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Government 'simplification' needs your examination!

Robert Lovell has reported elsewhere on AWEB on an apparently well meaning government proposal to simplify reporting requirements for very small businesses (those with turnover up to 500,000 euro or about £440,000).  His report includes a link to the government proposals.

Either I have misunderstood what the government has in mind or the proposal would, if put into effect, result in confusing and somewhat incoherent financial statements being issued by such companies and a much accelerated timescale for their submission to Companies House (the time limit being reduced from 9 months to 12 weeks after the year end).

Read Robert's report HERE.

David

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By Locutus
29th Aug 2011 19:49

The last I heard was that ...

A few months ago a government minister had trumpeted that micro entities would, from some date in the future, be exempted from filing ANY accounts with Companies House.  Apparently these micro entities would save millions of pounds.

This, of course, was nonsense as all companies would still be required to file FULL accounts with HMRC in iXBRL format.  So any saving would barely be measurable.

I haven't read the link you provided yet.  If, as you say, there is a proposal to file financial information after only 12 weeks after the year end, this only goes to prove how "out of touch" those that consider these things are.

Anyone who has dealt with SMEs will know that at least 75% of them haven't even thought of getting their accounts done 12 weeks after the year end.

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29th Aug 2011 20:54

Strange

I've said this before and I'll say it again that the Government ministers who are proposing these changes are missing the point entirely about what causes small companies massive headaches.  They are making it sound like producing accounts for small companies and submitting abbreviated financial statements is a huge job, full of never-ending red tape and major headaches for small companies. Certainly the proposals to produce a trading statement on a cash accounting basis seem inconsistent when the proposals then go on to require a statement of position which is prepared on an accruals basis. Ed Davey, the business minister, has claimed that smaller companies have limited resources available to comply with accounting requirements applicable to larger entities.  Clearly he's never heard of FRSSE.

More astonishingly is the fact that the Government ministers seem to think 'micro entities' will have all their books and records available and accounts produced and approved within 3 months after the year end - I'm not sure what planet these government ministers are on! Small companies would benefit more from reduced red tape in health and safety legislation, employment legislation and, more importantly, simplification of the tax system but they seem to focus on areas which, in reality, aren't that bad! 

I would implore any Government minister involved in these proposals who would like to shadow me for a week in practice to contact me via the PM facility and we can arrange a week's 'work experience' to give a practical insight as to what really happens in the world of the average 'micro entity'.  I can understand the frustrations vented by critics of IFRS and auditing standards when they say these are over-burdensome for smaller companies which apply them, but the micro entities proposals don't seem consistent with HMRC requirements.  Moreover the savings which Government say will be made by putting the proposals through are grossly inflated at some £300 million.

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By Locutus
29th Aug 2011 20:42

OK I've read it now ...

I fear the Department for Business, Innovation and Skills hasn't really got a clue how micro companies operate.  The way I read the proposal is that the Department assumes that owner managers of micro companies are all expert bookkeepers that keep perfect accounting records on something like Sage and a week after the year end they press the "print" button and out pops   perfect financial data ... and that it is us evil accountants that complicate / delay matters with our accruals and depreciation.

So the proposal seems to be to file a "trading statement" (basically a P&L prepared on a cash basis), a "statement of position" (some sort of statement of assets and liabilities, although I'm not sure it is required to "balance" in the same way as a balance sheet - it can't since you don't know the P&L movement for the year as you are not preparing a P&L in the first place) and an annual return which tells you who owns the business ... all within 12 weeks of the end of the financial year!

One further point - paragraph 3.18 talks about standardising the reporting year.  So does this mean all companies will have 31 December year ends?  That's going to make it a busy first 3 months of the year for accountants!

It all seems such nonsense that I wonder whether I've fundamentally misunderstood something.

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30th Aug 2011 10:29

Deadlines

3 months or 9 months makes no difference to nearly all micro-businesses.  What counts is a deadline.  To a man they do the figures when they have to.  If you gave them 2 years to get the job done, a majority would still be scrabbling around at the 23 month point.  It's simply a lot easier to do the figures sooner rather than later and to do them quickly is to do without the existential angst and guilt which they feel through not doing a job they know they have to do.

Stick your hand up if you've ever had a client say that getting their stuff together wasn't as hard as they thought it would be and they'll do it more promptly next time.  It's just like being back at school and having to get your homework done for the next day instead of in a week's time.

