Study tips: Management accounting: decision and control. High low with stepped fixed costs

Posted by & filed under Professional Diploma, Students.

MDCL: High low technique series for AAT Professional Diploma students

I watched a TED talk recently about mastery based learning. The basic premise was that you wouldn’t want to live in a house that has incomplete foundations, because one day it’ll collapse.

Similarly, if we try to use advanced level techniques in our studies, without first understanding the basics, then at some point we’re likely to hit a brick wall.

The talk made me think of using the high-low technique at professional level. The basic technique, of separating a total semi-variable cost into its variable and fixed elements, is first taught at foundation level and is consolidated at advanced level.

This foundation is then built on at professional level when the reality of stepped fixed costs and bulk discounts complicate the theory of cost behaviour, on which the technique is built.

So if you feel your foundation about how costs are categorised and how they behave, isn’t totally solid, then have a quick re-cap about fixed, variable and semi-variable costs. Equally, a refresher of the basic high-low technique is advisable if you want to shore up your knowledge and understanding before you continue.

Looking at the high-low technique with stepped fixed costs

In this article we’re going to focus on using the high-low technique when the fixed element of the total cost includes stepped fixed costs. A stepped cost increases by a fixed amount at a certain level of output and then remains fixed, at the increased level, until the next step is reached, unlike a normal fixed cost which remaining the same at all levels of output.

Let’s assume we’re the cost accountant for a manufacturing organisation and that we have the following information about the company’s factory overheads:

We also know the overhead cost is semi-variable and that the fixed element contains a step of £1,250 every 2,500 units once production levels exceed 15,000 units.

The company is planning an increase in production levels and you have been asked to calculate the total overhead cost of manufacturing 30,250 units.

Calculating total overhead costs

Our fundamental understanding of cost behaviour and of the basic high-low technique enables us to adapt the normal calculations to accommodate the stepped fixed cost. This is because we know that the total semi-variable cost is made up of the variable and fixed elements but that the fixed element is also made up of two sub-elements, the normal fixed costs and the stepped fixed costs.

The key to using the high-low method in these circumstances is to recognise that, because each element behaves differently, it must be accounted for individually.

When there is no stepped fixed cost, the high-low technique calculates the variable element first. This is done by dividing the difference in the total costs by the difference in the volumes to give the variable cost per unit. However, when a stepped cost is involved, the calculation of the variable cost per unit needs to be adjusted to exclude the stepped element from the total cost because it needs to be accounted for separately. Therefore, in these situations, the first step in the high-low process must be to calculate the stepped fixed element:

Step 1 – stepped fixed element

In order to calculate the value of the stepped fixed element we first need to ascertain the number of steps included at each level. In this case, it is one for 15,500 units ((15,500 – 15,000) ÷ 2,500 = 0.2) and five for 26,250 units ((26,250 – 15,000) ÷ 2,500 = 4.5).* This means that £1,250 of the total fixed cost is incurred due to the single step in costs when 15,500 units are produced and £6,250 of stepped fixed cost is incurred for five steps when 26,250 units are produced:

Step 2 – variable element

Now the stepped cost element has been separated, the variable element can be calculated. The variable cost per unit is the difference in the total costs (£279,375 – £183,000 = £96,375) less the difference in the stepped elements (£96,375 – (£6,250 – £1,250) = £91,375). This is then divided by the difference in the volumes (£91,375 ÷ (26,250 – 15,500) = £8.50) to calculate the variable cost per unit. 

The value of the variable element for 15,500 units is therefore £131,750 and £223,125 for 26,250 units:

Step 3 – fixed element

The table is completed by deducting both the stepped element and variable element from the total cost which for 15,500 units is £183,000 – £1,250 – £131,750 = £50,000. Due to the way fixed costs behave, we already know that the fixed cost at both production levels should be the same.

