The Office of Tax Simplification (OTS) has produced the treasury-funded report on small business taxation, which looks at areas including national insurance and taxation of income compared with earnings.

According to the OTS, the current tax system "undermines" the government's plans for entrepreneurial freedom, and has suggested a number of reforms for small business taxation.

Among the suggestions put forward to reduce the administrative burden to SMEs are the merger of national insurance contributions and income tax and the introduction of a flat rate of taxation for businesses with annual sales of less than £20,000.

The report stated: "The current lack of clarity poses a barrier to self-employment and is at odds with the government's ambitions for creating growth. The overwhelming conclusion is that genuine and long-lasting simplification can only be brought about through major structural change to the UK tax system."

Small business support organisation the Federation of Private Business has urged the government to listen to the report.

In particular, it said the proposal to merge income tax and national insurance would "heavily streamline" the taxation of small businesses.

Head of campaigns Jane Bennett said: "We have been calling for the alignment of income tax and National Insurance for a number of years. Most business owners find the continuing distinction between the two baffling.

"The OTS has certainly put forward some solid pro-business ideas which will be popular with the SME community. But unless these suggestions are acted on – and soon – business owners will come to see this report simply as a PR exercise."

Chancellor of the Exchequer George Osborne will present the budget next Wednesday (23 March).