Cash accounting for tax: Call for responses

The consultation on the proposed cash accounting rules ends this week. It is clear that this initiative is intended to benefit very small businesses, and mainly those who are unrepresented, explains Rebecca Benneyworth MBE.

The potential impact on small firms of accountants is huge, in terms of changing processes and potential loss of fees – particularly those firms who pride themselves on a good service at a reasonable fee. They now potentially face being undercut by agents without accountancy backgrounds, keen to make a killing by offering a very cheap service for cash “accounts”. These issues are worthy of wider debate, but in my view we have to be realistic and accept that this comes from “on high” and is designed to benefit small businesses. We, I guess have no God given right to our market place – and we can discuss the impact of this at some length once the consultation closes. I do have some ideas about how we might re-engineer small practices to benefit from what is going on around us, but will save that for a future debate.

Read the rest of the article to find out:

  • Who can use it?
  • What are receipts?
  • What is expenditure?
  • Other issues

Continued...

» Register now

The full article is available to registered AccountingWEB members only. To read the rest of this article you’ll need to login or register.

Registration is FREE and allows you to view all content, ask questions, comment and much more.

Comments

Pages

Important omission...

Mike Truman | | Permalink

... in the introductory para of this article, given the date that it was posted. Should say '... explains Rebecca Benneyworth MBE' (see the Birthday Honours list).

Congratulations!

and apologies for derailing the article...

EDIT - Glad to see it has been added!

carnmores's picture

and you said it was simple!

carnmores | | Permalink

I would like to see some clarity on vat cash accounting. When taxpayer has to register for vat will there be a restriction on claiming pre registration inputs

Why ?

The Black Knight | | Permalink

Just let them cock it up as usual

We will have nothing to do with this anyway.

Turn away clients of this size they are too much trouble and it is best the sharks do their tax returns as they will save even more tax that way. Tell them it should only cost £50 as a guide price. They will be out of business shortly after anyway when you withdraw the free advice that saves them.

This is being driven by software houses who have already written the software before it became law ! funny that?

To actually do this properly will cost even more (twice the amount). At which point the good and honest cannot compete with the people this Idea is trying to help.

Time to change career perhaps there are lots easier ways of earning a living.

 

Nick Graves's picture

Symptomatic    2 thanks

Nick Graves | | Permalink

It's clear that there are far too many zombies trying to create lucrative jobs for themselves by fixing things in accountancy that actually aren't that broke;

The ASC, Vince's mob, EU's lot...all producing contradictory simplification by complication.

I should be grateful if they'd do us all a favour by stopping fiddling around. Just pay them to stay at home, please. 

 

 

Old Greying Accountant's picture

Sounds to me ...

Old Greying Acc... | | Permalink

... like a tax dodgers charter!

Don't have time at present for full reply, but will come back to this.

Most businesses of this size are pretty much done on a cash basis anyway, with a bit of tweaking to get cut-off right - it doesn't exactly take long to put in debtors and creditors for a one man band anyway - hardly going to save them much money.

There are enough bargain bucket shop accountants out there anyway for those that want them, I try and get clients that value an accountant for more than just compliance work.

I see big problems though, ooh, hold back bankings, nice low tax -until the snowball melts!

Seems a bit like flat rate VAT too - you don't know which is best unless you compare, so two lots of work to do!

Seems to me a typical government ill thought out headline grabbing idea to paper over the cracks.

 

 

Got it all wrong we have    1 thanks

The Black Knight | | Permalink

You need to look at the industries the government is trying to help.

Delinquent child factories, tax evasion, drug dealing and general crime all of these are supported in action, (not words).

johnjenkins's picture

I really

johnjenkins | | Permalink

don't think it will affect any of us. Most business want to use credible Accountants and know that decent advice costs more than £50 a year. It would be interesting to know how much this scheme has cost (which could have gone to Agent strategy).

Congrats. Rebecca - well deserved.

BobEdwardsLandmark's picture

Cash Accounting for Tax

BobEdwardsLandmark | | Permalink

Useful article, thanks Rebecca.

I think smaller practitioners should start planning now on the basis that a simplification of accounting and reporting for micro businesses is going to happen.

Whether this will result in a further slippage of clients to "opportunistic" non-qualifieds will depend on how you communicate the change to clients - in my opinion. Is this change a problem for practitioners or an opportunity?

Where I think we should be placing our attention is in defining what the opportunity may be? If your practice is saving time in preparing the simplified numbers dosen't that give you more time to prepare some basic tax or business planning for the client? The conversation should not be:

"You only have to submit simplified information to HMRC so we can reduce your fee..." but rather,

"Good news, you only have to submit simplified information to HMRC from xxxx so we can increase the advice we offer without increasing your fee. For example this gives us an opportunity to offer you additional (tax planning/business) development advice as part of your normal annual fee..."

In other words if you are freeing up time how can you use this time to increase the level of service to the client? This is the real challenge...

Bob Edwards FCCA

Sole practitioner and founder Landmark Regions UK Ltd

 

 

silicondale's picture

Underwhelmed

silicondale | | Permalink

As owner of a micro-company that falls into the target category, I have to say that I am distinctly underwhelmed by the proposed "simplification". I have been running my business for 19 years, the last 17 without needing to use accountancy services at all. Thank goodness for that - because any accounting fees would eat up a significantly large chunk of my net profits. And that has been with changing tax regimes (including the horrendous non-coporate dividends rules a few years ago), various CT tax rates, changes in the Companies Act, etc. For companies the size of mine, using the services of an accountant is an expensive luxury. If the government can produce some genuine simplification that doesn't cause bigger problems than it solves, I shall be very happy.

