The European Union’s financial and economic affairs council agreed a new directive on Tuesday 21 February that allows member states to exempt very small companies from accounting and financial reporting obligations.
The reforms are part of a Europe-wide drive to ease the administrative burdens on the continent’s smallest companies. The enshrine a new category of "micro company" and enact proposals put forward in March to allow them to file accounts based on simplified profit and loss accounts and balance sheets. The UK government enthusiastically embraced the European proposals as part of its deregulation drive for small business.
A recent BIS consultation document on company law reforms said the UK will look to implement the changes “as soon as possible” following detailed consultation. That makes it an odds-on cert to feature in announcements around the Budget on 21 March, potentially alongside further reform proposals to increase the audit thresholds for mid-size companies and other ideas put forward via the Red Tape Challenge focus on company law.
If and when the EU directive is enacted in the UK, companies will be allowed to apply the simplified reporting regime if they stay below two of the following thresholds:
- balance sheet total of €350 000 euro
- Net turnover of €700 000 euro; and
- average of 10 employees during the financial year.
BIS March 2011 discussion paper ‘Simpler Reporting for the Smallest Businesses’ suggested that the new look reporting package for these firms would include:
- A simplified, cash-based trading statement to replace the profit and loss account
- A statement of position
- A simplified annual return.
Taking account of the latest EU thresholds (50% higher than when the proposals were aired last year), the BIS estimates that around 1.5m micro-enterprises will be excused the need to publish full annual accounts when the reforms are enacted.
Dr Nigel Sleigh-Johnson, head of the ICAEW’s Financial Reporting Faculty gave the new directive a cautious welcome. “The majority of micro-entities do not trade across national borders, so it makes sense to allow individual member states to decide how they report, allowing them to closer align accounting rules with national laws and tax systems,” he said.
“Reducing the regulatory burden on these businesses where possible is something we strongly support.
“It is, however, paramount that any potential changes to the UK reporting requirements for our smallest businesses do not reduce access to reliable financial information or send misleading signals about the importance of sound financial management.”
The latter part of Sleigh-Johnson’s comments will be more popular with accountants and auditors on AccountingWEB.
ICAS is less equivocal, with technical policy director James Barbour warning that the reform will remove “a crucial layer of transparency from small businesses”.
This is also the view of tax justice campaigner Richard Murphy, who recently told AccountingWEB that any changes to small company accounting would increases the risk to business.
“The thing that really makes me angry is when people say that accounts are adding to the burdens companies are suffering when in fact accounting is fundamental to their survival.
“The reality of life is that small companies do need to prepare accounts on a proper basis to ensure they’re on top of their financial affairs and correctly managing cash flow, which is critical to their survival,” Murphy said.
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