News 2013
Tuesday 17th December 2013 - An 'audit bonus' for business, but dire news for small firms.
OVER the last decade the audit threshold in the UK has continued to rise at a steady rate with the result being that more and more companies no longer require a formal audit.
The EU's Accounting Directive passed earlier this year by the European Parliament proposes to further raise the threshold within the EU by a significant amount. At first glance, this would seem to be a bonus for business - but it could actually have far reaching unforeseen consequences for them, and the accounting profession.
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Below £6.5m turnover. - Balance sheet total of below £3.26m.
- Not more than 50 employees.
Should this proposal be accepted, then of the 4.8 million business in the UK some 98%-99% of them would be potentially exempt from the statutory audit regime. This would mean that a massive majority of businesses are free from the red tape of audit regulation. Only an estimated 57,000 companies in the UK would need an audit and the majority of these companies would be clients of the larger top 30 firms. This is great for business, but possibly only in the short term. After all, no one wishes to argue for companies to be burdened by red tape. In the longer term, however, this change could be dire for the smaller end of the accounting profession which, in turn, might have serious unintended consequences for businesses too.
The accounting profession is constantly striving to increase the quality and efficiency of the audit product it delivers and to meet the increasingly stringent requirements of this service. To achieve this, there must be continual investment in both people and systems.
The nature of the profession is that staff gain their skills by intensive formal learning and crucial on-the-job training. Once they have this, they move upward and onward and so there is a constant pressure to find quality new people to add to the staff pipeline.
This constant feeding of the staff pipeline and continual upgrading of systems is only sustainable when the ‘critical mass' of audit work is achieved. For the model to work, both staff and systems must be fully occupied. If the proposal of the EU Directive is implemented in the UK, we run the risk of smaller accountancy firms having to scale back their investment in their audit offering. This will inevitably mean, in time, a drop in the quality of the audit work being produced in the UK. Ultimately, there would also be the prospect that the financial statements produced will be devalued by the end users. In addition, it could be argued that companies which currently require an audit are getting good value as there is strong competition amongst suppliers and strong downward pressure on the price of an audit. Audit fee increases amongst mid-tier firms have been relatively low over the last few years.
What we need to consider is, what happens if the smaller firms begin to drop out of the market place for audits? Will clients have fewer choices of suppliers? Will the cost of audits increase as a result? Will quality suffer? Will businesses be worse off than they currently are?
03.10.13 - ACCA warning on self assessment PPI pitfalls.
Hundreds of thousands of extra people are expected to complete a self-assessment tax return for the first time by the end of this month, including people who have won compensation for mis-sold payment protection insurance (PPI) who are at particular risk of making errors on their returns, according to ACCA.
ACCA is warning taxpayers who have been paid any of the estimated £10bn paid out so far in PPI compensation should pay close attention to how they fill in the forms, which must be filed by 31 October.
Chas Roy-Chowdhury, ACCA head of taxation, said:’ 'While the PPI compensation itself is not taxed, any interest element awarded on that sum is taxable. Failure to declare that in the self-assessment form could lead to a knock at the door from HMRC. It’s not obvious at all in completing the necessary forms.'
The institute says changes to the child benefit system and a rise in the number of self-employed are behind a predicted substantial rise in the numbers of individuals who self-assess. High earners with incomes over £50,000 who continue to claim child benefit but do not complete a self-assessment form could be liable, not only to repay part of all of the benefit claimed by way of a tax charge on the highest earner of the couple, but also interest and penalties on the tax unpaid.
Roy-Chowdhury said: ‘Even those who have gone through the self-assessment process before will see some new elements to it, making what was originally meant to be an easy process much more complicated and vulnerable to mistakes. It’s not just completing the form that’s tough, its knowing what can and can’t go in that could trip you up.’
01st September 2013 - Second home tax-dodgers have one week to declare property profits or face possible penalties and convictions, taxman warns.
Holiday homeowners and buy-to-let landlords who have sold properties which are not their main residence and have not declared any profit to HM Revenue and Customs now have just one week to pay up.