But in the meantime, the devil we know is probably better. Long-term stability in the tax regime counts for a great deal - to be able to complete the accounts next year and the year after and the year after that... in the same way as last year and this year would be very helpful. For that reason I think it unlikely that I shall be switching to cash accounting as proposed. I have found the online HMRC CT filing, this year integrated with Companies House filing, excellent though it is in theory, was a real pain to use. Far better they put their efforts into debugging the software for their existing system than think up a whole new system which will come with its own batch of teething troubles.

cash accounting

chubby0024 | | Permalink

Does the government have any idea how confused the average small business finds all this?

To bring in a new set of 'simple rules' which you need to compare  and explain to those same clients doesn't really help anyone.

Can anyone explain to me why the thresholds for joining and leaving need to be different?

If someone is close to the threshold for joining and plans to grow their business they wouldn't enter the scheme in the first place would they?

I expect some small clients may think this is simpler and easier and start to do returns themselves, which will lead to more returns with mistakes.

Like the comment above the preferred clients are ones who appreciate the job we do and know we have gained our qualifications for a good reason.

 

REGULATION BY THE BACK DOOR

david5541 | | Permalink

[quote=Nick Graves]

It's clear that there are far too many zombies trying to create lucrative jobs for themselves by fixing things in accountancy that actually aren't that broke;

The ASC, Vince's mob, EU's lot...all producing contradictory simplification by complication.

I should be grateful if they'd do us all a favour by stopping fiddling around. Just pay them to stay at home, please. 

YEAH.

somehow or another government depts-in particular the Inland revenue-to whom the coalition has given the buzword "tax simplification" which is not much different to the "BIG SOCIETY" buzword(meaningless and inneffective in implementation)think they have accountancy expertise so use the word "accounting" HMRC should stick to using the word "reporting"-Anyway everyone already knows in tax CASH ACCOUNTING IS A METHOD OF ACCOUNTING FOR VAT!-why confuse the two!

If someone wants accounts they use an accountant; if someone want their tax return filed they use "bucket shop scammers". everyone including HMRC are convicned its easy to complete a tax return. this perception conveyed by so many "tax enquiry centres and "hmrc call centre staff" in the end will shoot hmrc in the foot and let all the big boys get away scott free.

why doesn't tthe hmrc use its language more carfeully to avoid "mixed metaphors"?

its clear HMRc is attempting again to supply another regulartory framework under which bucket shop scammers can fill in tax returns without preparing accounts which with the Agent strategy will be a furter regulatory step. 

vowlesj's picture

As you imply we are gonna get it regardless, here's my input    1 thanks

vowlesj | | Permalink

Thanks Rebecca (MBE!) for undertaking to make a response.

I think both Carnmores and the Black Night makes an interesting comments in that anyone who thinks this is going to be easy and straightforward might well find that it is only simple if you remain a small business, oh! and never need to borrow or anything else that is a restriction.    However, given that some 3 million business are below the VAT registration threshold it will have some applicability!

I think my input to your response are:

1  Only VAT unregistered business should use it and therefore you came off the scheme at the current registration threshold rather than at £150k.  The bigger the business the harder and more complex it is likely to be to deal with the transition so this should be kept to small business.  However I actually agree with the OTS that the threshold for leaving the cash basis should be £30k turnover, ie it it should be firmly aimed at the very small business.

2   The various restrictions, borrowing costs, motoring costs, etc., only make sense if there is a clear choice and the taxpayer can choose to be on this 'simple' scheme or normal rules.  Any new businesses must not be defaulted into this scheme but given choice.

3   Why are the rules for Barristers being changed, if it works don't break it! 

4   How does hmrc intend to police the anti-fragmentation issue.   Anti-fragmentation for VAT isn't policed terribly well at the moment so surely the same issue would crop up here.

5   Why bring in this proposal anyway - isn't it just a proliferation of rules for no good result?  Very small businesses tend to prepare income and expenditure accounts on what amounts to a cash basis anyway, so will this new legislation actually achieve anything apart from extra costs and complexity.

6   How will the transitional rules work in practice? Will this simply end up being more costly for business in the end? 

7   The thresholds should be defined as the current VAT limits, otherwise we instantly start making thresholds an overly complex problem. 

8  The use of home and flat rate use of business appear to be a bit draconian.  Isn't this a backdoor attack on small businesses expenditure?

9  According to HMRC there will be no need to keep complicated records, eg stock, debtors, creditors!  Which idiot thought that up!   Obviously every business needs to record debtors and creditors or it risks going out of business through sheer stupidity.  How are the necessary records that a business keeps going to be any less than the records they need to keep for tax purposes.

10   Whilst I'm on the subject, why does the consultation document say that cash account businesses won't get tax relief on the withdrawal of cash for personal use and the payment of income tax or capital gains tax.  As you can't at the moment it does seem more than a bit strange to say you can't in the future.   Who drafted this document, a 16 year old on work experience?

Jonathan

 

simplification

david5541 | | Permalink

BobEdwardsLandmark wrote:

Useful article, thanks Rebecca.

"I think smaller practitioners should start planning now on the basis that a simplification of accounting and reporting for micro businesses is going to happen.

Whether this will result in a further slippage of clients to "opportunistic" non-qualifieds will depend on how you communicate the change to clients - in my opinion. Is this change a problem for practitioners or an opportunity?

