An introduction to the three line account

The three line account is an optional way of completing relevant sections of a tax return, available to those whose annual turnover from self-employment or income from UK property is below the VAT registration threshold.

Rather than giving HMRC a lot of detailed information, all that has to be provided on the relevant pages of the tax return are:

  • Details of the business
  • Turnover (see below)
  • The total of allowable business expenses
  • Net profit or loss
  • Details of any adjustments, allowances or losses

Turnover means the total income earned, including

  • Cash and cheques
  • Tips, fees and commission
  • Money due to you up to the accounting date whether or not actually paid
  • Payments "in kind" for work done
  • The value of any stock or goods taken from the business for use by you, family or friends without payment
  • Income from letting of any land or property
  • Any rent over £4,250 (£7,500 from April 2016) from a furnished room in the taxpayer's own home

It does not include money received from the sale of business premises or a piece of machinery previously owned and used in the business.

If the relevant accounting period is longer or shorter than 12 months then the annual turnover limit goes up or down proportionately.

The three line account cannot be used for

  • Income and expenses from land and property abroad
  • Employment income and expenses
  • Any income shown on the Self Assessment Trust and Estate Tax Return

HMRC recently published a guide - Self Assessment - what you need to know about using the three line account (Tax help series TH FS2) - to explain the rules. The first two pages set out details of the three line account, and part of the third page contains reference to the records that need to be kept, with a very brief summary of Simpler Income Tax (the new cash basis). The helpsheet can be viewed here: www.hmrc.gov.uk/factsheet/three-line-account.pdf

Accounting Records

Whether or not the three line account is chosen, the taxpayer is reminded of the legal requirement to keep full and accurate records of income and expenses. There are penalties for not taking reasonable care with records and tax returns.

Simpler Income Tax

Much publicity has been given to the fact that the cash basis is an alternative to the accruals basis of accounting, and can embrace various simplified expenses. However the three line account clearly requires the inclusion of debtors and various other non-cash adjustments, although there will also be scope for simplified expenses to be included in the three line account.

It seems that a full range of reliefs is available for three line account losses, whereas cash accounting losses are restricted to carry forward against future profits. This can be explained if the accounts do indeed have to be prepared on the accruals basis.

For some very simple businesses which are substantially cash based, it would be possible to present the information in the form of a three line account and, of course, rental income is not covered by the self-employed cash basis. However, it seems that in the main Simpler Income Tax and the three line account will be mutually exclusive.

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