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Europe okays micro company accounts reform

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22nd Feb 2012
Editor in Chief AccountingWEB
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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.

Replies (65)

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By petersaxton
24th Feb 2012 14:59

Tax

Adrian

Doesn't this depend on how tax is calculated?

Will HMRC be happy with a taxpayer wiping out their tax bill by buying something or making a payment in advance?

If this is just for "reporting" purposes I'm not sure of any savings - in fact it will cost more if there are "reporting" costs and tax calculation costs.

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By Paul Scholes
24th Feb 2012 15:38

Tax & our fees

Reading the proposals again (as I said above) the accounting, cash-based, profit would be the tax profit, and you would use capital allowances in place of depreciation and other simplification, in order to achieve this.

The point about pre & post year end manipulation is valid however I'm sure HMRC will just follow the line that if a transaction has no commercial validity then they can ignore it.

As to loss of fees for firms, the deregulation of small companies from the audit regime was huge but we weathered it and just had more time to spend on more valuable work for the clients.  I'm sure, for many firms, that will be the same this time.

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By petersaxton
24th Feb 2012 15:52

Disagree and agree

 

"The point about pre & post year end manipulation is valid however I'm sure HMRC will just follow the line that if a transaction has no commercial validity then they can ignore it."

Most taxpayers hate paying tax. They would prefer to pay rent one month early than pay tax. OK, next year they will have to pay rent two months early but they will still do it. HMRC wouldn't challenge it.

"As to loss of fees for firms, the deregulation of small companies from the audit regime was huge but we weathered it and just had more time to spend on more valuable work for the clients.  I'm sure, for many firms, that will be the same this time."

My clients pay me to prepare their payroll, company accounts and tax returns. They may pay me to do some tax planning but not a lot. They don't usually want to pay me to do things that you would see as more valuable. I'm sure I'll get by whatever is decided. My view is this "idea" is similar to the Gordon Brown 0% company tax band. Let's see if it lasts five years.

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By The Black Knight
24th Feb 2012 17:21

Presumably

The definition of distributable reserves will change also or perhaps companies will be taxed more using a different calculation. You can kiss good bye to the tax advantages of being a limited company.

There is nothing as bad as a slow death.

The answer is to go home breed some more delinquent kids.

Shop in tesco's for everything.

Vote labour.

and don't pay your taxes.

That should bring the end quicker! Then perhaps something useful can be built out of the ashes.

 

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By Bob Harper
25th Feb 2012 08:33

Accounts (reporting) and tax are different

Cash based report is very simple and will reduce costs for clients/fees for accountants.

As regards HMRC/tax, the calculation could simply make adjustments for items that are not deductible e.g. payments for the following year.

Do a SWOT analysis and it will show there are threats; technology reducing fees and legislation eliminating fees but there are opportunities. The trouble is, the SWOT analysis of a typical firm would also show weakness with innovation and marketing - both are needed to capitalise on the opportunities. 

Can't wait for the changes to happen, better for UK businesses and it will shake up the profession.

Bob Harper

Co-founder of Crunchers Accounting Franchise

Marketing for Accountants

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By The Black Knight
25th Feb 2012 10:16

Business failure

In my opinion Business failure at the micro level is often down to not understanding how the business is performing, If you don't know you have a problem then you can't fix it.

Record keeping is appalling anyway and that won't change even if the numpties think cash accounting is easy to understand.

So far as cost are concerned a cash based method of reporting probably takes just as long as a useful method. Most clients cannot manage the bank reconciliation and postings and this is where the majority of the time is spent.

The quickest way of preparing a profit and loss account required for taxation purposes is Invoiced sales less purchase invoices NOT a bank analysis.

This really is a disaster all round for clients and accountants.

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By petersaxton
25th Feb 2012 12:55

Understanding is important

Black Knight, the problem is that the people who make these decisions have no understanding of anything.

Bob, what these rules will do is make it clear that the incompetents who dreamt them up have got it wrong. There is no logic to them. Doing something that has no use simply because it is easier is similar to killing a patient because it is easier than understanding their illness. It won't be long before they revert to the present system. This reminds me of the Gordon Brown 0% company tax rate. What happened to that and why? It was eventually scrapped because the fools who introduced it needed a dose of reality before they realised it was a bad idea. A proper accountant knew it was a bad idea as soon as it was suggested.

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By Bob Harper
25th Feb 2012 15:45

Standard accounts or cash accounts

@Peter - the logic is reducing costs for businesses. I agree that accounts (cash or standard) have very little use.

@Blacknight - micros fail because they don't develop a strategy, poor marketing, weak sales, lack of pricing leverage and being under funded. The accounts just confirm (and quantity) the problem.

What would be good is for accountants to identify and help solve the problem rather than just quantify it.

Bob Harper

Portfolio Marketing

Crunchers Accounting Franchise

 

 

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By The Black Knight
25th Feb 2012 16:45

@Bob

The good ones amongst us do.