Where I think we should be placing our attention is in defining what the opportunity may be? If your practice is saving time in preparing the simplified numbers dosen't that give you more time to prepare some basic tax or business planning for the client? The conversation should not be:

"You only have to submit simplified information to HMRC so we can reduce your fee..." but rather,

"Good news, you only have to submit simplified information to HMRC from xxxx so we can increase the advice we offer without increasing your fee. For example this gives us an opportunity to offer you additional (tax planning/business) development advice as part of your normal annual fee..."

In other words if you are freeing up time how can you use this time to increase the level of service to the client? This is the real challenge"

very soon more and more clients without savings income will be sent small"simplified tax returns" anyway regardless of the business type and size...

Bob Edwards FCCA

Sole practitioner and founder Landmark Regions UK Ltd

 

 

bookmarklee's picture

In haste    1 thanks

bookmarklee | | Permalink

I'd like to see responses to the Con Doc include ref  to whether the increased cut-off limits make sense to us as compared with what OTS proposed. They set a lower cap for a reason as I recall.

I'm of the view that the proposal is intended to simplify issues for the vast majority of smaller businesses that use DIY re bookkeeping/tax filing and who don't have an accountant. Under the present regime HMRC staff have a reason to raise enquiries and to make adjustments as non-accountants typically use the cash basis. If enacted these proposals will remove the tendency to focus enquiries on smaller businesses where the adjustments are more of a timing issue than anything really 'wrong'.

Whether the changes will be an opportunity or a problem for accountants is a separate issue for a separate thread IMHO

Mark

KH's picture

Fail to see the point

KH | | Permalink

I fail to see any point in this whole process of tax simplification. It already exists for those who want it (i.e. just choose whatever figures come to mind when filling out the three-line "less than £73k income" self-assessment pages ... and Bob's your uncle!). So why all this brouhaha over all this additional twaddle? It's sheer madness out there already, without adding another layer of insanity on top of something which does the job well enough, and is already a tax-fiddler's charter. Is it me?... Or am I just getting a wee bit jaded?

borrowing costs    1 thanks

Joss | | Permalink

Rebecca (MBE), Thanks for highlighting complexities, pitfalls and issues yet to be resolved.

Forgive if I offend but, I have never met a non-accountant who can grasp the fact that (other than for interest-only loans) not all of a loan repayment amount is a business expense. Ergo, nearly all traders left to their own devices would put through their loan repayments wholly as an expense. And they may still do so if this is not clearly flagged on the new tax return.

However, It is outrageous to say that small businesses can use the new "simple" scheme but only if they forego claiming their cost of borrowing. Loan interest can form a substantial element of a business' costs.

Legislation on this new "elective cash basis for small businesses" needs to include a requirement for all banks to provide a certificate of interest for each income tax year on all types of loans to individuals (including mortgages where, in my experience, the certificate is currently only available on request). There should be a clear note on the certificate saying "Keep this document safe, you may require it for your tax return if you complete one".

This loan interest figure, subject to adjustment for any part of the loan which was for private purposes should be transferred on to the small business' cash basis tax return pages. The new tax return pages which I assume will be required should direct them to locate the figure they need from this certificate and to enter zero if they do not have this certificate.

Having considered and argued through this point I find myself wondering if OTS (with the best intentions) really will be creating a mountain of inadvertent taxpayer non-compliance considering the coverall legislation that will need to go around this "simplification".

I still think the idea of an "optional flat rate scheme for income tax" based on a percentage of cash-basis -receipts (annual, quarterly or monthly) is the way to go - if you are going to simplify then really simplify. Just imagine how quick and economical a tax enquiry could be. With the money they saved maybe they could afford to put some more staff on the helplines!

Not for Companies!!    1 thanks

kkay783 | | Permalink

I think you will find even if you wanted to switch you couldn't as the proposal states on page 2 "The proposals are relevant to individuals carrying on a trade or profession as a self-employed sole trader, or in partnership with other individuals" - it would seem therefore NOT FOR COMPANIES!!

@silicondale, doesn't apply to you    1 thanks

watercleaves | | Permalink

"The new proposals apply only to unincorporated businesses with business receipts of less than £77,000 in 2012-13"

So if you're paying CT now you're not going to have the option of changing, as you must currently be incorporated.

No criticism, but it shows how difficult things get for very small businesses whenever the rules change. IT'S HARD TO READ ALL THIS CRAP! Personally I was over a year late finding out about the new Annual Investment Allowances, to my cost. Don't recall reading about that in the HMRC quarterly gazette.

Flat rates for expenses

cathy329 | | Permalink

They have not provided enough detail about how flat rate expenses for use of home will be calculated.

Estimating stationery costs based on the number of business letters sent is a joke. A lot of businesses conduct most of their correspondence by email these days, but still spend a lot for their internal use on ink cartridges, paper, files etc.  It is difficult to estimate this on a unit cost basis.

 

 

 

eve2206's picture

This will confuse many business owners

eve2206 | | Permalink

I've just been reading the consultation document and the way HMRC have worded it is worrying. Many "small business" owners or rather self-employed people will be very confused by this.  Many will assume cash accounting means the money that crosses their palms and much of that never gets declared anyway.  None will prepare any accounts so when they need to apply for a bank loan they will come to you expecting to have three years accounts knocked up - but where are the records!  Or are the banks going to lend money on the basis of three years copies of (self declaration) tax returns - I doubt it.