The taxman’s property sales campaign, launched in March, has been aimed at those who have sold second homes in the UK or abroad where capital gains tax should have been paid. This includes properties that have been rented out and holiday homes.
Taxpayers have until next Friday to pay the CGT and HMRC says those who come forward voluntarily will receive the best possible terms and any penalties will be less severe than if the taxman catches up with them first.
Marian Wilson, head of HMRC campaigns, said: ‘Hundreds of people have come forward to take advantage of this campaign. It is not too late to contact us. ‘If you have sold a second home you might not know it could attract CGT. You should look at HMRC’s website to find out if you owe CGT. Telling HMRC about your tax liabilities is straightforward and help, advice and support are available.’
After 6 September, the taxman says it will take a much closer look at the tax affairs of people who have sold properties other than their main home, but who appear to have paid no CGT.CGT
This tax is applicable when a property, which is not your main home, is sold at a profit that tops the annual CGT allowance, which currently sits at £10,600. Buy-to-let owners can read here on ways to pay less CGT
HMRC says it holds a database for all property sales that attract stamp duty land tax and will crosscheck this with people’s tax records to establish if they should have paid CGT – and whether they have done so.
People do not have to be concerned about the sale of their main home or private residence as this is usually exempt from CGT, HMRC added. So far, crackdowns by the taxman have raised £547million from voluntary disclosures and nearly £140million from follow-up activity, including 20,000 completed investigations.
These crackdowns have targeted a number of different areas, including offshore investments, medical professionals, plumbers, VAT defaulters, coaches and tutors, electricians, online traders and higher rate taxpayers with outstanding tax returns.
Seven people have been convicted through the various campaigns, with custodial sentences handed out of up to two years. They have between them had to pay over £550,000 the taxman says.
People can visit the HMRC campaign website for more information while help is also available from HMRC by calling 0845 601 8819.
19th August 2013 - HMRC wins £68m stamp duty avoidance case.
HMRC is celebrating a legal victory after the Court of Appeal ruled against a £68m scheme used to avoid stamp-duty land tax (SDLT), overturning a previous ruling by the upper tribunal.
HMRC has won four other major SDLT cases this year, worth almost £400m.
The latest scheme involved the purchase of the former Dickens and Jones building in Regent Street, London by DW3, a property developer, which tried to avoid paying £2.6m SDLT by selling the leasehold interest to a partnership in which it had a 98% interest.
The upper tax tribunal ruled that the scheme worked. HMRC took the case to the Court of Appeal.
In his judgement (The commissioners for HMRC and DV3 RS Limited Partnership, EWCA 907), Lord Justice Lewisin, said that DW3 claimed to have "devised a simple and elegant" scheme to avoid SDLT but "in the real world" the company had acquired a chargeable interest in the property and was therefore liable to pay tax.
HMRC said the appeal ruling could set a precedent for 87 other cases.
David Gauke, exchequer secretary to the Treasury said the ruling was an "excellent win" that will protect taxpayers' money.
Tax expert John Christian of law firm Pinsent Masons, said: "The taxpayer's successes before the First Tier and Upper Tribunals have vanished before an elegant interpretation of the legislation by the Court of Appeal."
10th July 2013 SELF-ASSESSMENT TAXPAYERS who have failed to submit tax returns are being offered the opportunity to settle their arrears in an HMRC campaign.
From this week, the campaign is aimed at people who have received a self-assessment tax return or notice to complete a tax return for any year up to 2011/12, but are yet to take action.
The scheme will see HMRC writing directly to several thousand people it has identified using intelligence-gathering software, before following up with calls to many of them.
This latest drive follows a similar initiative undertaken last year, which covered higher-rate taxpayers who had failed to submit 2008/09 or 2009/10 returns. That campaign yielded more than £30m when over 3,000 people came forward, filing more than 5,500 returns.
Once participants have told HMRC they wish to take part in the campaign, they have until 15 October 2013 to complete and submit a return, and pay the tax and National Insurance Contributions (NICs) that they owe.
