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The future of three-line accounts

14th Oct 2016
Tax Writer Taxwriter Ltd
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Many self-employed traders report accounts information in just three boxes on their tax return, but this simplification could disappear under MTD.

Simple reporting

As long as I can remember self-employed taxpayers with modest sales income have been able to provide the simplest of accounts information to HMRC, consisting of: Turnover, expenses and profit or loss. This so called three line account has been accepted by HMRC as an adequate report of taxable income since at least the introduction of self assessment in 1996, and probably long before. Incidentally the guidance on three line accounts is now only found on the form SA103S.

The upper turnover threshold for three line accounts was set at £15,000 for years. It gradually crept up until it was aligned with the VAT threshold at some point before April 2011. The Budget on 21 March 2012 confirmed that the upper threshold for three line accounts would remain tied to the VAT registration threshold, and that is where it has remained.

MTD complication

Under the Making Tax Digital proposals self-employed taxpayers will be required to sort their expenses on a quarterly basis into range of categories. HMRC is suggesting that the current 15 expense categories on the SA103F form should be used (see Annex A to Bringing business tax into the digital age). This point is addressed in question 20 of that MTD consultation document.

What about three line accounts?

Self-employed traders who are not required to submit quarterly updates under MTD, will report their trading income once a year on what will in essence be an annual tax return, but it may be called: “personal digital account update”. It is not clear whether the three line account facility will be retained on that annual return (or update).

What is clear is that HMRC wants the minimum threshold for quarterly reporting to be set at around £10,000. This figure appears to have been pulled out of the air, as HMRC present no evidence in the MTD consultations or in face-to-face MTD meetings, on why £10,000 was chosen as a reasonable threshold. HMRC is certainly open to moving that minimum threshold (see question 35), but will it agree to an alignment with the VAT registration threshold (£83,000 for 2016/17)?

Currently thousands of self-employed traders don’t have to worry about categorising their business expenses, but they will have to this for MTD. Even if the taxpayer has the most fantastic accounting software in the world, he will still have to make choices about which categories his expenses fall into. Perhaps the accounting software will ‘learn’ to recognise particular purchases, and categorise them automatically. However, I wonder whether this feature will be included in the most basic free version of the accounting software.

Conclusion

If the quarterly reporting threshold under MTD is not aligned with the VAT threshold, many taxpayers will lose the simplification of three line accounts reporting. Is this right?

If the current reporting standard of three line accounts is adequate for tax returns today, why should it be unacceptable for MTD updates?

 

What do you think is a reasonable minimum turnover threshold for MTD quarterly reporting? You can give your views directly to HMRC on [email protected]  or comment below.

Replies (6)

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Locutus of Borg
By Locutus
15th Oct 2016 09:05

The mind boggles at why, to combat fraud and error, HMRC considers that the threshold for minimal disclosure has to drop from £83k to £10k.

I am puzzled what actual use HMRC will make of this "big data" when they receive it. They hardly have the resources to open tens of thousands of more tax enquiries.

Thanks (6)
Man of Kent
By Kent accountant
17th Oct 2016 09:38

I haven't seen anything to change my original view that MTD is purely a vehicle to accelerate the collection of tax.

This could have been far easier and quicker by changing the tax return submission/payment deadline.

Thanks (6)
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By Vaughan Blake1
17th Oct 2016 10:22

Initially setting the minimum quarterly filing level at the VAT turnover registration limit makes a great deal of sense. This would mean only VAT registered/larger businesses would be involved. It would therefore be a question of filing a sort of heavy duty VAT return showing all expenses analysed as required. The only new comers to the game would be businesses/B2L over the threshold but have not been required to register for VAT.

The turnover level can then be reduced to £15,000, being more sensible than £10,000, in 2025 (coincidentally the year after I retire!).

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By nogammonsinanundoubledgame
17th Oct 2016 11:51

For as long as 3-line accounts have been available I have been unable to discern their merit for either HMRC or the taxpayer. In order to take adequate care at arriving at a taxable profit, you will generally need an analysis of expenses. If you have that analysis to hand, it is a trivial thing to provide that analysis on the return. Particularly if your records are in any way computerised.

With kind regards

Clint Westwood

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By johnkcound
19th Oct 2016 11:10

MTD is for one reason & one reason only: so they have real time information in respect of the self employed in the same way as they do for employees & the sole purpose is for paying Universal Credit

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By johnjenkins
19th Oct 2016 11:43

Great article, Rebecca.
HMRC clearly do not know what they are doing. I've said all along that this is just a preparation for the small self-employed to be put onto RTI. Limited Companies on RTI. Of course HMRC will just take the Ltd status away as they have tried to do with IR35.

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