There is a difference between tax simplification and over-simplification. This initiative should come with a health warning.

Cash accounting

RoderickH | | Permalink

If they want to make Corp Tax simpler for small businesses, why don't they use the same flat rate scheme as they do for VAT?  After all, that seems to work for both businesses and HMRC.

No doubt the Treasury has stats that support the various VAT flat rates presently in use for different commercial sectors, and so could presumably adapt those to equate roughly to its take from Corp Tax.

Stock at the End of the Accounting Period

kershcliff | | Permalink

Will there need to be an adjustment for stock in hand as presently. Otherwise I see large purchases towards the end of the accounting period to reduce tax bills. Older readers will remember the stock relief debacle.

RebeccaBenneyworth's picture

A few extra points

RebeccaBenneyworth | | Permalink

Hi all. Some useful contributions, which I'll reflect in our response. I do take the point about extra complexity.

For VAT I think this can work well with the flat rate scheme. Obviously it is not restricted to those on flat rate as that would rule out repayment traders. My concept is by having two columns - one "Allowed expenses" and another (Guess ?) you reduce the bookkeeping burden.

No stock. Buy lots of stock at the year end = bust overdraft limit and have to waste some next year as not sold quickly enough.

The thinking is based ( I suspect) on the fact that the bank wants cash flow statements to support lending and this is the same (ish).

Yes, I do adjust for stock, WIP and UITF 40 for some sm,all businesses (eg jobbing builders). Almost all of my clients fall into this category - I work from home with no staff so my costs are low. Give me a couple of hundred of them (and no lectuires or writing or ....etc) and I'd actually be very happy. I like that I can get them to understand how it works better. I know you disagree.

Barristers - keep cash basis if small and no silly adjustment when they switch to an accounting basis (might be a bit difficult to swallow though).

Yes this is about what they do by themselves (and sometimes much worse), so why not make it easier for them?

And of course they'll record debtors and creditors. It's called a pile of unpaid invoices (or indeed 2). Even teeny tiny businesses can do this.

Loan interest - POLICY decision. Check it out!! Can't comment then - they say that not many will be affected.

silicondale's picture

Thanks kkay and watercleaves

silicondale | | Permalink

Thanks kkay and watercleaves - I have to admit I didn't spot that this doesn't apply to companies. So we're going to get even more differences in the rules for microbusinesses, depending on whether or not they are incorporated. For flat-rate VAT it doesn't matter, the rules apply equally to companies and sole traders (I think - but then I'm on standard VAT and always have been). I can see the potential complications with companies, especially those required to operate IR35 which is not now being abolished. And altogether I fail to see how the proposal is any sort of simplification. Call me cynical, but I think the big problem with all consultations of this sort is that you are expected to go along with the agenda (set by Treasury or HMRC) in order for any comments to stand a chance of being considered. And even then, they will go ahead and do whatever they intended originally.

information the banks need for loans

Joss | | Permalink

FYI - Not sure if this info will help but it might so I will share it with you... I applied for a short term loan recently. I am a sole trader. My bank would accept either my SA302 (tax calc) or my accounts. This despite the fact that my taxable income shown on my SA302 might be affected by loss reliefs or distorted by capital allowances etc. and so could be significantly at variance to my accounts.

Next they did an "affordability check" which consisted of netting off what comes in to all my bank accounts against what goes out and asked if I had any other bank accounts they needed to factor in. I was flabbergasted by this massive assumption that a person's cashflow was the same as what they were DUE to pay and receive.

I said "so if I went home and cancelled all my discretionary standing orders / DDs (such as monthly donations, a couple of insurances, etc) and came back into the branch tomorrow then you'd be able to loan me more tomorrow than you can today?" The loan advisor felt he should not answer this.

It seems the banks now work in ways you might not expect and, certainly in times of recession, cash flow is what they want to know. I wonder...is it possible with the big push to get banks lending that this not-very-simple simplification is greatly and perhaps unduly influenced by what the banks want to see in order to keep their loan assessment processes simple and mechanised.

Wow!

Paulsoper | | Permalink

Not sure many people have really got the point here.  It doesn't matter how small your business is, you are obliged by FA 2002 and successive legislation in ITTOIA and CTA to use FULL GAAP unless you opt to use the FRSSE.  A while ago a builder called Smith (Smith v HMRC of course) was subjected to years of discovery assessments because he had accounted for income received on the basis of architects certificates of value prepared by his client's architects.  A quite commonly used method of accounting for profits in the building industry but the Tribunal judges, both Chartered Accountants, decided to prove their accounting expertise by reviewing GAAP and concluding that Mr Smith's accountants (not Smith, what did he know?) had been negligent in not using GAAP - hence justifying the HMRC discovery assessments.  How many of the comments above come from practitioners who, hand on heart, make sure that all of their client's accounts fully comply with GAAP?  If you don't you also have been negligent and so have exposed your clients to the potential of 20 years discovery assessments!

Now, as identified by John Whiting's Office of Tax Simplification, whose report should be read in conjunction with this, at present 65% of ALL small businesses, many of whom are hobby traders on eBay, or small landlords, or part-time antique dealers, already use the cash basis.  So, don't look for problems, look for solutions, let these small traders use an accounting basis that is suited to their businesses.  How can anyone, in their right mind, insist on the full horror of GAAP being applied to these businesses?