Therefore, reconciling the figures at the other level of production, in this case 26,250 units, confirms that our calculations are accurate (£279, 375 – £6,250 – £223,125 = £50,000):

Forecast

Now that we’ve established the costs of the three individual elements of the total cost, we can use them alongside our knowledge of how they behave, to predict the total overhead cost of manufacturing 30,250 units.

  1. Number of steps = 7 ((30,250 – 15,000) ÷ 2,500 = 6.1)*, therefore the stepped fixed element is £8,750
  2. Variable element is £257,125 (30,250 units x £8.50 per unit)
  3. The fixed element is £50,000

Therefore the total overhead cost of manufacturing 30,250 units is £315,875.

If you’ve found this article useful, then further reading about adjusting the high-low technique when bulk discounts have been applied, might be of interest.  You might also like to watch the TED talk I referred to at the start.

* It’s important to realise that if the number of steps requires rounding, they will always need to be rounded up in order to be accurate.

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Understanding Costing and Cost Classifications

Posted by & filed under Foundation Certificate, Students.

Management accountants connect financial information with business analysis to advise managers creating business strategy. We explore the essential Costing knowledge for this role.

There are a number of specific management accounting topics that are covered in the AAT Accounting Qualifications including budgeting and forecasting, performance evaluation and variance analysis and decision-making. This article will focus in on another key area – costing.

Costing

‘Costing’ is the process of identifying the cost per unit of production. If I’m a manufacturer of cars (or cakes or chairs for that matter) it’s incredibly useful to know how much each unit will cost me to produce.

Knowing this, enables me to:

  • Set a profitable selling price – In order to make a profit, a business must ensure that the price they charge for each unit is greater than the costs of making it.
  • Value units of inventory at the end of a period – As a general rule, we value inventory at the cost of production of those units.
  • Identify where cost savings can be made to improve profit – A good starting place is to understand clearly where costs are being incurred.
  • Compare the profitability of different products – By looking at the price of each product and the production costs, we can work out where we make the most money.

A typical starting point of the costing process is to break down the costs of the business into sensible categories.

Classifying costs

There are a number of different ways that you can break down costs into different groups; this is the process of ‘classifying’ costs.

Classifying costs by function

When we classify costs by ‘function’ we are thinking about which location within the business they are incurred in.

  • Production costs are incurred in the factory where physical production occurs.
  • Non-production costs are incurred elsewhere in the business, for example:
    • Administration costs are incurred as part of the administrative function.
    • Selling costs relate to the process of stimulating demand through marketing and advertising products.
    • Distribution costs are incurred in the process of delivering finished goods to customers.
    • Finance costs would be those incurred as part of raising finance and paying interest.

Classifying costs by behaviour

When we talk about the ‘behaviour’ of a cost we mean the way that the cost is affected by changes in the volume of production.

  • Fixed costs are unaffected by the volume of production so stay the same whether you make 5,000 units or 10,000 units.
  • Variable costs change in line with any changes in production volume so if you double the volume of production you double the cost you incur.

One thing to note is that when we describe a cost as ‘fixed’ that doesn’t mean it will never change, just that it is not affected by changes in volume. For instance, your factory rent can go up each year, but your landlord isn’t interested in how many cars you make.

Classifying costs by element

  • Material costs are the purchase of anything physical.
  • Labour costs are when we pay for the time of a member of staff.
  • Expenses relate to anything other than material and labour.

Classifying costs by nature

  • Direct costs can be ‘traced’ to a single unit of production. The total of all direct costs is the ‘prime’ cost.
  • Indirect costs cannot be traced to a single unit of production but are ‘shared’ over many units. Indirect costs are often called ‘overheads’.

You have to remember that our categories of cost overlap:

The purchase of wheels used in assembling cars can be thought of as:

  • Production costs as they are used in the factory.
  • Variable costs as an increase in the number of cars made will mean more wheels being bought.
  • Material costs as the wheels are a physical product.
  • Direct costs as you could trace four wheels to a single car assembled.

