On 25 August, the FRC and BIS issued a discussion paper entitled “Simpler Reporting for the Smallest Businesses.” This introduces simpler reporting requirements for micro-entities.
This is a step that has been anticipated for some time with expectations of a multi-tier corporate reporting system being developed; one such tier leading to reduced reporting requirements and exemptions for so-called micro-entities.
Perhaps it is of particular interest to note that the paper refers to the work being done by the Office of Tax Simplification to simplify taxation for smallest businesses: work that is focused on unincorporated businesses.
The paper therefore brings together the interests of all smaller businesses, whether corporate or not. It seeks views on minimum reporting requirements, approaches that could align reporting and presentation of financial information with the tax system, and to reduce or remove the inconsistencies between micro-companies and similar sized unincorporated businesses.
What size businesses could be affected?
The paper notes that earlier this year the Competitiveness Council defined a “Micro-entity” as a company with a turnover of less than £440,000, net assets of less than £220,000 and employing fewer than 10 people. It is estimated that 1.3 million companies in the UK (60% of all registered at Companies House) along with 3.5 million unincorporated businesses fall within this criteria.
How could reporting and filing requirements change?
It is suggested that the reporting and filing requirements for micro-companies be changed so they prepare:
- A simplified Trading Statement - in place of the Profit and Loss Account. The idea is for this to be prepared on a cash accounting basis. Anyone remember UITF 40?!
- A Statement of Position (including details of shareholder’s funds, fixed assets (at historical cost), cash, debtors, loans and short and long term creditors).
- A simplified Annual Return.
There would then be an alignment of financial and tax reporting so that only one set of data needed to be prepared, from which all reporting obligations could be met. This approach would also be applied to unincorporated businesses that qualify for ‘micro’ status. There is a proposal to produce an integrated software package to help in preparing this financial information.
It is acknowledged that meeting these requirements would not produce accounts that give a true and fair view. So the proposed regime would not prevent a business from using a higher level of reporting if that would be more appropriate to its requirements.
We think there could be a significant concept challenge for the accountancy profession. For instance, how will our long-time friend ‘double entry’ fare in accounts that report a profit based on cash ins and outs, but include debtors and creditors in the Statement of Position?
Though it is a similar position to receipts and payments accounts for very small charities.
The new regime would likely lead to changes to filing dates. Mention is made of filing Annual Returns within 12 weeks of the end of the financial period, and that the reporting year may be standardised.
Alignment with Tax
Having one set of accounts that satisfies reporting as well as tax requirements would be simpler. However there are a number of issues that would need to be considered which is acknowledged in the paper.
For instance it suggests amending accounts depreciation so it matches capital allowance rates. One wonders though where this will be reported since the Trading Statement only deals with cash ins and outs, and the Statement of Position records assets at historical cost.
Another issue that would need addressing is an arrangement for businesses that grow out of or fall back within the micro-entity regime, and therefore switch between cash and accruals accounting.
Impact
Clearly, if implemented, the changes being discussed in the paper are going to have a big impact on the work carried out by accountancy practices. This is particularly so in view of the proposals that this reporting regime apply to unincorporated businesses.
If clients perceive their affairs as being simpler then it is likely that firms will find them exerting pressure to drop fees. And if the proposals do actually lead to a simplification in work processes this will mean the amount of time spent on compliance work for current clients reducing. Firms may need to consider staffing levels, more aggressive competition for new clients, threats of other firms touting its clients etc.
Positive strategies might include:
- Reducing reliance on accounts and tax compliance work by expanding into other areas of work.
- Being the first to advise potential new compliance clients of the changes if and when they do come into effect.
Pro-actively managing the expectations of current clients of the changes and their effect on fees. This could be an opportunity to reduce the fee for the clients you regularly under-recover on, but in such a way as to improve recoverability.
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