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Three lines by Simon Sweetman

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11th May 2009
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Simon considers tax simplification and what HMRC has been doing to progress this issue for smaller businesses. Simplification of the tax rules might be too big an issue to cope with, but simplifying completion of the tax return for many smaller businesses might be a good starting point

There is clearly a wind blowing for simplification : one of the effects of this is that some people realise they don’t actually want something simplified if it means serious changes.

HMRC set out a year or so ago to consult on simplifying CT computations, and came up with a couple of ideas, suggesting that small companies should be able to use either a cash basis for accounting or use a new tax-based standard. It always seemed to me to be slightly starting in the wrong place , as it would have seemed logical to start from the unincorporated end, and it now seems the reception for these ideas was lukewarm at best and they have gone away to think again.

But then in the Budget we had the extension of the three line account to all unincorporated businesses with a turnover below the VAT threshold. It wasn’t a Budget headline, and when it became known the reaction generally was a bit less than excited, especially from agents.

But this is actually a measure of some significance. This is partly because a high proportion of this part of the taxpaying public – the smallest of the small businesses but perhaps half the businesses in the country – file their returns for themselves. Some of them may have some help preparing a set of accounts, but for others – especially if you are not looking for help from the bank – a simple statement of income and expenditure is all that’s needed. It is then a struggle to break your expenditure down between those mysterious boxes on the tax return, with that sinking feeling at the end that far too much of it has ended up in the “miscellaneous” box. For these people there is going to be a real saving in time, effort and anxiety.

Now I can remember that when the three line account was introduced at a £15,000 turnover there were those – not just in the Inland Revenue – who saw this as a cheats’ charter. The Revenue devoted a fair amount of effort to checking up on these and found that they were on the whole as honest and accurate as anyone else, with a few spectacular exceptions.

The reason for the surprise now, perhaps, is that HMRC has always vigorously defended the need to put the Standard Accounting Information into the magic boxes on the self employed pages of the return. And why ? Because the analysis would give a fantastic tool for risk assessment by comparison both year and year and to similar businesses. As some of us had been saying for some years, it didn’t. There was no discernible improvement in the selection of cases from the old days when they were picked in the local district. To HMRC’s credit, it has accepted this.

So something in the Budget that was helpful, and nothing to do with the state of the economy.

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Replies (5)

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By martinfoley07
12th May 2009 00:13

cash accounting
well, for unincorporated business up to say £67k (or thereabouts if UK VAT threshold remains at that sort of level) I am certainly in favour. The business owner(s) should be aware they are running a risk if they do so, but they run plenty of other risks which are probably more threatening if they get them wrong.

I am less convinced about larger businesses since the liklihood (not certainty, but liklihood) is that they would need some form of record keeping over and above a cashbook, so I doubt the simplification would be of much practical help (other than give leeway for significant tax deferral which may not be a great thing from the exchequers viewpoint).

I am unconvinced about cash accounting for incorporated businesses.
There are plenty enough micro incorporated businesses that (wittingly or otherwise) screw themselves in terms of accounts and owners drawings as it is.
Limited liability is a right/privelege that should carry some potential responsibility, including requirement to keep track of business assets and liabilities (as rightly enshrined in company law at present).
So the information is required to be there already, no extra burden for tax.
I do not believe the "burden" should be removed from company law.
In which case, what is the simplification of removing it for tax law? Hence (in my view) th eless than enthusiastic response to HMRC corporate tax "simplification" - it wasn't.

(I think there is Govt thought to removing the company law need for incorporated bodies to keep records other than cashbook - it's not a simplification I would view as appropriate in terms of balance of interests of various stakeholders.)

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By martinfoley07
12th May 2009 00:04

fair amount of time checking up ??????
I have no idea on the stats, but grapevine wise the level of checking up on micro size businesses (certainly £15k turnover) seems pretty non-existant?
Not a complaint, since clearly the cost of inspection will be disproportionate, almost whatever the level of misdeclaration !!
But the quantum of enquiries (again grapevine wise) on businesses with t/o under £30k and indeed £64k also seems pretty non-existent.
Are there any HMRC published stats on this?
(I imagine the answer might be no, lest it encourage the otherwise faint-hearted to take their chances?)

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By martinfoley07
11th May 2009 23:56

limited reporting of expense splits
I agree that the increase in limit (to VAT threshold) for reporting expenses splits for unicorporated business makes sense in terms of simplification.

It seemed self-evident from the taxpayer / agent side of the table that the risk analysis tool available to HMRC due to the expenses split was on the face of it achieving the square root of nil (other than largely fruitless aspect enquiries that were often explained upfront, but still an aspect enquiry ensued!!).

So the only other rationale would have been that the need for the split may have encouraged better record keeping.
I would have thought that was possibly valid ; but if the empirical evidence (albeit, see next posting) from full enquiries was that there was no discernible statistical difference in the tax mis-declared/stated as between those with an expense split and those with no split, that rationale goes out the window.

Of course there is no magic number at which it is self-evident a small business would need better analysed records on expenses, but the level at which UK VAT limit is set seems sort of suitable and as good as any for purpose.

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By martinfoley07
11th May 2009 23:43

Errrr
part 2.
Shome confusion, Paul.

07-08 SARs required, even if using the SE (short) form, that business with turnover in excess of £30k (up from £15k) disclose a split of expenses over specified categories.

Different (and fewer) categories than those with turnover £64k or more (of course !! - but no easier for the unititiated to work out !!). But a split nonetheless.

The three liner was restricted to those with under £30k turnover.

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By Paul Soper
11th May 2009 15:39

Errrr
Perhaps Simon hasn't noticed but the 2007/08 return 3 line account limit was £64,000, the same as the VAT reg'n threshhold for tht tax year , this year's return limit is £67,000, the same as the VAT thresh-hold and so - in announcing that the VAT thresh-hold will be used for 3 line accounting purposes next year they are merely repeating what they have already done, and we fall for it and welcome as good news - it's old news.

Now cash accounting would be a completely different matter. I suspect that very many small businesses with a turnover of up to £1,350,000 are already using cash accounting for VAT purposes. Surely it would make sense to allow ANY business that elects to use cash accounting for VAT to also submit their accounts to Companies House using the same method (perhaps with a creditors/debtors reconciliation) and of course a very large percentage of these businesses are submitting simplified accounts anyway, and then simply make their CT/IT return on the same basis. At the moment we have the ludicrous situation where an election designed to simply matters complicates them because of the necessity to use cash based accounting for VAT but accruals for everything else. Now that could be a genuine simplification.

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