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Micro reporting rules will have little impact

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18th Sep 2013
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Allowing “micro businesses” to file simpler accounts will cut unnecessary bureaucracy for the UK’s smallest businesses, says the government and a small business group.

But critics of the new measure say that allowing companies with fewer than 10 employees and a turnover of less than £632,000 to submit an abridged balance sheet and profit and loss for their annual accounts will make the financial statements less useful and undermine investor confidence in small businesses.

A third view is that the new financial reporting option – which implements a European Union directive and will apply to accounts filed on or after 30 September 2013 --probably won’t make much difference to small businesses. So far, most of those who have commented on the change on AccountingWEB have plumped for the second or third interpretation.

Experts reckon that although the abridged accounts will be 30-40% simpler, small businesses that chose to file them won’t save much time while investors probably won’t notice much difference in the type of information in accounts.

Less Red Tape

Earlier in September, when the government announced the changes to financial reporting rules, business minister Jo Swinson said: “Thriving micro-businesses are a vital ingredient for a stronger economy. However, because of their size they don’t always have dedicated finance teams behind them. We therefore need to make sure that they can focus on growing their business - rather than completing unnecessarily detailed paperwork.”

The micro-business reporting measure would cut bureaucracy, and let firms get on with running their businesses and creating jobs, she added.

The government said that the majority of responses to its consultation on simplifying financial reporting rules for the smallest businesses were broadly supportive.

Respondents had two main concerns, thought: the impact of the changes on the ‘true and fair view’ principle, which applies to all UK accounts; and the potential effect of changes on the UK’s established “accruals accounting” framework.

In response to these concerns the government dropped those parts of the directive that would “remove the obligation to present prepayments and accrued income and accruals and deferred income” and allow companies to recognise only certain prepayments and accrued income and accruals and deferred income.

Also, charities will be excluded from the choosing micro-accounting rules “in the interests of transparency”.

Small business support

The Federation of Small Businesses (FSB) supports the change to financial reporting.

“The Federation of Small Businesses actively lobbied for it in Brussels and will be watching closely to ensure it brings positive benefits for small businesses on the ground,” FSB chairman John Allan said. “While not every micro business will make use of the change, it enables such firms to reduce their regulatory burden where it is appropriate for their business.”

But Nigel Sleigh-Johnson, the head of the ICAEW’s financial reporting faculty, said although the institute supported reducing unnecessary regulation of business, it had “repeatedly cautioned against presenting requirements on businesses to produce and publish important financial information as simply another aspect of ‘red tape’”.

Drawbacks

Managers of small businesses need to consider whether there are risks involved in reducing the financial information they make available to finance providers and other stakeholders and in no longer having easy access to key performance indicators critical to efficient management of the business, Sleigh-Johnson also said.

Richard Martin, head of financial reporting at the ACCA, had similar concerns. He said there were “significant downsides as well as [upsides],” to the micro-accounting option.

Cynics may say that accountants are worried about a loss of business. In this case, however, any loss of business is likely to be small.

Alan Bonham, an author and lecturer who specialises in financial reporting and audit reckons accontants will still probably take just as long to produce the abridged accounts.

What about savings for small business?

In its summary of responses to the micro-accounting consultation, the government said: “Most responses noted there would be either limited or no cost savings, as the majority of costs are incurred in the preparation of the accounts. Once entered into an accounting software package, the accounts information can easily be placed into a statutory format for filing.”

Any savings from reduced disclosures in accounts could be offset by an unwelcome unintended consequence of micro accounting: more scrutiny from HMRC.

AccountingWEB technical editor, Steve Collings, also audit and technical director at chartered accountant Leavitt Walmsley Assoicates, said that HMRC may open more enquiries into small businesses if these businesses make fewer disclosures in their financial statements – for example, about directors’ loans or motoring expenses.

Changes to legislation on health and safety, employment and tax would be of more help to small businesses, Collings said.

Micro businesses explained

A micro-entity is defined as meeting two of the three following criteria: 

  • Balance sheet total: £316,000
  • Net turnover: £632,000
  • Average number of employees during the financial year: 10 (or fewer)

The financial reporting exemptions are optional.

There are approximately 1.56m micro-entities in the UK, as compared with a total number of companies on the UK register of approximately 2.8m, according to the Department for Business Innovation and Skills. 

Replies (8)

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By DMGbus
19th Sep 2013 08:38

Who can quantify the benefit, please?

I pose a question here - to be answered preferably by those who support the micro-entities proposals -

"please quantify the benefit"

So far as I can see the benefit is less that 5 pence a year per business.

I am very disappointed at the FSB's support for this little-or-no-benefit measure and would have hoped that they could have instead addressed / campaigned against really serious extra costs imposed by the following measures:

#  RTI reporting of payroll transactions

#  iXBRL filing of CT computations, accounts and returns

#  Auto enrolment

The first two items might cost a micro-entity businesses around £_200 to £_300 per year.

