The Office for Tax Simplification said people had to prepare arduous accounts to complete their tax returns, and grapple with unduly complex tax and accounting rules when their enterprises were often small and informal.
The OTS said it was concerned that the tax system demanded too much from people in terms of skills, training and time to handle taxes in such small firms.
“A major simplification of the rules could improve the extent to which such businesses engage with the tax system,” it said in a discussion paper.
Business groups welcomed the paper. “This is a sensible survey of the options for resolving a serious issue,” said Richard Baron, head of taxation at the Institute of Directors.