Comments from ACCA
ACCA (Association of Chartered Certified Accountants) is pleased to have this opportunity to comment on the above discussion paper.
We very much support removing disproportionate administrative burdens from small businesses, including those connected with accounting.
However we do not believe that accounting represents a significant government-imposed burden even on the smallest businesses, certainly not compared with others such as many aspects of health and safety legislation or the PAYE system. This was debated in the context of the European Commission’s proposals for micro-company reporting and we would refer you to ours and many other submissions to those proposals.
Many of the assertions and assumptions made in this paper appear not to be based on specific evidence (eg Para 3.4 "Analysis suggests ...").
If this paper was intended to elicit views on outline ideas rather than specific proposals, then perhaps it might have been a bit more open ended and raised perhaps other possibilities rather than simply describe one.
The proposals are based on the assumption that shareholders will always be able to access whatever financial information they would like because they are also the management. While this may be true in a majority of businesses of this size, it is not always the case and some family shareholders (for example divorced or separated spouses) may rely on the financial statements prepared under the law. A protective requirement for minority interests for the adoption of these sorts of accounts may need to be provided.
It is regrettable that the paper does not seem very well presented with cross-references that do not work and questions that do not cover all relevant issues such as the thresholds suggested.
Answers and comments on specific questions raised
Q1. Would benefits flow from deregulation of reporting responsibilities of micro businesses?
There are benefits to be obtained from reducing reporting requirements on small entities. We would see these as restricted essentially to those very small businesses that do not employ software or anyone with book-keeping skills and where the proprietor might wish to complete the accounts themselves. This might be the case with small charities where the treasurer is a person with no accounting training. However for this to be possible then the requirement probably has to be restricted to the trading statement reporting cash flows. The proposals for the position statement as well, would most often remove that possibility and therefore the potential benefits.
For those businesses using accounting software or someone familiar with book-keeping the savings in accounting (not preparing accruals based P&L) are likely to be insignificant.
If the accounts preparation requirements of Companies House and HMRC are not aligned then the majority of savings will not materialise - for example if true and fair accounts were still to be the basis of corporation tax.
Q2. Would the proposed alternative reporting structure meet the needs of users?
The value of the information provided will be reduced for users. In our view accruals accounts do produce better quality financial information about most entities than simply a cash flow statement. Profit is a better measure in most cases of performance than simply cash inflow. The combination of the two tends to be better still.
In addition accruals-based accounting helps with the better management of these small businesses than cash flow information - for example with the management of inventory, receivables and payables, as is indeed set out in Section 5 of the DP and the overall gains for the economy of the better management of very small businesses.
Q3. Would the trading statement and statement of position provide an acceptable basis of reporting by micro companies?
The particular model proposed seems not to save any significant effort and therefore in our view is not an acceptable basis.
The trading statement is on a cash receipts and payments basis, but in order to
- decide whether you meet the threshold criteria
- to supply the position statement
accruals accounting would be needed. There is a disconnect between the trading statement and the position statement and the one would not explain the change in shareholders’ funds in the other.
It is not clear whether the statement of position is meant to be a complete but simplified balance sheet, or whether it is meant to be a list of selected figures. It is also not clear why inventory is omitted from the position statement or why debtors appear twice.
The meaning of paragraph 3.11 does not seem very clear particularly in relation to statement of receipts and payments.
Q4. Would the information proposed to be in the annual return be sufficient?
The lack of internal coherence in the accounting statements proposed would potentially make them confusing and the quality of information provided would be reduced compared to the balance sheet information that currently must be filed by small companies
We also note that supplying turnover numbers for the return would involve accrual accounting (unless the definition were to be changed) and would constitute more information than small companies are currently obliged to provide under the abbreviated accounts regime.
Q5. Are the proposed filing obligations for micro companies appropriate?
We support the filing by companies of some financial information on the public record and so very much support the DP in this regard.
Cutting filing deadlines to 12 weeks might help users but are likely to be viewed as a burden for small businesses. We are not clear why micro entities might be penalised in this way compared small, medium or large entities (who would all apparently have longer).
Standardised year ends would not help and there seems to be no benefit to be gained from this measure. Some small businesses are seasonal and one year end may be more appropriate then another, whether in the farming or the retail sectors for instance. They would also not help businesses where an accountant prepares the statement, as this would give the workload of such persons a very uneven distribution and thereby increase costs.
Q6. Other matters to be addressed
The question of distributable profits is not addressed by the paper and that is a significant gap. Many of the smallest companies are established in order to pay dividends to the owners rather than salaries for example.
Q7. In principle would the proposed approach to providing financial information to HMRC be an improvement?
We did not find the proposals very clear in this section, but we are not convinced that they would be an improvement by being simpler or more cost effective.
As noted above the principal benefits from any new reporting regime for small businesses is if it is aligned with the accounting required for tax purposes as well. The lack of internal coherence of the proposed accounting model undermines this. We doubt that the trading statement could be the basis of the tax computation - there would have to be adjustments to the raw cash flow figures for loans, hire purchase and, to judge from the second bullet point in 4.3, for depreciation and capital allowances.
If taxation were to be simply based on cash flow that runs the risk of further encouraging behaviours that do not make commercial sense, and are simply about deferring or avoiding the payment of tax.
The experience from the VAT scheme should be investigated. If an option is offered for tax purposes of one accounting basis or another this may lead to significant expenditure being incurred in determining whether an individual business is better off choosing one rather than another.
There is also a risk to the Treasury of a loss of revenue in these circumstances.
Comments on Section 5
It is not clear (and not evidenced) that it is the accounting requirements that are the cause of late filing among these companies.
Many of the advantages of appropriate accounting software set out here may be true, but they are unlikely to be affected by the sort of accounting and reporting model proposed by this paper.