This proposal is just common sense.  How many of the respondents above have bothered to read Whiting's report, read the consultation, and take part in the consultation - precious few I'd guess.  And they see it as some sort of threat to the viability of their own practice!  I put my comment in to the consultation some time ago - this is to be applauded, in fact why not take it one stage further and allow any business which elects for VAT Cash Accounting to use it to determine all taxation liabilities.  Any difference would be a minor timing difference which over the whole history of the business would cancel out.

Some respondents have complained that HMRC have not provided enough information on the proposal for standard deductions - you can already use a standard deduction for mileage, by concession, and this simply extends that to certain other expenses, such as use of home as office as well - but the point is that this is a consultation, the revenue haven't provided the information because they want you to comment.

I'd suggest that instead of getting worked up over a very sensible proposal that recognises the reality of many small businesses we get worked up over the restriction on tax relief for losses and interest relief where the sum exceeds £50,000 or 25% of income - easily forgotten because the charities have been let off the hook.

johnjenkins's picture

@Joss

johnjenkins | | Permalink

What you forget is banks don't want to lend unless you are a country that cannot afford the interest repayments let alone the capital. They want to sell sell sell to get commissions. Only if you are squeaky clean with loads of money will they lend as a business or individual. It has always been said that when you need money the banks won't lend but if you don't need it they can't wait to give it away. That's why we always end up in these stupid bank led recessions. Paul you are quite right and really HMRC are only ratifying the situation. I bet that hardly any of us are affected by this "new" scheme.

Government clueless    2 thanks

North East Acco... | | Permalink

A small sole trader client of mine recently looked into taking on their first member of staff to help develop their business.

Once they had looked at the lack of suitable finance, PAYE/NIC obligations, employment law (with a distinct chance of future maternity leave possibly), health and safety, Real Time Infomation and Auto Enrolment on the way etc they concluded that it wasn't worth the hassle and they would stay on their own.

These are the real issues which need addressing to free small business to grow not another layer of complexity which will ultimately cost more.

The government is clueless.

Get on with the tough decisions and action required rather than wasting time adding yet more complexity.

Some thoughts

ireallyshouldkn... | | Permalink

1. Threshold too high for deregistration. I would suggest they use the VAT threshold.

For a small service business a £150,000 turnover could be a business with a net income of £145,000. This is not a small business.

2. Generally I think they to use the scheme they should be looking at 50% or 2/3rds of the VAT threshold not the full level, but use of this threshold is very sensible "peg" rather than inventing a different one. Ie if they do want a large de-registration threshold at least peg it to multiples of the VAT one.

3. Property businesses are often drawn up on a cash basis through ignorance anyway. but cost of borrowing is clearly the major cost so uptake would be negligible.

4. Choice = complexity. How about it being compulsory, but only for businesses below the ONS suggested thresholds? I know accountants would hate it, but often certainty makes things "fairer" than giving choice when many people are not equipped to make the choice.  This is aimed at unrepresented tax payers who dont tend to haver much ability to make choices.

5. Need clear rules for things like cheques not available to draw. Ie what is the date they are counted? Date of banking? Date of clearance? Pedantic but needs to be made clear.

6. Must be strong rules to prevent "gaming" between the two schemes, especially for higher earners who can afford the advice. Eg a consultant hovering around the higher rate threshold.  Suggest maximum of 1 change of status in any 3 year period or similiar.  If you (say) 2 in 5 it allows people to drop in/out for one year.

And finally to avoid this being a big old mess the over riding principle should be to not make this any more complex than is necessary. For example restricting sideways loss relief is an extra complication and a rule few people outside of practice will know understand. The rules should be identical as possible for cash and accruals, any exceptions ought to be for very good reasons indeed. There WILL be a tax loss to HMRC due to this, and this ought be taken on the chin at the outset, and not ought to be restricted with complex rules which then destroys the whole point of simplicity.  Ie dont over engineer it, just make the controls around getting in/out strict to prevent gaming.

 

silicondale's picture

... or better still ?

silicondale | | Permalink

ireallyshouldknowthisbut wrote:

...

And finally to avoid this being a big old mess the over riding principle should be to not make this any more complex than is necessary.

...

... better still, just scrap the whole idea?

Or is it too late for that - HMRC/Treasury have already decided what they want to do, and this consultation is a sham like so many before?

.

ireallyshouldkn... | | Permalink

Whilst it will happen, the point of the consultation is to fine tune it and make it work. By asking accountants who do this for their day job the result is better legislation which is why Rebecca and others take the time to respond to these things.

silicondale's picture

better legislation?

silicondale | | Permalink

ireallyshouldknowthisbut wrote:

Whilst it will happen, the point of the consultation is to fine tune it and make it work. By asking accountants who do this for their day job the result is better legislation which is why Rebecca and others take the time to respond to these things.

In other words, you say we just have to accept the government's agenda on this even if we believe that it is bad legislation? I'm a businessman, not an accountant, but it isn't at all clear to me that any tinkering (sorry, 'fine tuning') with it would make it better, and indeed some things could make it much worse. For example "simplifying" by making it mandatory for those businesses that fall within the net could cause them a lot of grief if they are happily using the existing system. You've identified a real potential problem, that some might gain a tax advantage by switching back and forth between the two regimes. Surely the answer is not compulsion to use one or the other, or complex rules on how often you are allowed to switch - but simply having just a single system, rather than introducing another new one in parallel with it? 

Nick Graves's picture

Clueless and thus easily corrupted    3 thanks

Nick Graves | | Permalink

North East Accountant wrote:

A small sole trader client of mine recently looked into taking on their first member of staff to help develop their business.