The monthly salary of a factory supervisor could be seen as:

  • Production costs as the supervisor works in the factory.
  • Fixed as the monthly salary paid will be the same no matter how many cars are made.
  • Labour costs as they relate to paying for someone’s time.
  • Indirect as you cannot trace the monthly salary paid to a single car.

The quarterly electricity bill for lighting the accounts department would be:

  • Non-production costs as the accountants don’t work in the factory.
  • Fixed as the bill will have no link to the number of cars being assembled in the factory.
  • An expense as it is not material or labour.
  • Indirect as a bill for three months will be shared over all of the production in that quart

In summary

Classifying costs is an essential process to management accountants, enabling them to translate financial costs into business strategy, so it’s important to understand the basics at this early stage of your AAT studies.

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What history’s least ethical accountants can teach you

Posted by & filed under Ethics.

Accounting and finance professionals are supposed to command respect and unquestioning trust. After all, they’re the arbiters of financial truth. However, the practice of cooking the books is as old as the abacus.

Here’s our selection of some the most significant accounting scandals of the last hundred years, where a handful of accounting and finance professionals have fallen far, far short of these standards. 

Arthur Andersen and Enron

When Enron filed for bankruptcy in 2001, the Houston-based energy trader’s labyrinthine accounts revealed that it hid huge debts and losses from the balance sheet. Once declared, the company imploded, wiping out $74bn of shareholder funds along with the pensions and jobs of thousands of employees.

Former chief executive Jeff Skilling was sentenced to 14 years in prison, while Enron founder Kenneth Lay died of heart failure while awaiting a likely sentence. Enron auditor Arthur Andersen collapsed the following year after being convicted of obstruction of justice — it had ordered staff to shred documents relating to its Enron work.

The Supreme Court overturned that conviction in 2005, saying the trial jury hadn’t been told that conviction requires “consciousness of wrongdoing”.

Harold Morland and Lord Kylsant

Lord Kylsant built the Royal Mail Steam Packet Company into the world’s greatest shipping operator through a series of acquisitions that included the White Star Line in 1927 for £7m — around £420m at today’s prices.

While the group had prospered in the first world war as the government paid to requisition its ships as military supply vessels, during the 1920s the profits of the company rapidly dropped, and Kylsant began supplementing the company income by taking money from the reserves.

The complex share structure of companies within the group allowed him to hide trading losses in individual firms by moving reserves around. At the time the ruse was discovered, the company had a trading deficit of £300,000 a year, the reserves were exhausted, and the company owed £10m — £600m at today’s prices.

Raymond Marien

In 1938, the police arrested Homes & Davis accountant Raymond Marien for forging cheques from the bank account of one of the firm’s clients, Interstate Hosiery Mills. During the ensuing investigation, the New York Attorney General’s office found that Marien had “juggled” the books of the corporation and that these accounting irregularities inflated Interstate Hosiery Mills’ assets by $1.9m (or $35m at today’s prices) — about 40% of the company’s assets.

For almost four years the firm had been basing its salaries, dividends, bonuses, and general financial policy on balance sheets that Marien had made up. He was tried on a charge of forgery and sentenced to two and a half years at New York’s Sing Sing prison. 

Dennis Kozlowski

Dennis Kozlowski began his career at Tyco International as an auditor, working his way up the corporate ladder to become CEO in 1992. Over the next decade, Tyco grew from a small New Hampshire conglomerate into a global giant operating in more than 100 countries with 250,000 employees and $40bn in annual revenue.

Kozlowski resigned in 2002 after it emerged he was being investigated for tax evasion. In 2005, Kozlowski and former chief financial officer Mark Swartz were found guilty of stealing more than $150m of company money in unauthorised bonuses and forgiven loans.

