The future of three-line accounts
Many self-employed traders report accounts information in just three boxes on their tax return, but this simplification could disappear under MTD.
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.
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.
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.