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Simple isn't always best

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23rd Mar 2012
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ICAS technical policy director James Barbour breaks ranks with the OTS and government over proposed small company accounting reforms.

I recently reviewed a set of accounts for a charity which had been prepared on a receipts and payments basis as is allowed for smaller charities. Financial information presented in this format is undoubtedly far easier for the average person to digest, does it actually serve the purpose of allowing business owners and others to understand the performance of the business and, just as importantly its financial position?

This is where I break with the call for some form of cash-based accounting for business entities.

In his Budget, the Chancellor vowed to bring a new cash accounting basis for tax purposes from April 2013 as part of his mission to make "tax easier, quicker and simpler for small business".

But businesses needthe right financial information but they need the right financial information, which a simple statement of receipts and payments cannot provide.

I understand that ‘cash is king’, but £1,000 in the bank is no use if you have much bigger outstanding liabilities that are not reflected in your year-end accounts. Most small business owners will understand what a set of accruals-based accounts is trying to convey, once they have been properly explained by their accountant.

If cash accounting is such a panacea, why are so many governments moving from cash accounting to accruals-based financial reports?

Whilst I welcome any proposals to simplify the UK tax system, the solution recently recommended by the Office of Tax Simplification and so enthusiastically embraced by George Osborne does not pass the ‘good move’ test for me. My big simplification tip would be to dispense with the annual budget, which has become far too politicised and merely feeds an ever-growing volume of tax legislation. 

James Barbour is Director, Technical Policy, for the Institute of Chartered Accountants of Scotland (ICAS)

 

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