Two years later, PricewaterhouseCoopers (PwC) paid $225m to settle a class-action lawsuit brought by Tyco shareholders who had claimed that as auditor, PwC had failed to uncover the fraud. The SEC barred PwC partner Richard Scalzo from auditing the accounts of a public company, finding that he had been “reckless” and had ignored and failed to act on several visible signs that Tyco was being looted.

Lessons to learn

  1. Keep audit and accounts teams as separate as possible
  2. Beware of hidden reserves
  3. There should be limits to what an accountant in practice can do for a company
  4. Be vigilant about directors’ loans  
  5. A toxic corporate culture creates susceptibility to corruption

Further reading:

Could you spot these 5 signs of financial crime?

Posted by & filed under Ethics.

For every type of financial crime, there are “red flags”. The role of forensic accountants involves detecting fraud, figuring out how it’s happening, and providing the evidence to confront the perpetrators.

Common financial crimes tend to leave certain red flags. Here are some of the key signs of what to look for…

1. Corporate fraud

What is it?

The company or its owners are often the perpetrators rather than the victim in cases of corporate fraud. It can embrace a multitude of sins. Payment fraud, invoice fraud, Ponzi schemes and trading frauds are all examples. Corporate fraud can mean falsifying financial statements – for instance, attracting investment through over-stating profits, or hiding debts from banks and investors. It can also mean making false claims about products or services.

How to spot it

Inevitably, there is no single telltale sign for such a wide range of criminal activities. But Ben Crowne, a senior manager in forensics and investigations at Quantuma, says: “One common danger sign is a company that stands out from its competitors as being unusually successful when it’s not obvious why it’s business model would make it so.”

Companies falsifying financial information generally tend to make themselves look more successful than they are, he says, and that can lead to reporting ever-bigger profits and bigger deals to attract more investment and keep the fraud going. Go through the records with a fine-tooth comb. “It’s very hard to create a picture of a successful, growing business, which is fraudulent and at the same time 100% watertight,” says Crowne. “Usually, somewhere, there is something in the picture that doesn’t make sense.”

2. Tax evasion

What is it?

The three taxes that companies are most likely to avoid paying are VAT, PAYE and corporation tax. VAT carousel fraud, or missing trader, is a specific crime which involves goods being imported free of VAT, then sold on to a series of companies, with each paying VAT and then reclaiming it from the Government.

The initial importer then disappears without repaying the VAT it has charged to the Government. Payroll and corporation tax frauds typically involve under-declaring the amount of tax to be paid.

How to spot it

One approach forensic accountants take, says Crowne, is to establish a benchmark of how much tax should have been paid and comparing this to actual tax paid.

Warmington says that looking at reward schemes and the behaviour they encourage can also help identify any tax holes. During the 1970s, Citibank rewarded country managers and traders on their currency dealing profits after paying local taxes. As a consequence, some of the managers came up with the bright idea of exporting their profits to zero-tax Nassau in the Bahamas, via lossmaking after-hours trades.

It later emerged that, although Citibank appeared to have a phenomenally successful trading operation in Nassau, it didn’t employ any traders there. Citibank was forced to repay millions in taxes to European governments as a result.

3. Money laundering

What is it?

Conventionally, money laundering means disposing of the proceeds of crimes ranging from extortion to drug trafficking. The archetypal money laundering business is a pizza restaurant or a nail salon or similar, where there are high volumes of cash transactions, and “dirty” money can be added in by inflating the turnover.

How to spot it

Business funding that comes from apparently unconnected sources in high-risk countries is one sign of money laundering. Loans that don’t come from regulated banks is another. Also, look for transactions that don’t appear to make sense – for example, where an asset sells for less than its market value.

Warmington, who was previously head of global investigations at Citibank, says: “Around 20 years ago, we had a tip-off from a customer about the branch at Puerto Banus, Marbella. We went and investigated – while we’d have expected the biggest loan in a retail bank in Marbella to be maybe $800,000, this bank had $40m loans on its books.” Many of the loans were guaranteed by a Finnish bank, in turn, underwritten by a Russian bank.

