Tax return simplification

I agree with Simon but suppose that a large proportion of the self employed who do their own SA will wrongly be using cash accounting and no balance sheet.

The way this direction would reduce burdens is if everyone was allowed to do the same.

Less than 1% of taxpayers are selected for investigation and HMRC makes very little out of full enquiries on a cost v benefits basis in any case.
The self-employed can and do use HMRC's online software and it doesn't make any difference, you can make it all up which ever way you do it.

Presumably in risk scoring the tax returns for small business the usual will apply:
No agent - high risk
Losses - high risk
High expenses to earnings - high risk

If you want to work out what sort of level of expenses HMRC thinks is right, look at the % for the VAT flat rate scheme and then you can work out what on an industry by industry basis seems right.

This does all make me wonder if there is now a case for a flat rate tax for small businesses. Seems eminently preferable if you really want to reduce adminsrative burdens AND try to keep the grey ecomomy at bay.

@Simon
If, as you suggest, the unrepresented taxpayer has already "painfully categorised" his expenses, only to have to re-do the exercise for the tax return, it begs the question why his initial categorisation was so far removed from that desired by HMRC.
Just how painful that initial categorisation was will vary from taxpayer to taxpayer, but I suspect, although I have done no research, that a (ever-growing) majority of unrepresented self employed taxpayers, particularly those affected by this proposal (ie turnover above the old threshold and below the new) maintain their records on their own computers. The simplest and cheapest software designed for this exercise provides the facility to analyse expenses.
That said, in your original post, you say that "HMRC [...] encouraged advisers to make use of the new concession on 2010 tax returns" (my emphasis). Advisers can only act for represented taxpayers. So I repeat my concern, reworded: What benefits are there to that population in using the 3-line approach, and why would HMRC want to encourage it?
As regards the impact on risk assessment, you can believe the HMRC spin if you wish. I provided the reference to evidence to the contrary, and you can ignore that if you wish. In the end, you may be right, but who would want to take that risk?

@Mike
The appointment to which I refer may have post-dated the 10% debacle. Not sure about that. It does exist, however. Rebecca may be able to clarify (it was at one of her courses that it came up)

@Clint:
the brief of reducing the administrative burdens of red tape on businesses imposed by government

Surely you jest - how else to explain the "10%" yoyo ?

Except a yoyo goes all the way back again, but with tax laws, there's always some extra complexity left behind !!

Self-Employed keep records so that they can prepare Financial Accounts. These are for 3 reasons; and in this order:
1. For the Owner - so that they can see how their "business" is doing,
2. For Finance - if they require bank/financial assistance,
3. For the TaxMan - to enable a TaxReturn to be prepared.

Summary - Tax returns are from Financial Accounts. Accounts NEED to be prepared. The TIME in transferring the data to the Tax return is minimal. It matters not one iota whatever is suggested.

Nearly half the self employed - and a much higher proportion at the lower end - prepare their own tax returns and they will either do it by hand or use HMRC's software. For them this is a substantial simplification because you no longer have to rearrange the expenses you have painfully categorised.

And I think it is clear that HMRC would not have done this if it thought that it would damage its risk assessments - I suspect the answer to that is that risk assessment based on the standard accounting info was valueless anyway.

There is a government minister whose name eludes me (someone will doubtless jump in with it) who has been charged with the brief of reducing the administrative burdens of red tape on businesses imposed by government. Apparently that post wields a considerable amount of power within the present administration, and a lot of stuff that we might have regretted has been blocked from progressing for fear of crossing this path. This particular measure has all the hallmarks of a sop to that cause, albeit a purely cosmetic one with a high ratio of public exposure to practical value.

Still, perhaps we should not complain too loudly. If that government department really has teeth, perhaps it will be beneficial on balance, even if odd quirks like this one slip through as a price to be paid.

If taxpayers cotton on to this, they will think they can do their own accounts now as they don't need to do all of the work that we do. Three line accounts on the tax return won't save me any time or any money for my clients, but I think the number of unrepresented clients will increase as a result, and the tax rules as favoured by the pals in the pub will be rife.

Madness.

Will there be a consultation on this or is it coming in anyway?

3,800,000 Tax Returns will be simpler. The total saving is £58,000,000 so each Tax Return will have a have a saving of £14.21 associated with it.

Simplification really is making small businesses more profitable.

Most tax returns for the self employed are generated from computer software. The work required to get to the figures to be returned, prior to exporting to the tax return, is (or SHOULD be) the same regardless of whether you intend to return a 3-liner, and the software couldn't care squat which type it generates, the work involved is the same (a few nanoseconds). Those who genuinely believe that it would save them time are probably those who should be forced to spend the extra time to generate a full P&L.

I am unpersuaded by HMRC claims that the risk of enquiry into a 3-liner is not appreciably increased. In Nick Morgan's case it gave him an extra 6 points on the tally (per page 6 of his draft book).

It is just another attempt at "puff".

I agree - this seems like a big step in the wrong direction.

I'm all for simplifying tax matters for small businesses. But as detailed records must be kept in the first place, what on earth is the point of filling in a much shorter return?

The money HMRC save by this measure will be more than eclipsed by the money they have to spend making extra enquiries because they can't see the detail of business expenses.

M

is this really going to bring about cost savings for the tax payer or will it just save HMRC money?

Clients will still need their accountants to prepare accounts for the basis of the tax returns, with most accountants now using tax software to prepare the returns, the amount of time involved is no different for a 3 line account or full disclosure. Hence no time and cost saving to the client - only the added threat of enquiry and more fees.

It does seem strange, that with all the various accounting software programmes available to both businesses and accountants, to ensure revenue expenditure is correctly accounted for, HMRC has decided to go the other way with regard to the tax return simplication.

I appreciate accurate records need to be maintained, not only for HMRC, but for many financial institutions, but I agree with James, this does seem an unusual step in the wrong direction.

My concern is that it will undoubtedly increase the number of enquires; besides the estimated cost saving of £54 million is peanuts when measured against many of the other ways they could help small businesses. £400 million, for example, in automatic small business rate relief.

This new law, in fact, even the current law, allows people to take deductions without necessarily researching them carefully and many people will stupidly take ones that aren't substantiated. None of which gets discovered until the taxpayer is investigated. Meanwhile, honest tax filers who happen to have large deductions will continue to get harassed through pointless, lengthy, tedious examinations.

The correct procedure to eliminate/reduce the amount of time spent investigating "honest" taxpayers (ones where little or no change is made to their figures) whilst not missing the honest ones is to have MORE lines, not less. More lines allow for automated red flag filters for types of deductions related to that taxpayer's particular industry. More lines allows for automated Fibonacci analysis to determine which numbers on the return are made-up guesses (and not labelled as estimates). More lines allow the intelligent self-filer to self-catch mistakes (sample line of reasoning: "there's no line for entertainment, let me look up why, oh, that means that there's no deduction allowed") before filing.

--Liz@BritishAmericanTax.com