After 15 October, if they have not submitted their returns and paid the tax due, penalties of up to 100% of the tax, or even criminal investigation, could follow.
HMRC head of campaigns Marian Wilson said: "This is definitely the best time to catch up, on the best possible terms. While some penalties will apply, it is likely to cost people more if we have to find them rather than them coming to us. We have made it easy to take part.
"We know this approach works because campaigns launched so far have produced more than £547m through people coming forward voluntarily. And evidence shows that people who change their behaviour voluntarily are more likely to remain compliant longer. We will continue to analyse information using connect, our state-of-the-art risking engine, and will be looking more closely at people who have gaps in their tax records."
3rd July 2013 - Changes ahead for small companies
On 12 June the European Parliament adopted the revised accounting directive which was borne out of the European Commission (EC) Responsible Business package.
The main objective of this directive is to reduce the administration burden for small companies and, to a certain extent, improve the quality and comparability of the information disclosed in the financial statements.
The current EC directive has been in place since 1978 for individual financial statements and the directive governing consolidated financial statements has been in existence since 1983, and together these two directives govern the way in which financial statements are prepared, including the form and content. Collectively they are known as the fourth and seventh directive respectively and the new directive essentially combines and improves these two directives with the idea being that the EC’s ‘think small first’ (which is reflected in the directive) will benefit both preparers and users of financial statements prepared under the new directive as the EC allege the revised directive reflects present and future needs of both parties. There are many cross-references between the fourth and seventh directives and this is the reason why the EC saw it appropriate to merge them into the new directive as well as the fact that supporters claimed that merging the two directives would provide clarity, consistency and coherence to the accounting framework for unquoted companies.
The EC acknowledge that during the past 30 years, various amendments to the fourth and seventh directives have added many requirements including new disclosure requirements and valuation rules (particularly detailed provisions on fair value accounting provisions). The EC admit that these amendments have served to increase complexity and regulatory burdens for companies. Where financial statements are concerned, the EC has said that, in the current form, the fourth and seventh directives make financial statements less comparable across the EU with small and medium-sized entities suffering the most. Many in our profession will say “my small clients don’t have anything to do with the EU” or “who is going to compare my client’s financial statements with another entity’s in the EU?” These statements were considered by the EC and they claim that as small companies grow bigger, they will undoubtedly have more involvement with other countries in the EU.
One of the tasks of the UK government is to reduce the burden on small companies often referred to as the ‘red tape challenge’. This task is more widespread than just in the UK and the EC has acknowledged that “unnecessary and disproportionate” administration costs that are imposed on small businesses impede growth and unemployment and as a consequence the new directive simplifies the manner in which financial statements are prepared. It is currently unclear as to the likely impact on small clients in the UK and future articles will outline the impact once it is made clearer. At the moment, there are significant concerns for the UK about the impact of the EC’s simplifications and the lengths these simplifications go as some claim that they will result in financial statements being meaningless and certainly departing from giving a true and fair view, which is something the UK must avoid at all costs and is something professional bodies are actively striving for.
The new directive mandates each member state to make a distinction between those companies which are small and those which are large. In the UK we achieve this by way of turnover, balance sheet total and number of employees. For the purposes of the new directive, small companies will be those will less than 50 employees, a turnover of not more than €8m and/or a balance sheet total of not more than €4m. Member states may also use thresholds for turnover of up to €12m and a balance sheet total of up to €6m. Companies that are classed as ‘micro entities’ have also been incorporated into the new accounting directive and a micro entity is one with less than 10 employees, a turnover of not more than €0.7m and/or a balance sheet total of not more than €0.35m. Such micro entities are also afforded the same level of protection by the new directive as small companies with such companies being able to prepare a very simple balance sheet and profit and loss account with virtually no notes to the accounts if the member state so wishes.