Once they had looked at the lack of suitable finance, PAYE/NIC obligations, employment law (with a distinct chance of future maternity leave possibly), health and safety, Real Time Infomation and Auto Enrolment on the way etc they concluded that it wasn't worth the hassle and they would stay on their own.

These are the real issues which need addressing to free small business to grow not another layer of complexity which will ultimately cost more.

The government is clueless.

Get on with the tough decisions and action required rather than wasting time adding yet more complexity.

 

Tell me about it! A client of mine recently made the point that we (Jonsers) were probably the last generation to have the chance to become entrepreneurs entirely off our own bat.

Unfortunately, the politiciunts seem to have been listening to the School of Perverted Economics, so they only act in their own interests, aligned with those of big business and the banksters, rather conveniently.

It seems that very few (if any) actually understand the importance of small businesses to the economy's survival and are thus slowly driving us towards a totalitarianism and government-welfare dependency, in spite of its self-evident unsustainability.

Clueless AND easily misled; not a good combination.

 

 

 

 

software change

The Black Knight | | Permalink

I suppose those businesses that have been using sage or another computer package will need to buy an upgrade. Or change their package.

Or if no data is needed just revert to cash, why even waste money banking who's to say whether you were ever paid that invoice.

Ideal for builders Invoice raised but payment never received ha ha. Now you can have your cake and eat it. (tempted to discuss this in the PUB)

Can't wait to see the muddle of changing from one system to another. I suppose this will be the usual government response of what is behind you is behind you.

Anyone cute during the changeover could make a huge saving from an innocent I don't know. It is traditional for HMRC not to understand or even look at issues because they are too complicated for them to police. Special no enquiry year when you can do what you want! and even if they do they will never be able to prove anything again anyway.

carnmores's picture

REBECCA    1 thanks

carnmores | | Permalink

you state that it will work well with the flat rate scheme and so it should, in my view changes need to be made to the FRS for items such as rent received which appear to part of the income for such puposes - in any event this needs changing as it is ridiculous

New Software? ETC    1 thanks

Paulsoper | | Permalink

Not needed - very few clients of a firm will want to prepare accounts on any basis other than the normal accruals principle - this is intended for the small client who probably doesn't use an accountant anyway, and can really only affect the timing of income recognition in the long run.  As with the VAT scheme you would be unable to receive cash in advance, whilst accruing, and then invoice when switched to the cash basis, and indeed vice versa on leaving the cash basis.  It would be silly, as one respondent has suggested to have a deregistration threshold which is lower than the enrolment threshold.  There won't be a muddle on switching to the new system because a) people will be able to choose and b) the vast majority - according to OTS over 65%, are using the cash basis, or something close to it already - it takes them out of a technical infraction of GAAP which, for heaven's sake, cannot be appropriate for businesses of this magnitude, a point most respondents are happy to ignore.

I have suggested that it should be possible to use it up to the VAT Cash Accounting limit but if that is going too far then allowing it to be used up to the flat rate threshold would be sensible given that that has a cash component in any event.

johnjenkins's picture

I wonder

johnjenkins | | Permalink

how many "employed" people will suddenly become self-employed. I shudder to think how much HMRC are going to lose in tax and ni.

the point of the excercise    1 thanks

The Black Knight | | Permalink

johnjenkins wrote:

how many "employed" people will suddenly become self-employed. I shudder to think how much HMRC are going to lose in tax and ni.

 

Is that they will no longer be able to see this problem....hence no problem.....hence we have met target performance for compliance.

Job done in civil service land and now time for tea!

johnjenkins's picture

Until the big boys

johnjenkins | | Permalink

start shouting "unfair, unfair, we want a level playing field" and then the circle starts all over again.

Further Unbillable Time

thomas34 | | Permalink

We have around 9 months to prepare for this upcoming shambles.

I'll be continuing to prepare all accounts on the accruals basis but that won't prevent a hypothetical claim against me if I haven't convinced my clients that there's no loss of tax by ignoring the cash basis option.

We're being asked to comment on this madcap scheme but we should be spending our time planning how we'll cope with the two parallel systems.

In theory total taxable profits will be roughly the same over the lifetime of a business but there are fine differences which may disprove this fact.

At 5 April 2014 some taxpayers will save a lot of tax by ignoring debtors and opting for the cash basis. Will we be covered if we explain that future profits will be reduced by the value of these debtors? If he is working on an overdraft the additional tax payable by maintaining the accruals method may be enhanced by say 10% because of the interest on his borrowings.

We will certainly need to recompute profits using the cash basis each year (probably less than an hour's work in most cases) but what we do with the answer could be very important and very costly if we don't put in place an agreement with the client.

This has all the hallmarks of the introduction of the MLR regime where a lot of time was spent for which no financial benefit accrued.

 

 

Agreed    1 thanks

Trevor Scott | | Permalink

silicondale wrote:

... better still, just scrap the whole idea?

Or is it too late for that - HMRC/Treasury have already decided what they want to do, and this consultation is a sham like so many before?

The profession should explain, technically, why it is a non-starter and that therefore we won't waste time engaging in such a process. Engaging with such idiotic or moronic ideas does nothing but lend credibility to those that should be sacked, and will only encourage more crazy proposals. 

carnmores's picture

thomas

carnmores | | Permalink

Stop billing by time

Paul Scholes's picture

RTBQ

Paul Scholes | | Permalink

Having drafted some responses a few weeks back I had to go back and re-read the condoc as, after reading some of the stuff above, I feared I'd been reading the wrong thing. 

