Changes to the Basis Period Rules will make it easier for self-employed workers and small businesses to report and pay tax, it has been revealed.
The report comes after the Government announced a raft of measures designed to simplify accounting for the smallest of firms.
According to HM Treasury, the new rules – set to come into effect by 2023 – will help prevent businesses from paying tax twice when their financial year does not align with the tax year.
Under the existing rules, 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 (05 April). But a separate set of rules come into force when a business starts and draws up its accounts to a date different to the end of the tax year.
In these circumstances, 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.
Experts have also raised concerns that the application process to relieve double taxation is too “complex”, with more than half of those affected not claiming the relief they are entitled to.
But the reforms will mean that businesses are only 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 changes, 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.”
HM Treasury added that the changes will also reduce the number of times those with several sources of income will need to report their income under Making Tax Digital (MTD) for Income Tax, which is set to go live in April 2023.
For help and advice with related matters, please get in touch with our expert team today.