Of course there can be reasons why 3 months is an impossibility and so a soft penalty regime or an extension just for asking, would be desirable.  But a 3 month aspiration ought not to be a problem, just so long as they don't go down the common year-end route! 

 

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I dont think 3 months is a problem personally, as above its just about getting your act together, unless of course everyone had the same year end which would be insane, however having read the proposal it really is quite bonkers.

Do bang in an email in response here:

[email protected]

Essentially once you have done the accounts for your limited company client, you have to produce a cashflow statement, and cherry pick some lines for CH, rather than the current abbreviated accounts.  Savings? None. Extra work? You bet. Utter confusion? Guaranteed.

 

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30th Aug 2011 11:56

.
I think 3 months is a bit too optimistic especially if you consider these proposals are for the very small clients most of which probably don't have a full time bookkeeper and take ages. Most of our clients are like that. What's the big deal about filing in 3 months anyhow? As others have said the proposals are nonsensical to say the least.

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30th Aug 2011 12:12

The proposals

As the proposals stand I think the requirement would be to produce a document (which we know as a Profit & Loss Account) on a cash (i.e. receipts & payments) basis and send that to HMRC for tax purposes and prepare a Balance Sheet on an accruals basis and send selected figures from that to Companies House with the Annual Return.

The idea seems to be that it would not then be necessary to prepare a P&L A/c on an accruals basis resulting (the government believe) in a saving of costs and time.

Unfortunately someone has failed to recognise that the P&L A/c and B/S are in reality as inseparable as the two sides of a coin.  In order to compute the Shareholders' Funds figure in the B/S it is necessary to prepare a P&L A/c on an accruals basis.

So (unless I have misunderstood the proposal) it is a nonsense.

David

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By Locutus
30th Aug 2011 13:11

Deadlines and balance sheets

I agree, up to a point, that many clients tend to put off having the accounts done until they are forced to by a deadline.  So the same sort of people would probably be last-minute if there is a 9 month, or even a 2 year deadline.

However, reducing the filing deadline to 12 weeks is so short that it introduces a whole new set of problems.

Most of my clients, however good they are, aren't usually in a position to hand over the meaningful bookkeeping records until about a month after the year end.  It takes time for the previous month’s purchase invoices, bank statements, credit card statements, etc to filter through and quite often they need to file a quarterly VAT return.  So that leaves 8 weeks to ship it over to the accountant, for the accountant to sort out the mess they’ve been given (perhaps the new bookkeeper didn’t reconcile the bank properly!) and resolve all of the queries.  Hope the client’s year end isn’t 31 October, otherwise it’s going to be difficult for the accountant to do anything in December and January with tax returns.  What about the summer holiday season for directors and the accountants – 12 weeks is not long to plan around this!

David’s question of how can you prepare a balance sheet on an accruals basis when you have prepared the “P&L” on a cash basis is correct.  However, is the balance sheet actually required?  The way I read the proposal was that the “statement of position” simply lists assets and liabilities so it may not actually reconcile to anything.

I think this is dangerous as this encourages company directors to become DIY accountants and simply put whatever Sage tells them to onto the Companies House annual return without a thought as to whether it is accurate or not.

A recipe for disaster I think!

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30th Aug 2011 13:40

Balance Sheet

The proposal indicates that micro-businesses would prepare:

"A Statement of Position – which would include details of shareholder's funds, fixed assets, cash, debtors, loans, and short and long term creditors".

I interpret "shareholder's funds" to mean share capital and reserves (including the balance of undistributed profit).

However "shareholder's funds" could be interpreted to mean share capital only.

I don't think the Statement of Position is intended to 'balance' in the way that a Balance Sheet does - so it may be that only share capital is intended to be shown.

Note that there is no mention of stock / work-in-progress in the Statement of Position.  I take it that this is deliberately excluded so as to avoid the need to count and value stock / WIP at the year end.

David

P.S. As for deadlines, I remember in my younger days a client who came in regularly - once every 6 years - to have his accounts and tax returns brought up to date. Them were t'days eh!

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Quote from Roberts article - The paper also proposes developing an integrated software package to help small businesses prepare financial information, allowing managers to gain a better understanding of the trends in their businesses’ performance and help them plan for the future.  """"" "''

So not only are they shortening the deadline etc - they are going to give you the software to use to run your business properly and produce the information needed to submit etc? That fills me with more dread I am afraid - keep your records when I say, where and how I say, real time accounting on the way?

