HC Deb 16 March 1993 vol 221 c184

As the House is aware, the Government have embarked on a major drive to reduce the burden of regulation on industry. I will therefore start with three significant measures of deregulation, which should be of particular benefit to the self-employed and to small businesses generally. Self-assessment of income tax has operated successfully in many countries, including the United States, but none of my predecessors has found a way of introducing it here. For most people, that has not been a problem—the PAYE system already deals very simply with the tax affairs of some 16 million employees—but for the 8 million taxpayers who have to fill in a tax return each year, the current arrangements are very far from simple.

Following a detailed consultation exercise, I now propose to offer these people, including 4 million self-employed, the option of self-assessment on income tax. Legislation will be brought forward in next year's Finance Bill to implement the proposal from the earliest practicable date, which is 1996–97.

For those who choose to take it up, self-assessment should provide a significant reduction in bureaucracy and paperwork; and it will also bring out more clearly the link between public spending and the burden this places on the individual taxpayer. A more transparent tax system can only lead to more informed choices and debate; and I believe that self-assessment for a third of all taxpayers will contribute to that.

But for self-assessment to work, the system has to be simple enough for taxpayers themselves to be able to fill in their own returns. My second reform will achieve a significant simplification, particularly for the self-employed. One of the least attractive features of our present tax system is that it is simply too complicated for them to work out how much tax they owe: people setting up in business on their own are more or less forced to employ an accountant.

Since 1926, the self-employed, working under the so-called "preceding year" basis of assessment, have generally paid a tax bill based on profits they made up to two years previously. People with several different sources of income may be assessed on a number of different bases, with separate tax bills and payment dates for each. It would be difficult to invent a more complicated system for taxing the self-employed, even if one set out with that very intention.

Under my new proposals, people will have just one tax bill each year, covering all their income, and the self-employed will pay tax on the profits they make in the current year, not the preceding year. This should be a major simplification; and I am sure it will be warmly welcomed.

Taken together, these two measures amount to the most fundamental reform of income tax administration since the introduction of pay-as-you-earn in 1944.