Comments from ACCA
ACCA is pleased to have this opportunity to respond to the above discussion paper. It has been considered by a number of ACCA's technical committees covering tax, small business and financial reporting and members of ACCA's public practice and corporate networks.
We believe any simplified regime for companies should also be extended to unincorporated businesses. It is not desirable to create purely tax and other bureaucratic incentives for businesses to incorporate.
In terms of the appropriate threshold, we consider that this should be properly researched to optimise the balance between costs and benefits. We see the main issues as
- The costs of preparation against the scale of the business
- Generating an efficient and effective overall regime for accounting by business to government and other stakeholders
- Alignment of thresholds generally including those for company law, corporation taxes, VAT and employment wherever possible
- The costs to businesses of making the transition
- The particular problems of the many small businesses operating under the IR35 regime in whole or in part which is potentially more complex given its mixture of different tax treatments
In our view there are much more significant ways in which tax returns can be simplified for these businesses than the accounting changes proposed in the Discussion Paper. For example, the number of potentially disallowable expenses could be reduced or the treatment of cars used by directors and others could be simplified. In addition, the frequency of changes to tax rules and the need to understand and apply them are also a significant burden. We believe that these areas are where the majority of the costs of preparation of the tax returns are generally incurred.
We also believe that it is important to recognise the fact that there are other users of accounts, other than HMRC, who need accounts on a true and fair basis.
Proposal 1 Tax-based statutory accounts
Q1. Would moving to a new statutory accounting standard which incorporates tax rules as outlined above deliver real simplicity and savings for smaller companies?
We are sceptical that it would make a major difference. The substitution of depreciation by capital allowances appears to be the major area of simplification and while this may help it is unlikely to save significant time in the preparation of the return. As noted above the alignment in the tax and accounting treatment of other items (such as cars, fines and entertainment) could yield greater savings.
We also note that in practice the preparation of accounts is done through the use of fully integrated commercial software, and that necessary tax adjustments are therefore relatively straightforward. We see little benefit from the proposals in this respect.
Q2. Where and for whom would the benefits and savings occur in practice?
Any savings from simplification would be gained via a reduction in the time spent in preparation particularly the professional fees involved, although we are doubtful to what extent. We have noted above that the threshold of application would require careful research.
We note that there could also be cost savings for HMRC as the reconciliation between the statutory accounts and figures shown on the tax returns would not need to be reviewed.
Q3 What drawbacks, if any, do you see with this approach to integration of statutory reporting and tax calculation obligations for smaller companies?
Tax and company law are the principal areas where statutory accounting requirements have to be applied by all businesses. When there are significant other uses for statutory reporting (see Q4 below), then we can see drawbacks. In some cases, the balance sheets produced by such reporting might be inappropriate for other uses. For example in the cases of buildings, expensive cars or where the annual investment allowance is taken up and there is material investment in plant and equipment, the value in tax terms of the assets might be very significantly different from a normal accounting value. In some of these cases the resulting accounts would not show a true and fair view and therefore the company law obligation and the tax legislation would need to be amended. A potential consequence of moving to a tax-based system would be that GAAP for smaller companies would be set by HMRC and not the Accounting Standards Board.
Q4. What other user interests must the development of such a standard for smaller companies consider?
Again, systematic research should inform the decisions of government, not merely public consultation. Although some argue that the statutory accounts of micro companies are not used beyond the management and HMRC, there are other groups who clearly rely on the accounts from time to time, including shareholders not involved with management (for instance divorced or separated partners), employees, trading partners and suppliers of credit. It is the extent of the interest of these other parties which needs to be researched.
Proposal 2 Calculating tax on a cash-flow basis
Q5. Could introducing a new regime incorporating cash flow deliver real simplicity and savings?
At first sight a cash flow approach could deliver simplification. It could be particularly beneficial to business start ups, especially with flexibility on the carry back or forward of losses.
However, it seems unlikely that the complication of disallowable expenses would be removed nor the need to distinguish between some capital and revenue items (e.g. in the treatment of loans). New disallowable expenses of some kinds of interest might be created. Cash flow reporting is potentially subject to more manipulation and unexpected variations from year to year and this might in turn prompt increased enquiry activity and anti-avoidance measures from HMRC. There could be lost opportunities for tax payers to flex the timing of their tax payments with the current options to take or defer capital allowances. All of these issues would we suspect in practice significantly diminish the attractiveness of the cash flow regime, and essentially result in exchanging one set of complications for a new set.
Q6. Where and for whom would the benefits and savings occur in practice?
As noted above application thresholds would need to be carefully researched. As a preliminary estimate, however, we would expect this to be appropriate for the smallest sort of companies with perhaps turnover of less than £100,000.
The experience of the stock relief regime in the 1970's would indicate that some companies might make significant purchases of stock just before the year end in order to access the tax relief, which might favour those businesses with the financial flexibility to time their cash flows to greatest advantage.
Q7. What are your views on the various issues that the approach raises, and ideas on how a workable regime can be constructed?
We agree with the identification of the main issues in the paper. As noted above greater simplification might be achieved through looking at the tax treatment of certain items (for example the treatment of cars and entertaining). These should be resolved in as straightforward a manner as possible if this cash flow regime is going to achieve meaningful reductions in burden. Any disallowance of interest paid under this regime would be likely to render it very unattractive. There would be significant issues on a transition from a cash flow regime to an accruals regime if the threshold were passed. There seems little alternative to a start-up assumption on the switch to accruals accounts with the inevitable double-counting or omission of income and expenditure.
Q8. Do you feel either, or both, of the approaches outlined above should be pursued further?
In both cases we do not believe they will really result in significant simplifications for smaller businesses. As mentioned above, we believe that in many circumstances, such companies will be required to prepare accounts based on a true and fair basis for other parties.
Q9. What are your views on the size and type of business to which any new regime should apply?
We have noted above our views on the need to research thresholds carefully.
Q10. Could introducing new approaches on an optional basis provide sufficient stability and certainty where this is the priority for businesses?
The provision of options for different regimes will raise costs for businesses in selection and monitoring the different choices open to them, with the VAT Flat Rate Scheme being a prime example. We would see this as a greater issue than considerations of stability and certainty.
Q11. Are there other possibilities that you feel the review should examine?
We have noted above that simplifications of the tax system are likely to be more beneficial than these simplifications of accounting.