Tax-reporting rules due to get simpler

Tax reporting rules for self-employed doctors are due to get simpler after HM Treasury announced reforms to the taxation system. 

The new rules aim to make tax reporting easier for self-employed, sole traders and small business and are part of a raft of new tax measures made in the announcement. 

David Redfern

Tax preparation specialist David Redfern welcomed the new measures as a step in the right direction for small businesses and the self-employed, still reeling from the Covid-19 pandemic.

The simplified tax reporting rules aim to streamline the way self-employed workers and small businesses report profits when there is a disparity between the end of the tax year – 5 April – and the end of their own accounting year 

Currently, tax returns are based on the business’s set of accounts up to the end of the tax year. 

Double-taxed profits

Mr Redfern, director of DSR Tax Refunds Ltd, said: ‘Not all taxpayers have a financial year that sits in alignment with the tax year, meaning that they can end up being double-taxed on profits because, after their first trading year, profits are based on their full accounting year, not the tax year. 

‘While there are rules for these affected taxpayers to claim tax relief on these double-taxed profits, they are only applicable after the business finishes and are widely considered to be too complex to be fit for purpose.’ 

He said HM Revenue and Customs estimates that more than half of taxpayers do not claim the relief they are entitled to and the complexity of the rules leads to thousands of errors in tax returns annually.

The new rules, coming into effect in 2023, align income tax with the year in which the profits were received. 

Mr Redfern said: ‘If a business has a financial year end of 31 July, from 2023, they will account for their profits proportioned over the tax years affected. So 4/12ths of the profits will be accounted for in that tax year and 8/12ths in the following tax year – that’s to say, in the actual tax year the business receives the profit. 

‘This is a welcome step towards making the taxation system more supportive of small businesses and self-employed workers and, along with ensuring that these taxpayers claim all of their eligible tax relief, will help them build back stronger after the recent battering businesses have taken as a result of Covid-19.’

Avoidance clampdown

Along with the simplification of tax reporting rules, the announcement by HM Treasury also included measures to clamp down on tax avoidance schemes, especially those based offshore. 

These measures also include providing taxpayers with more information to prevent them falling prey to the schemes as well as make it easier for them to leave such schemes if they have unwittingly entered into them, as some private doctors have done in the past. 

The measures also touched upon Making Tax Digital (MTD) for income tax, following the positive reception of MTD for VAT.