Industry experts raise concerns over ‘inadequate’ timeframe for incoming self-employed tax reforms

The government have announced significant changes to the way the self-employed and small businesses file their tax returns.

These reforms aim to simplify the current system by taxing businesses on their profits arising in a tax year.

Currently, tax returns filed by the self-employed, sole traders and partnerships are based on a company’s set of accounts ending in the tax year (5 April). 

But this becomes more complex if a business starts and draws up its accounts to a different date. 

These confusing rules, HM Treasury says, have led to thousands of errors and mistakes in tax returns.

Changes designed to reduce tax admin for self-employed

The changes, which are set to come into force by 2023, have been formed with input from representatives of small businesses.

HMRC claims the overhaul will help the self-employed spend less time filing taxes and will align the way profits are taxed on other forms of income, including property and investments.

Jesse Norman, Financial Secretary to the Treasury, 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.”

Government consultation on reform ‘inadequate’

While the announcement to reform the tax system has been welcomed by professional bodies, many are concerned about the pace of change.

Pete Miller, Chair of the Chartered Institute of Taxation (CIOT), said: “This is a welcome simplification of the current system which has been with us in one shape or form since the 1920s.

“But we are concerned about the speed at which it is being introduced and whether there will be enough time for businesses to absorb the impact of the change on their individual circumstances and take action to avoid any adverse or unforeseen consequences.

“We are also concerned that the government consultation on this reform is inadequate. Six weeks during the holiday season, in the middle of a pandemic, is not sufficient for tax professionals and others to assess the details of this significant change, how it will affect them and their clients, and provide constructive feedback to government on it.” 

Self-employed tax reforms part of draft finance bill

Fred Hicks, Senior Policy and Communications Adviser at IPSE, echoed Miller’s concerns, adding that while it is a “worthwhile reform” in the long-term, “we are wary that these changes are coming quite soon.”

He said: “With a crucial transition year beginning from April 2022, freelancers should be given the time they need to familiarise themselves with the changes.”

The announcement comes as part of the draft Finance Bill 2021-22 published by the government for technical consultation and also as ministers consider increasing National Insurance Contributions (NICs) in order to pay for social care.

Currently, the Prime Minister is said to be looking at increasing NICs by one percentage point for both employers and employees – a move that could raise £10 billion a year for the taxman.

MTD ‘main driver’ of tax reforms

The government also published its report on Making Tax Digital (MTD) for VAT-registered businesses, which it said highlighted “positive developments in record-keeping behaviour”.

Miller claims the “main driver” for the tax reforms is MTD. He said: “This proposal is intended to reduce the number of quarterly submission dates from at least thirteen a year to eight, reducing the compliance burdens on most businesses, and we welcome that.

“But we are concerned at the very tight timeframe in which the changes will take place. We have been highlighting for years that MTD could mean some taxpayers facing significant burdens as a result of having to make multiple quarterly updates to HMRC each year depending on their individual circumstances.

“Whilst it is pleasing to see the government address this, it is regrettable that it seems to be being done at the eleventh hour, with little time for ironing out any problems which emerge.”