As Paul Soper constantly reminds us in posts & lectures, this is a CONSULTATION document (the clue is in the title) we have a chance to influence how the legislation will turn out but if we reserve all our huffing & puffing for this thread and, like so many previous condocs, only a few tens of responses are made, what is the government to think? Pats on the back all round for having got it right first time perhaps?

If nothing else, having gone to the trouble of starting this thread and setting out issues that she believes worth commenting on, the least we can do is to give some specific responses to Rebecca's questions.

My response was broadly in favour of the whole (common sense - per Paul Soper) thing but with an exit limit of say £130K.  I would also suggest that a business should be able to apply to stay in if an unusual event or transaction pushed them over but where their income in the forthcomming year was still expected to be below the limit.

I'm strongly in favour of a choice (rather than default) approach for new businesses, they need to at least have an understanding of the two options before they chose.

Whilst it goes against the grain not to allow interest on general borrowings I can see the argument that, with cash accounting, there is no control over the nature of the borrowing (ie to fund an overdrawn capital account in normal accounting) and so it is merely one of the costs of going the cash accounting route.  If someone has significant borrowings they use normal accounting.

Whilst I would not outlaw regular switching it should be the case that this might increase the risk of enquiry also, given the necessity too have to undertake adjustments each time you switch, there's an increased risk of error (and extra fees if you use an accountant).

Hear Hear Trevor

North East Acco... | | Permalink

Trevor Scott wrote:

silicondale wrote:

... better still, just scrap the whole idea?

Or is it too late for that - HMRC/Treasury have already decided what they want to do, and this consultation is a sham like so many before?

The profession should explain, technically, why it is a non-starter and that therefore we won't waste time engaging in such a process. Engaging with such idiotic or moronic ideas does nothing but lend credibility to those that should be sacked, and will only encourage more crazy proposals. 

I agree with Trevor Scott. The ICAEW should refuse to be drawn into this nonsense. Equally the same with most pre decided consultations. When are the ICAEW going to stand up and fight for their members? Don't hold your breath!

Perhaps our professional bodies

The Black Knight | | Permalink

Should require accounts to be prepared properly! They are unfortunately practically useless.

No doubt we will see an amendment to the standard engagement letter stating that we do not advise on complicated (simplified cash) issues that you are not prepared to pay double the fee for.

HMRC already turn a blind eye to to those that use varied basis for their calculations, so I really cannot see the difference for someone that does not use an accountant.

One thing is for sure this is a bloody nightmare over which we have no control, our option is to simply withdraw from the arena and let them get on with it!

If you really wanted to help small business you would reduce the amount of change!! Which is what causes the headache and the cost. You just learn how to do something one way and it's all change again and off on another course or buy some new software or spend hours with your accountant understanding or just get it wrong and pay the penalties in the most unlikely event you are found out (do not be honest and say you have made a mistake that is a cash cow for the slaughter by HMRC)

You are safest under the new system if you keep it all cash, they will have nothing to enquire into as the date of receipt could never be proved!  Has to be an easy argument?

Consultation ? done that ! Waste of time !

if we are going to have it anyway

The Black Knight | | Permalink

vowlesj wrote:

Thanks Rebecca (MBE!) for undertaking to make a response.

I think both Carnmores and the Black Night makes an interesting comments in that anyone who thinks this is going to be easy and straightforward might well find that it is only simple if you remain a small business, oh! and never need to borrow or anything else that is a restriction.    However, given that some 3 million business are below the VAT registration threshold it will have some applicability!

I think my input to your response are:

1  Only VAT unregistered business should use it and therefore you came off the scheme at the current registration threshold rather than at £150k.  The bigger the business the harder and more complex it is likely to be to deal with the transition so this should be kept to small business.  However I actually agree with the OTS that the threshold for leaving the cash basis should be £30k turnover, ie it it should be firmly aimed at the very small business.

2   The various restrictions, borrowing costs, motoring costs, etc., only make sense if there is a clear choice and the taxpayer can choose to be on this 'simple' scheme or normal rules.  Any new businesses must not be defaulted into this scheme but given choice.

3   Why are the rules for Barristers being changed, if it works don't break it! 

4   How does hmrc intend to police the anti-fragmentation issue.   Anti-fragmentation for VAT isn't policed terribly well at the moment so surely the same issue would crop up here.

5   Why bring in this proposal anyway - isn't it just a proliferation of rules for no good result?  Very small businesses tend to prepare income and expenditure accounts on what amounts to a cash basis anyway, so will this new legislation actually achieve anything apart from extra costs and complexity.

6   How will the transitional rules work in practice? Will this simply end up being more costly for business in the end? 

7   The thresholds should be defined as the current VAT limits, otherwise we instantly start making thresholds an overly complex problem. 

8  The use of home and flat rate use of business appear to be a bit draconian.  Isn't this a backdoor attack on small businesses expenditure?

9  According to HMRC there will be no need to keep complicated records, eg stock, debtors, creditors!  Which idiot thought that up!   Obviously every business needs to record debtors and creditors or it risks going out of business through sheer stupidity.  How are the necessary records that a business keeps going to be any less than the records they need to keep for tax purposes.

10   Whilst I'm on the subject, why does the consultation document say that cash account businesses won't get tax relief on the withdrawal of cash for personal use and the payment of income tax or capital gains tax.  As you can't at the moment it does seem more than a bit strange to say you can't in the future.   Who drafted this document, a 16 year old on work experience?