4. Insider trading

What is it?

Insider trading is making use of any information that is not in the public domain that could affect share or security prices, to make a profit. It’s commonly where a company receives a takeover bid at a higher valuation than its current stock market price. Anybody buying that company’s shares is likely to receive a windfall when the news goes public, and the share price soars – even though it’s illegal to do so.

How to spot it

Detection of specific instances of insider dealing is usually carried out by the relevant stock exchange, which can monitor share dealings and identify suspicious activity – such as a surge in transactions in a company’s shares just before such an announcement. The role of forensic accountants is more likely to be in providing evidence after the event, especially where somebody is trading through their company’s account. “The only thing you can do is look for lifestyle changes,” Warmington says.

5. Embezzlement

What is it?

Commonly known as employee fraud, this typically involves an individual in a position of trust, diverting company funds into their bank account. For example, by creating fake suppliers, counterfeit credit notes or even non-existent employees. One of the best ways to prevent employee fraud is to avoid putting too much responsibility and power in the hands of any individual. There should always be another pair of eyes to spot irregular activity.

How to spot it

The employee who is living a lifestyle apparently beyond their means is one giveaway sign. Another is patterns of unusual transactions that you can only pick up on by trawling through bank statements and other records. Crowne says: “We have been investigating a credit note fraud where junior employees processed refunds in conspiracy with customers. The company noticed an unusually high number of refunds on one account, so we came in to investigate.

We flagged up the transactions we thought were anomalous, then we went sideways, and we looked at the employees who had raised these refunds. A simple, but occasionally successful method of detecting employee fraud is to run the list of employees’ bank accounts on the payroll against all the other accounts to which payments have been made.

For more on ethics:

Chancellor announces review of IR35 scheme

Posted by & filed under IR35, Members, News.

The Conservative Party had pledged to conduct a review of IR35 regulations – the controversial rules that govern off-payroll working.

IR35 is due to be applied to private sector employers from next April. The scheme has already caused a wide array of problems in the public sector, ranging from higher costs, staff upheaval to legal cases.

Chancellor’s announcement

The Conservative promise to review the scheme was made by Chancellor of the Exchequer, Sajid Javid, during an interview for BBC Radio 4’s Money Box programme.

It comes as part of the Conservative Party’s election messaging to support self-employed workers. Sajid Javid said: ‘We’ve already said that we’re on the side of self-employed people. We will be having a review and I think it makes sense to include IR35 in that review.’

AAT view of developments 

AAT notes that the Chancellor’s announcement brings the Conservative Party into line with other political parties and it can be viewed in the context of the election campaigning.

Phil Hall, AAT Head of Public Affairs & Public Policy said: “With most political parties, including Labour, the Liberal Democrats and even the SNP, now promising a review of IR35 it comes as little surprise that the Conservatives have relented and said they will also review their plans to extend the off-payroll working rules to the private sector.”

The Chancellor has said the review would be swift and did not indicate that the April 1 introduction could be delayed.

However in September HMRC suddenly announced that it was delaying another major change – the introduction of the Construction Industry Scheme Reverse VAT Charge.

This happened just weeks before it was due to be implemented and left many agents feeling frustrated that they had spent time contacting clients, who were left confused.

Against this backdrop any uncertainty over IR35 will be seen as unhelpful.

How to proceed

However, with no certainty of delay, AAT’s Phil Hall advises that preparation remains the best policy:

“Employers should beware that politicians promises of reviews are very different to promises for change. As a result, continuing to prepare for the April 2020 introduction of IR35 remains the most sensible thing for companies to do.”

What you need to know: IR35 and personal service companies (login required)

How IR 35 could raise costs for private-sector employers

General Election 2019: How the parties line up on tax

Government’s Check Employment Status tool

Test your code of ethics: Try out these 3 scenarios

Posted by & filed under Ethics.