However the third item, Aweb now reports might cost small businesses close to £_9,000 in setting up costs!

See:

https://www.accountingweb.co.uk/article/full-cost-auto-enrolment-revealed/547095

 

Thanks (4)
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By Ian McTernan CTA
20th Sep 2013 11:50

If you want to cut red tape

for small/micro businesses, then a good starting point would be to have ONE reference number for an entity, used for all taxes, and one central tax pot for each company, and ONE registration process.

At the moment the process of registering for all the various taxes, getting numerous different reference numbers, having to get several authority forms signed, getting it all set up online etc just takes way too long.

And the problems for micro businesses where they may have overpaid one tax but owe money on another (CIS deductions for a start) create unnecessary strains on companies.

Until they get this basic right all the tinkering around the edges that they like to do so they can be seen to be doing something 'to help' small businesses is all just so much hot air.

Thanks (8)
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By deg2yq
20th Sep 2013 12:02

Strange
Don't that FSB have anyone on their team who actually understands the compliance regimes and their implications. This will have no impact what so ever except for some fool business people unwisely trying to do a DIY. Then having to pay a proper accountant loads of dosh to clear up the mess

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By PNN
20th Sep 2013 13:38

Missed opportunity

I agree that the savings will be negligible, and what the commentary in the article shows is the ignorance in Government and, it would appear, the FSB as to what is involved in the actual process of preparing accounts. Company accounts are more costly to produce than sole trader accounts because of the necessity to ensure compliance with the Companies Act - simply replacing one set of rules with another DOES NOT SAVE ANY COST.

When this relaxation was being mooted about 4 years ago I had in my mind that the deregulation would take the form of exemption from the provisions of the Companies Act of the detailed disclosure requirements and what we would end up with, effectively, for these companies would be glorified sole trader accounts ie a detailed P&L, balance sheet, some accounting policies and a couple of notes. A set of accounts running to 4/5 pages rather than 13/14. The added advantage would be that the clients could actually UNDERSTAND them. Is this not what the accounts are really for? Now that set up may well have saved £200 - £300 for some clients.

I don't know if any of the readers actually took part in the consultation? I did - and I was gobsmacked at the proposals. For instance, the bulk of the companies which fall into the Micro entities are owner managed one-man-bands ie there is one shareholder who is also the sole director. Why on earth does he need a set of accounts which has a directors report which tells him that he is the director? Yet the proposals in the consultation were adamant that a directors report was a important part of the new accounts format.

As it is, all that is filed for these companies currently is a balance sheet and couple of notes. I don't see why the abbreviated accounts format currently in place can not be supplemented by a simple P&L for the information of the directors (& HMRC) only to arrive at the "Full" accounts. After all, when you discuss the accounts with your microl company clients, how many of you actually go through the notes to the accounts with them? Or do you, like me, just run through the detailed P&L and balance sheet?

Thanks (3)
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By graham97370
20th Sep 2013 13:44

Not surprised

Why are we surprised at yet another variation on the theme of interfering with a system that works perfectly well from a team of politicians who it is apparent know nothing about the areas they legislate on and continue to overwhelm us with their incompetence at running the country as a whole!

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By listerramjet
23rd Sep 2013 10:02

investors in small businesses, as they are described here, are going to have zero interest in published unaudited statutory accounts of any kind.  In fact I think you would struggle to find anyone who has any interest in them.  Its just another complication in an already bloated disclosure regime.

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Replying to Nick Graves:
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By starbanana
06th Jan 2014 07:48

real life

And you have to wonder what those that comment on behalf of the accounting bodies are thinking. IMHO it sounds like they are desperately trying to grab every last penny of business, rather than being realistic about the stakeholders.

In most cases micro businesses just need a reliable system for records, and then it's a case of a few hours work at the end of the year to produce the current abbreviated statutory accounts. A P&L needs to be produced anyway to be able to complete the CT return.

In the case that the business is in need of additional financing, then they will need to produce some form of business plan, and at the minimum this would start from numbers that at least look like they bear some resemblance to the most recent filed accounts.

When the business is growing and getting to the top end of the cutoff, they are likely to be getting other demands that mean they need to produce additional information anyway.

The only stakeholder I can think are interested in more detail in smaller businesses would be HMRC.

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By js.btp
23rd Sep 2013 10:13

savings

I have always wondered what the FSB benefits are?

I agree that there could be lots of other cost saving things that the governement could do for micro business - RTi for one, VAT, new pension regulations - who is going to do and pay for all that new regulation?

They seem to ask people that don't understand what actually goes on in the real world in the first place.  perhaps they should ask small accountantancy firms what goes on.  How much did anyone save when self assessment came out - we did not lose clients. They still wanted accountants to do the forms - they are not easy enough for Jo Public to complete. 

 

 

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