Jonathan

 

I would agree with that response, not that we will use it...extra charge to plan and use alternative basis should save us making a loss in this area. Expect it will be similar to advising whether to incorporate or not after you have done the maths and the what if calculations for the projected years in question. And explained cashflow v profit. I expect the unrepresented will go for the low cost now and hit me later with the bill i don't understand much in the same way as low cost leasing or interest only mortgages or buy to lets work.... this is only a variation on a theme and clearly we have learned nothing from the economic disaster we are in.

daveforbes's picture

There must be some limit

daveforbes | | Permalink

Currently a sole-trader, however small should not be producing accounts for tax purposes on an income and expenses basis but must produce full UK-GAAP accounts. The threshhold can be debated but surely there is some limit below which it makes no sense to produce full UK-GAAP accounts. Perhaps the phrase "income and expenses accounting" would have sounded better than "cash accounting".

Can we not stop this insanity?

Ken Howard | | Permalink

Just what is the problem with accruals accounting?  We only need to deal with "material" adjustments anyway.  It's only accountants who bother doing prepayments for insurance and accruals for telephone or whatever anyway simply because it's the way we were trained by the old school.  Most decent software easily caters with accrual accounting.  Enter date of invoice - check, enter date of payment, check, let the software produce the results - simples.

Any decent business NEEDS to know it's debtors, creditors and stock levels - this information is needed day to day, so providing it once a year shouldn't be any problem at all.  In 29 years in practice, it's seldom been these items that have caused problems.  OK, getting proper stock figures is often hard, but even the most disorganised client can put a relatively good estimate on the table which is materially right in the big scheme of things.

The real areas where clients get it wrong and confused simply aren't being addressed - i.e. the complication and conflict over what expenses are allowable and what aren't.  Even with the proposed rules, business owners are still going to put their drawings down as a tax deductible expense and put their holiday bills through as travel, and that's without the complications of whether a training course is allowable or not, or the different ways in claiming for vehicle costs, or the ever changing capital allowances etc.

At least with the perception of accountants being needed to prepare accounts, there's a safeguard against the worst mistakes - if business owners do it themselves, I hate to think how much tax will be lost when they claim for things that aren't allowable.  HMRC have showed they don't have the ability to properly police self assessment as it is.

Yes, there's a need for simplified accounts for the smallest of businesses, but I'd put that at far lower turnover levels, say, £25k and far lower profit levels, say the proposed £10k annual allowance.  I.e. let the smallest and simplest businesses, where there's virtually no tax at stake anyway, to submit very abridged accounts.  At that kind of level, businesses either plod along for years (i.e. hobby or part timers) or quickly grow.  At low levels, the transition from cash to accrual accounting would be relatively painless, and far less stressful than at the VAT reg threshold or £150k.  I think "proper" accounts should be compulsory for VAT registered traders and for those with any staff - if businesses are so big as to employ people then they should be capable of proper accounting!

I'd also like to understand why the proposals don't extend to limited companies (yes I know legally it's because they have to comply with accounting standards etc!).  The Govt should change the law to allow for the same rules to be applied for incorporated as for unincorporated.

The whole subject strikes me as the Govt doing "something" to prove they're doing "something" rather than actually properly looking at the issues and doing the "right thing".  It's completely the wrong target and should be cut dead in it's tracks and the efforts devoted to other issues far more important.

Very Small Businesses

Wiganer Elaine | | Permalink

As I see it, cash accounting is designed to suit very small businesses who are not hoping/intending to grow into something above average or even huge. It is for your average "joe" who just wants to make a reasonable living without getting into complexities like VAT or becoming an employer.

It will be useful for the very many small clients who don't understand why they have to "pay tax on an invoice that hasn't been paid yet"!  These people are quite happy keeping a cashbook -trying to get their unpaid invoices (both sales and purchases) and asking them to provide a stock/wip figure can be a trial and requires a lot of patience and explanations so they eventually comply with your request but they still do not really understand it. These are the people who will benefit from cash accounting - finally they will understand what they are paying their tax on!

Basically, if they haven't received the cash for an invoice it won't be taxed and if they haven't paid for the goods they use they can't have tax relief on it! 

It seems to me that a lot of accountants out there are themselves over complexing this issue and trying to "fit" cash accounting to people for whom this system is not actually intended!

Generally accepted accounting practice

The Black Knight | | Permalink

daveforbes wrote:

Currently a sole-trader, however small should not be producing accounts for tax purposes on an income and expenses basis but must produce full UK-GAAP accounts. The threshhold can be debated but surely there is some limit below which it makes no sense to produce full UK-GAAP accounts. Perhaps the phrase "income and expenses accounting" would have sounded better than "cash accounting".

Where applicable to the entity !!!!

An accruals based (invoiced based) income and expenditure account already achieves this !!!

Reasonable Flat rate expenses have long been used to prepare these (often drawn from employee tax rules)

£3 per week use of home, 45p per mile travel etc etc etc

There is already flexibility in UK GAAP if the cash flow statement fits then wear if not don't.

Honestly this is akin to making a square wheel because you never understood how a round one worked and an MP thinks it will be better for parking up hill without a handbrake.....this latest consultation is to see if a triangle might be more acceptable! Doh

We are only the second oldest profession what would we know. Next we will be changing the rules of algebra because people don't understand that either.

Pages