Accountants have a duty to conduct themselves in an ethical manner at all times. Test your knowledge with these scenarios.

Ethics can sometimes seem like common sense. But there are many ways in which accountants trip up, even when they should know better. It’s important to note that they aren’t necessarily aware they are acting unethically – they might be trying to be helpful, or they aren’t really thinking. But an ethical breach is still an ethical breach.

“I’ve always made sure I spend time really going through ethics with my students, and even then, some of them have gone on to get themselves into trouble,” says tutor and forensic accountant Samantha Perkin. To help you get to better grips with your ethical knowledge, Perkin has written out some scenarios to get you thinking about ethics.

Scenario 1

A trainee accountant is working in a family practice, managing their own clients – their work is checked by a partner at the firm. They have finished one term of the AAT Professional Diploma.

The student is told that the practice is disengaging from one of the clients that they have been managing – they aren’t given any further explanation. The student has developed a rapport with the client and is disappointed to have lost one of their clients. During their lunch break, the student has an idea. They have the client’s number on their personal mobile, having worked from home from time to time.

They call the client and arrange to meet. When the student and the client meet a few days later, the student offers to take the client on at a lower price. The student does not have a licensed practice. Can the student take the client on? What should they have thought about when considering this move? Are they in breach of anything?

Solution

The short answer is that the student should not have taken the client on. They should have considered their position in the firm, their contract, and several laws and regulations before making such a move.

Under the AAT Code of Professional Ethics, students and members are expected to conduct themselves according to five principles: integrity, objectivity, professional competence and due care, confidentiality, and professional behaviour. This student has broken pretty much all of these principles.

Professional conduct and confidentiality have been broken by contacting the client outside of work – it’s also a potential GDPR breach. They have also most likely broken their employment contract, which would usually have a non-compete clause preventing staff from taking on the firm’s clients directly.

The student doesn’t have a licence to practice, and would not meet the requirements anyway. They are not registered for anti-money laundering, which means they’re breaking the law. The student should also have questioned why the client might have been dropped – the firm may have had a very good reason for doing so. As the client is the only one the student has taken on privately, their objectivity is also called into question. Lastly, by going behind their employer’s back, the student has demonstrated a serious lack of integrity.

Scenario 2

A student, partway through their Professional Diploma, is working in a business, splitting their time between IT work and bookkeeping. They spend a lot of their time entering records into Sage from bank statements as part of their job. The employer holds money for customers. However, all the money goes through one account – the student knows this because they reconcile it.

Can the business put all transactions through the same account? What should the student do?

Solution

This comes under professional conduct and due care. The student should know that client money should go into a special account. By not acting, the student is not providing a competent professional service based on current developments in practice, legislation and techniques. The student needs to go to their employer and explain how customer monies should be handled.

If the employer’s methods don’t change, the student should refer to the Code of Professional Ethics: “There may be circumstances where a member in business believes that unethical behaviour or actions by others or by him or herself cannot be avoided or will continue to occur within the employing organisation. In such circumstances, the member in business shall consider seeking legal advice.

In those extreme situations where all available safeguards have been exhausted and it is not possible to reduce the threat to an acceptable level, a member in business may conclude that it is appropriate to resign from the employing organisation.”

Scenario 3

A student lives with their dad and is halfway through completing their qualifications. Their dad asks them to prepare and submit accounts for his building development business, which he owns with two other directors. The dad does his own accounts and believes that by getting the student to prepare the accounts, he can save ‘unnecessary’ expense. The student prepares the accounts with their dad and then submits them to Companies House. No money passes hands.

The student has not covered business tax and is unaware of the company’s tax liabilities. Should the student have helped their dad? Is there any situation in which this would be OK? Can the student do anything to correct the error?

Solution

This scenario is problematic for several reasons. The student is not meeting their requirements for professional competence and due care. They also cannot be objective, thanks to the family connection.

