were recently published by the government, including draft legislation for the Finance Bill 2021-22 for technical consultation.

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