Reforms 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 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’ 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.

The announcement comes as a number of documents are published by the Government, including draft legislation for the Finance Bill 2021-22 for technical consultation. As part of this, the Government has 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.

As part of the announcements, the Government is also delivering on its commitment to help protect UK taxpayers through clamping down on promoters of tax avoidance schemes. The package of measures announced will be legislated for in the next Finance Bill (2021/22), and will:

• Tackle offshore promoters through hitting any associated UK entity with harsh penalties;
• Support taxpayers to steer clear of tax avoidance schemes, or get out of tax avoidance quickly, by giving taxpayers more information on the false reality of what is being sold to them;
• Clamp down on promoters who dissipate or hide their assets, by ensuring HMRC can protect its position and secure a promoter’s assets to pay any relevant penalties; and
• Give HMRC tougher powers to shut down promoters that continue to promote schemes and sidestep the rules designed to restrict their activities and stop them from setting up similar businesses.

A report on Making Tax Digital (MTD) for VAT-registered businesses has also been published by the Government. The research, conducted externally, highlights positive developments in record-keeping behaviour and on the benefits MTD can deliver and is delivering for businesses.