The changes, which are set to come into force by 2023, will mean that businesses will be taxed on the profits that are made in a tax year, rather than profits of accounts that end in the tax year. The introduction of the simplified system will allow less time to be spent filing taxes and align the way self-employed profits are taxed with other income types, for example property and investment income.
Currently, tax returns that are filed by the self-employed, sole traders and partnerships use the set of accounts ending in the tax year on 5 April. For businesses that start and draw up accounts to a date different to the end of the tax year, more complex rules will apply. In these cases, taxpayers pay tax for the first 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 complicated rules apply to relieve the double taxation when the business finishes.
These current rules can be very confusing, especially for new businesses, resulting in thousands of errors in tax returns. It is estimated that more than half of those affected do not claim the relief they are entitled to and could end up paying tax twice. The new system will prevent these errors and make it easier for businesses to understand.
For more information on the UK’s tax and payroll landscape, browse activpayroll’s Global Insight Guide to the United Kingdom.