The EC’s ‘think small first’ approach essentially says that more companies will be considered ‘small’ and therefore will prepare profit and loss accounts, balance sheets and related notes that are proportionate to their size as well as the information needs of users and the EC claim that more than 90% of EU companies will fall into the category of small for accounting purposes. The EC go on to say in their impact assessment that financial statements notes will also include between eight and 13 items as opposed to 14 and 24 notes (or more in some cases) as is the case today. There will also be no requirement to specify ‘extraordinary items’ (although in the UK, FRS 3 defines ordinary activities so widely that all our extraordinary items have disappeared and are referred to as ‘exceptional’ items). Such exceptional items will be reported, instead, as a simple explanation in the notes to the accounts, though I am not sure preparers of financial statements will view this as a significant simplification.
A key feature of the directive is the fact that it reduces and limits the amount of information that small companies will have to provide in their financial statements - notably in the notes to the financial statements. If the UK were to take the directive and adopt it forthwith small companies would only prepare a balance sheet, a profit and loss account and notes which would only be prepared to satisfy regulatory requirements. There is an option within the directive which permits member states to allow small companies to prepare abridged balance sheets and profit and loss accounts and small companies will still be entitled to provide more information, or additional financial statements (such as a cash flow statement) should they so wish. The fees paid to accountancy firms has been mentioned in the EC’s Explanatory Memorandum and they acknowledge that companies operating in member states that the savings they are setting out to achieve at company level will stem from a reduction in fees paid to accountancy firms with the negative impact on such firms only being marginal.
However things are not as simple as merely rushing to adopt the new directive tomorrow. The directive will be adopted by the European Council and published in the Official Journal. At this point, the Department for Business, Innovation and Skills (BIS) will more than likely launch a consultation and it will be then that we will have a better idea of when Companies Act 2006 will be amended and how.
Conclusion
The new directive has largely been welcomed, but not without some reservations. Certain critics have alleged that if the UK does adopt the new directive in its entirety, it will result in financial statements that are misleading, watered-down and fail to give a true and fair view - something that has been enshrined in the Companies Act for many years.
There are going to be substantial issues in the UK that will need to be considered, so this is likely to take some time - in particular a review of the FRSSE will have to be undertaken insofar as disclosure requirements are concerned.
Friday 28th June 2013
Me playing golf with two clients in a cancer charity golf team at dulwich and sydenham golf club on friday 28 th june 2013 From left to right, me with patsy clarke of aragon building services limited and dave cosgrove of xcel plumbing services limited.
Friday 14th June 2013 - HMRC extends monthly RTI respite to 2014
HMRC has extended the temporary relaxation of real time information (RTI) reporting rules for small businesses for a further six months to April 2014.
The relaxation applies to businesses with less than 50 employees and was originally set to run until October 2013.
In March, HMRC announced the easement after a widespread campaign across the profession and business groups, urging the government to ease the reporting burden on small firms by allowing them to submit payroll data just once a month.
Typically, this can reduce the number of required reports from up to 52 per year to 12.
Affected businesses will now not have to change their reporting approach halfway through the tax year, the Revenue said.
It added it would work with businesses over the coming months to identify whether there are any specific circumstances with on or before reporting it will need to cater for in the long term.
According to HMRC figures, around one in six payments reported under RTI since the system came in in April 2013 has been made using the relaxation.
In addition, 23% of the smallest employers are yet to report under RTI and may benefit from the relaxation.
Chair of ICAEW tax faculty and AccountingWEB tax editor Rebecca Benneyworth welcomed the announcement.
“This is the result of some hard work and extended engagement between employer representatives, including professional bodies, and HMRC. Thanks go particularly to Paul Aplin who has been leading for the ICAEW on this. I am also very pleased that although the easement will end in April 2014, HMRC will continue to work with stakeholders to identify the real issues for very small employers.
"The tax faculty will be issuing a call for evidence to members to help with this work, so that suitable adjustments to the on or before rules can be negotiated for 2013/14. As a member of ABAB, I shall also be looking carefully at the compliance costs and cost savings identified by HMRC and testing whether these have been robustly arrived at.”
Chairman of the CIOT’s Employment Taxes Sub-Committee Colin Ben-Nathan, also welcomed the extension, which he said is positive for small businesses.
