A new simplified accounting scheme will help small businesses and the self-employed meet their tax obligations, it has been revealed.
The report follows the announcement of new tax reporting rules for the smallest of businesses.
According to HM Treasury, the new regime – set to come into force by 2023 – will “make it easier” for small firms to fill out and file annual tax returns by simplifying the rules around profits.
Under the existing 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). However, complex rules apply when a business starts and draws up its accounts to a date different to the end of the tax year.
This can sometimes result in profits being taxed twice, forcing taxpayers to apply “complex” double taxations rules to apply for relief when the business ceases to trade.
Research also suggests that these rules lead to “thousands of errors and mistakes” in tax returns each year, while more than half of those affected do not claim the relief they are entitled to and “could pay tax twice”.
But the changes mean small businesses will only be taxed on profits arising in a tax year – rather than profits of accounts ending in the tax year – aligning the way self-employed profits are taxed with other forms of income, such as property and investment income.
Commenting on the new rules, 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.”
More information on the existing Basis Period Rules and reforms can be found here.
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