I am not an accountant but I forsee problems with all the other people you need to produce your accounts to in support of finance and trading accounts as I would expect this new format will not give you an accurate overall view. How will it be accepted by your professional bodies?

 

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On reflection I wonder if this is a response to the huge number of micro limited co's that 10 years ago would have been sole traders?

That is to say they seem to be going down the road of treating a limited company how sole trader reporting has gone for SA (ie doing away with the need for a balance sheet)

If so they are tackling the wrong problem.

 

 

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31st Aug 2011 13:21

HMRC and banks views

The quango's are at it again. I wonder what the banks and HMRC will say in response. I'm sure next week we will see a consultation on why banks are not lending to micro-businesses because they have no creditable information to rely on. Or perhaps HMRC are not collecting enough taxes because people who do not have any knowledge are filing their own CT returns and there are not enough staff to deal with such enquiries. Or even that banks will want external accountants to keep on providing references on even less financial information.

For me it is simple (also one other person aired on this), if you go Limited company, then there are additional costs and admin burdens. This is one area that I advise my clients on as well as potential commercial cost savings (ie tax). if the tax savings do not outweigh the additional costs and admin burdens then they will stay as sole traders.

We have the reduced disclosures of FRSSE and also we already have simplified accounts templates. Lets be honest, most accountants find that dealing with a micro-businesses annual accounts to be reasonably easy. So therefore why not just increase the exemptions contained within the FRSSE, rather than uphauling the complete system. If accountants and business owners are not able to produce creditable FRSSE accounts, they they should not do it. One reason is that businesses do not want to engage in external accountants (no value perceived) and want to deal with the affairs themselves.

Reading the introduction again, it discusses the first paragraph about regulatory and legal reforms since the financial crisis of 2007/08. For me, as an accountant that deals with small and micro businesses, the major cost has been that of HMRC and their inefficiencies. It has not really been down to the FRSSE and Companies Act 2006. What other changes has there been, that are focused around the micro businesses? So perhaps the real answer is to get rid of IXBRL filing of accounts? My software company VT, has done an exceeding good job of ensuring that my clients comply. If it is really down to regulatory and legal burdens that have been introduced since 2007/08, then surely we need to wait another 2 years to decide on what changes to make. For me 2010/11 has been a lot easier on the regulatory burden than 2009/10 and also I predict 2011/12 to be an even easier year. So are we looking at this issue too early, or have the government now reasiled that IXBRL is far too complicated and want to narrow down the fields.

Finally, the 3 months issue is a real concern. As highlighted above it takes about 2 - 4 weeks for the vat returns to be fully completed, this would only leave an accountant with a maxium 2 months. taking 2 weeks holiday into account (for both the accountant and the client) then this could leave a potential of 1 month to plan, undertake and finalise a simple set of accounts. Plenty of time, if things go right, but then again how long does it take nowadays to get a copy bank statement from the bank when you need one? Year end 30/6 - Accounts filed 30/9 (what summer holidays?)

 

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By cfield
07th Sep 2011 14:13

The most useless government report ever published

How this report ever saw the light of day is beyond me. I've seen some rubbish from government departments before but this one really takes the biscuit. I was so incensed after reading it I was tempted to e-mail Julian Thompson and tell him what I thought, but I doubt he would take much notice. The whole thing's  probably just a flag waving exercise anyway.

First of all, who is actually complaining about the burden of filing accounts? I think most business people see accounts as a necessary evil and have no real objection to doing them per se. It's the disclosure rules many take exception to, such as related party transactions. Most take the view that if you are going to do accounts you might as well do them properly, which is why they employ us. I wonder who the report is actually referring to when they say micro businesses  complain about the burden of filing accounts. Do they have any evidence for this or are they just making it up to justify their half-baked proposals?

Secondly, it is not the complexity of accounts that makes many business people lose the will to live but the idea of doing them at all. Again, that is why they employ us. They know accounts are necessary to run the business and work out tax liabilities, but dread the thought of doing them personally, however much the government or the EU try to simplify them. They simply don't want the hassle of doing all that number-crunching themselves.