Building development companies are tricky to account for – what land counts as stock? What should go on the balance sheet? Then there are some serious errors in the tax calculations. The student has also not met their responsibility to the other directors, either. The student is not registered for anti-money laundering and isn’t licensed to practice.  

If the errors are spotted and a licensed accountant prepares and resubmits the accounts before the deadline, it’s possible that the errors could be corrected without any impact on HMRC compliance.

However, it’s more likely that the company would be penalised. The student
would also face a misconduct hearing through AAT and could have their student membership revoked or suspended.

For more on ethics:

General Election 2019: How the parties line up on tax

Posted by & filed under AAT news, Policy.

Whilst much of the 2019 General Election focus has been on the parties spending commitments, much less attention has been paid to the taxation approaches each party will take. 

Here Phil Hall, head of Public Affairs and Public policy at AAT examines the key tax pledges made by the main political parties.

The Conservative Party

The Conservative Party manifesto confirmed that a Conservative Government will raise the threshold for paying National Insurance Contributions (NICs) from £8,632 today to £9,500 in April 2020, with an ultimate ambition to raise it further to £12,500. The ultimate ambition will see the NICs threshold aligned with the Income Tax threshold.

This will benefit millions of workers by both reducing almost all workers National Insurance Contributions and by ensuring over 2 million people no longer make any contribution at all.

However, such a move doesn’t come cheap. The first step of increasing the threshold to £9,500 will cost over £2bn a year, increasing it to £12,500 will cost around £10bn a year. That’s £10bn that will have to be found from tax increases elsewhere unless cuts are to be made.

Possible areas where the Conservatives might have looked to recoup some of the £10bn cost of this proposal include:

  • Ending the NICs exemption for those in receipt of the state pension (1.2m pensioners are in employment and paying no NICs) which would raise over £1.5bn annually
  • Increasing NICs for the self-employed (9%) to the same rate as that paid by the employed (12%) which would raise £3bn+ per annum
  • Increasing the overall rate of National Insurance Contributions for the employed. Each additional 1% is likely to raise in the region of £5bn+

However, none of these measures is now possible given the Conservative Party manifesto also includes a so-called, “triple tax lock” a repetition of their 2015 manifesto pledge. This means the rate of National Insurance (and VAT and Income Tax) will not rise under a Conservative Government.

The triple lock may make political sense but from an economic perspective, it’s heavily restrictive. The lock leaves serious questions about where the money is going to be found to pay for increases to the NICs threshold, not to mention the numerous other multi-million pound spending commitments the Conservatives have made in recent weeks.

The Liberal Democrats

The Liberal Democrats have promised £36bn of tax rises.

This includes restoring Corporation Tax to 20%; raising an additional £5bn through a reformed Air Passenger Duty regime and £6n of anti-avoidance measures.

They are also committed to ending the Contractor Loan Charge, reviewing IR35, replacing business rates with a land value tax and building on the OECD’s proposals to require multinationals to pay a level of tax which is more closely related to their sales in each country in which they operate.

They have also promised to scrap the Marriage Tax Allowance as proposed by AAT last year. It is worth noting that this is worth a maximum of £250 a year so its removal is very unlikely to influence an individual’s decision to marry. It’s also taken up by less than half of those who are eligible, the primary beneficiaries are men (84%) and over a third of recipients (35%) are above state pension age.

Pleasingly, the Liberal Democrats have also pledged to introduce AAT proposals to make the Prompt Payment Code compulsory for all companies with 250+ employees and for the Small Business Commissioner to enforce this. Although this isn’t related to tax, given a quarter of business insolvencies are due to late payments, this should mean a reduction in business closures and consequently increased tax receipts.

There are also plans for additional VAT variations on items such as electric vehicles and a range of new taxes and duties such as a Cannabis Duty. A further complication to the tax system will come in the form of Stamp Duty payments being based on the energy rating of a house. Although many of these appear well intentioned, the impact on the bureaucracy this will create does not appear to have fully considered.