I spend a lot of time helping to fix areas that the accounts have highlighted.

Whilst history they are fact !  I think in recent times accounts and accountants have been devalued because many including the cheap end providers do not understand them.

You should see some of the messes (unbelievable ones) I have seen created by franchise providers often they have cost the clients a fortune. (many times the fee)

Even if you save more than your fee the fee price still remains foremost in a clients mind.

Added to which we often spot and can advise on issues while we are doing the compliance work which purely compliance focused services will never be able to do.

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By petersaxton
25th Feb 2012 18:12

Who are you agreeing with?

"I agree that accounts (cash or standard) have very little use."

Who are you agreeing with? Standard accounts can have a lot of use. They can show profitability of products and areas of business. Unfortunately, franchise accountants tend to be the kind who produce very poor quality accounts so I understand why you think all accountants are like that. Once you get a proper understanding of the accountancy profession you will know what many accountants do for their clients. Some clients want the cheapest possible service and they will be looked after as long as the level of accounting is of good quality.

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By Bob Harper
26th Feb 2012 11:27

Understanding the big picture

@Blacknight – Compliance is a good excuse to spend time with clients but not a highly profitable or marketable value proposition.

Yes, some clients are 100% price focussed but most are value conscious when the marketing, selling and packaging is done well.

It sounds like you are missing out on your share of the value you are creating. Most accountants are because they charge based on time.

@Peter - I agree with the research that shows 73% of accountants believe standard accounts are of little or no use to business owners.

I have also heard complaints about the quality of work from certain franchises. They are normally from qualified accountants about unqualified franchisees. So, I think it's about qualified verses unqualified rather than franchise or not.

Having worked with over 200 firms, and carried out practice reviews with hundreds of others, I think I have a very good understanding of what most accountants do for most their clients. This is what I found:

They charge their clients based on time and spend 80% of it is spent completing and correcting bookkeeping mistakes. Very little (if any) is invested on helping their clients develop an effective business strategy, cost reduction programs, improving productivity, marketing, sales and pricing models.

It’s not because they can’t; accountants can easily learn how to do this work. It’s because they don’t need to because they have GRF and are too busy. I don't see either as good for the long term of the profession and have written a report on it – GRF is Killing the Profession.

Bob Harper

Crunchers - accounting franchise

 

 

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By johnjenkins
26th Feb 2012 15:42

One to one

with the client is more important than any software. All that software does is replace the old hand written ledgers and give you info a bit quicker. So the days of the bookkeeper will change to that of input person - no real difference. Cash accounting can never take off unless all money is received and paid out prior to year end. My view is that with Agent strategy Accountants will be used a lot more and with a complete change in the way fianancials are going to go we will be called upon much more.

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By petersaxton
27th Feb 2012 10:18

"You say that your clients

"You say that your clients can't produce statutory accounts but that's today and, to be blunt, that's because they are your clients.  Many of my clients, even the micro-micro ones produce a P&L & Balance Sheet that's pretty close to what I submit and this has just taken a bit of coaching by us in showing them how to provide for depreciation and other entries traditionally down to us."

Yes, that's because they are my clients. Even the better clients have problems. I have one client who has a a qualified accountant and a bookkeeper but I still prepare the accounts. They messed up the depreciation this year for an example.

Another example is a company owned by two qualified accountants. They still prefer me to do the tax. They prepared the statutory accounts based on the accounts I had prepared for them the previous year and they'd done a very good job. Unfortunately, they hadn't heard about iXBRL!

 

 

"As to online accounting, you are obviously very unlucky or maybe just sniffy?  The system I use is loved by clients, most of which wouldn't have a clue how to use Sage or QuickBooks but then these again are the systems favoured by some accountants."

I'm certain it is because I am sniffy. I have two clients using the same software as you. They like the software and it has a lot of good features. I just wish they had improved the depreciation and the opening balances. They only accept trade debtors and trade creditors as one amount each rather than individual invoices.

 

 

 

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By ireallyshouldknowthisbut
27th Feb 2012 11:53

.

Just to add I agree with Adrian and Paul at the end of page 1* in terms of 5-10 years time.  I look back to 10 years ago when on-line filing barely existed, before VAT online, PAYE online, CT online and when filing SA was an 'adventure'.

From the outside all it looks like it accountants trying to protect their turf, which is why the debate on cash based accounting (which I think it barking mad myself) needs to be handled carefully.  What is more relevant to my mind is the requirements as Paul touches on, such as deferred tax and disclosures which are quite frankly not produced for users of the accounts, but because its the rule that we need to do it. Once you get to that point its just protectionism.

 

*Teach me to check if that was the end of the thread or not.

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By Tonykelly
03rd Mar 2012 21:38

First step - without any further ado

is to exempt these companies from iXBRL. This can be announced in your forthcoming budget. Osborne can stand up in that there house of commons and announce this.

 

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