“'On or before reporting’ has been a significant concern for small employers. This announcement is good news and shows that HMRC has continued to listen to the concerns of small employers, their agents and the organisations that represent them. It will help small employers continue to engage positively with RTI and to keep the costs of RTI reporting to a minimum," he said.
24th May 2013 Challenging tax penalties: Reasonableness
When HMRC were formed in 2005, they inherited a vast patchwork of penalty provisions relating to the various taxes previously administered by the Inland Revenue and Customs & Excise.
In 2007 they embarked on a programme to establish a unified system of penalties across the tax system. The main pillars of this system are penalties for:
- Inaccuracy in a document (Schedule 24, FA 2007)
- Failure to notify HMRC of a liability (Schedule 42, FA 2008)
- Failure to make a return on time (Schedule 55, FA 2009)
- Failure to pay on time (Schedule 56, FA 2009)
The provisions on inaccuracy in a document establish tax-geared penalties based on a hierarchy of culpability, including:
- Deliberate behaviour with an attempt at concealment
- Deliberate behaviour without concealment
- Carelessness, which is defined as failure to take reasonable care
- No culpability
If the taxpayer was not culpable to any degree in respect of the inaccuracy in the document, then he has a complete defence and no penalty can be levied. The burden of proving culpability lies with HMRC.
The failure to notify provisions use the same hierarchy of culpability except that failure to take reasonable care is replaced with lack of a reasonable excuse, which is also a complete defence.
By contrast, there is no reference to deliberate behaviour in the provisions on failure to make a return and failure to pay on time, but the taxpayer can still rely on the defence of reasonable excuse. If the taxpayer asserts that he has a reasonable excuse, then he bears the burden of proving it.
In practice the provisions on reasonable care and reasonable excuse are used much more often than those on deliberate behaviour, presumably because deliberate behaviour is harder to prove.
According to a recent Freedom of Information request, there were 13 penalties for deliberate behaviour and 3,208 for failure to take reasonable care in relation to self-assessment returns in 2010-2011.
The following year the figures rose to 49 and 9,315 respectively. Figures for reasonable excuse are not available, but the published tax tribunal decisions show that such penalties are increasingly common.
Therefore, the concept of reasonableness lies at the heart of the new penalty system. Surprisingly, however, the penalty legislation has only a partial definition of it.
We are told that it does not include:
- Insufficiency of funds unless the insufficiency is attributable to events outside the taxpayer’s control, or
- Reliance upon a third party, unless the taxpayer themselves still took reasonable care in relation to his own acts and omissions
We are also told that where the taxpayer has discovered a careless error, or where a reasonable excuse has finished, the taxpayer will still have a defence if he remedies the error or failure within a reasonable time thereafter.
Beyond these general principles, one must look at the case law and HMRC guidance to see how the concept of reasonableness applies in any given case.
23rd May 2013 - HMRC consults on changes to partnership tax rules
HMRC has begun a review of proposed changes to the tax rules on partnerships, as part of a bid to minimise any tax losses.
The consultation will look at two issues: the disguising of employment relationships through the use of limited liability partnerships (LLPs); and arrangements for allocating profits and losses among partnership members. Any changes will take effect from 6 April 2014.
The move was originally announced in Budget 2013, when the government said it would be looking at removing the presumption of self-employment for some LLP members, to tackle the disguising of employment relationships through LLPs; and would also be addressing the manipulation of profit and loss allocations (by LLPs and other partnerships) to achieve a tax advantage.
In its briefing on the consultation, HMRC says that it will be examining profit-sharing arrangements where it appears that the main purpose is either to secure an income tax advantage for any person, or to allocate a partnership loss to a partner with a view to that partner obtaining a reduction in tax liability by way of income tax reliefs or capital gains relief.
It will also consider tax-motivated arrangements whereby one partner transfers profits to another as a result of a revised allocation of profits in return for payment that is not taxed as income.
HMRC says it welcomes views on the detailed design of the changes and on how to ensure that any impacts outside the specified targeted areas can be reduced without giving rise to uncertainty and avoidance.
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