Micro businesses without an accountant will probably just carry on doing their accounts in their own sweet way anyway, regardless of what the law says. It won't make any difference to them. And how is this idea going to square with the current drive by HMRC for businesses to keep proper accounting records? Once again, it's a case of unjoined-up government thinking, with the left hand not knowing (or caring) what the right hand's doing.

It just seems odd that they pick on accounts as the thing that gives micro businesses the most problems when there is so much else, such as employment law, health and safety, VAT rules, PAYE on expenses and benefits, bribery act, etc that just cause them one headache after another. For example, I wonder what drongo took the decision that every micro company must now file tax returns on-line using compatible software? Those without accountants or software must now either outsource what used to be a 5 minute job at extra cost or struggle with the HMRC system, after first changing their trust settings and then finding out they can't file until October anyway because the tax rates haven't been changed yet. The whole thing's just a complete joke.

I wonder why they think filing the Annual Return is such a hassle. It takes about 2 minutes if there are no changes. The hardest bit is finding your security code. Now they want to "simplify" it by reporting the average number of employees, the amount of turnover, etc. They seem to think it is something to do with the accounts. This is the work of someone who hasn't even bothered to check out what the Annual Return is.

As for their ideas about simplifying accounts, the idea of producing a balance sheet with debtors and creditors when the P&L is on a cash basis is the work of people who are totally illiterate about accounting. You'd think the BIS would have chosen members of staff who at least knew something about book-keeping. And I wonder what HMRC would say about people delaying their year end invoices or incoming receipts to avoid tax. Did they even consider this?

As for filing within 12 weeks, that may be possible for very small businesses that keep good accounting records but is pie in the sky for any company that has any sort of complexity whatsoever. For example, I have travel clients where you need to work out things like profit adjustments and customer deposits on open bookings, liabilities for unredeemed vouchers where customers have paid but not travelled yet, reasons why individual bookings have different margins to those estimated. Usually the reservation systems do not produce all the accounting data needed so a lot of manual interrogation is required. No way could those accounts be done properly within 3 months.

I hope whichever minister is responsible for reviewing this report gives it the appropriate short shrift and lambasts the individuals responsible.

Maybe AWEB could do a digest of this strand and e-mail it to Mr Thompson with a request for his comments. That should make interesting reading!

Chris

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send it chris!

Chris -  if you have taken the time to write that, email him with your thoughts.

Cut, paste and send the relevant bits (prehpas with some of  the emotion taken out!) 

It all helps. They count entries even if they dont read them properly.

Next we will be told to wear our calculators on our heads on the way to work to assure the public that taxes will be collected.

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07th Sep 2011 14:32

HMRC can't reply to letters within 12 weeks

This report was no doubt written by a civil servant on a good salary and pension - what rubbish. I think all civil servants should do 5 years "national service" in the private sector so they can experience the real world.

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Nooooooo

kevinringer wrote:

This report was no doubt written by a civil servant on a good salary and pension - what rubbish. I think all civil servants should do 5 years "national service" in the private sector so they can experience the real world.

 

 

If they did that the poor little dears would be on sick leave for the rest of their career having been "traumatised" by having to actually work for a living.

 

 

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07th Sep 2011 15:22

This is becoming a recurring theme!

Steve started a thread after Vince Cable's remarks about reducing red tape by somehow simplifying accounts and maybe it would be possible for those nice people at accounting web to pull the various contributions together.

When I first read these proposals I was struck by how unfair on taxpayers the cash basis would prove to be (although there were some quite large partnerships who were taxed on a cash basis until surprisingly recently and ran quite high debtor and WIP balances as a result)

Then I wondered was it just me, as an accountant, liking to see nice neat tidy balance sheets which balance?

I came to the conclusion that accruals based accounts are more likely to give a fair reflection of a business's earnings over a given period, so we should probably stick with them as the basis for taxation and other reporting needs.

I remain perplexed that a pretty good model for simplified reporting was issued by the Company Law Review Committee more than 10 years ago and was simply ignored by the politicians when CA 2006 was introduced. Yet it's the politicians themselves who are claiming that it's our fault that small business accounts are over-complex and coming up with half baked (actually not cooked at all) proposals like this. 

I have some song lyrics on this theme which go to the tune of Wait Mr Postman, if anyone's interested!

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07th Sep 2011 19:06

3 months

With 60% of our limited companies having a March year end I would be absolutely dreading April - June every year - it would end up with more pressure than January!  BTW I promise that we didn't chose the March year ends - mostly the clients did.

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