The Labour Party

The Labour Party manifesto commits the party to introduce a host of new taxes, from a Financial Transactions Tax and a new Second Homes Tax to a “Super Rich” rate of income tax for those earning  £125,000 a year or more.

Simultaneously, myriad increases to existing taxes are promised. For example, Income Tax for those earning over £80,000 per annum and increases in Corporation Tax to 21% for small businesses and 26% for large ones.

Although they do promise there will be no increases in the headline rate of VAT, it will be extended to cover various areas, for example, private school fees. The extension of existing taxes and duties is a common theme in the manifesto, for instance, Stamp Duty on shares will be extended too.

Like the Liberal Democrats, they also believe £6bn can be raised through new anti-avoidance measures.

If elected, Labour will adopt an AAT recommendation to scrap Entrepreneur’s Relief and like the Liberal Democrats, they have also pledged to scrap the Marriage Tax Allowance, saving the taxpayer billions of pounds. 

Their manifesto also promises that Making Tax Digital (MTD) will not become mandatory for any business operating below the VAT threshold. This is not great news for reducing the tax gap but may have the support of some small business groups. For those small businesses who are keen to take advantage of the many technological and tax advantages of MTD, they can voluntarily participate as already happens today.

Finally, the Labour Party manifesto also contains a specific reference to review all corporate tax reliefs within the first six months of a Labour Government, with the help of AAT, the National Audit Office, Office of Tax Simplification and others. This is also estimated to save several billion in taxpayers money.

Other parties

  • Notable contributions on tax from the other parties include both the Brexit Party and UKIP pledging to abolish Inheritance Tax – AAT would like to see the various exemptions and reliefs removed in tandem with a halving of the headline rate from 40% to 20%.
  • The SNP have again demanded the devolution of tax powers to the Scottish Government. Like the Conservatives, they have also promised a reduction in NICs contributions and promised no increase in VAT. Like the Liberal Democrats, the SNP also want a review of both IR35 and the Loan Charge. They have also demanded a comprehensive inquiry into Making Tax Digital.
  • The Green Party have a raft of tax promises in their manifesto. These include “green” taxes you might expect, like a Carbon Tax and supporting the transition to plant-based diets by phasing in a tax on meat and dairy products. However, they have also focussed on a range of more traditional taxes as needing bold reform.

Further reading on Tax:

Business ethics: Why it makes a difference

Posted by & filed under Ethics.

It’s a rare business that can get away without having some sort of environmental or ethical policy in place these days. That includes accountants. 

Jonathan Orchard, partner at Sayer Vincent, says he’s noticed a definite trend for accountancy firms to move into ethical territories. Yet unlike the new adopters,  Sayer Vincent’s ethical philosophy has been there right from the beginning.

Turning away unethical business

“In some ways, we were ahead of our time – environment awareness and ethics weren’t really in public consciousness then. Now though, we’re much more aware as a society.”

Sayer Vincent’s remit is around using professional skills and experience for wider social benefit. Orchard says the firm actively turns down work from big corporations or high net worth individuals if they feel they act unethically. Excessive tax planning is also a hard “no”.

“We believe everyone should pay their share of the tax burden, so we wouldn’t encourage tax avoidance,” he says. “That kind of work is ethically questionable, and we’d worry what it might do for the standard of the profession.”

Donating to the charity sector

Alison Godfrey, director at Godfrey Wilson, agrees. “Where tax is due, it should be paid,” she insists. “We wouldn’t ever get involved in clever tax schemes.”  

Like Sayer Vincent, Godfrey Wilson has an active ethical approach to business. Sayer Vincent donates at least 5% of its annual turnover back into the charity sector through direct donations, toolkits and additional guidance to encourage a sustainable approach to accountancy.

Godfrey Wilson ensures that every single product or service they use or recommend as a company is ethical. Tea, coffee and sugar are all fair trade. Company stationery is purchased through a local eco-specialist company. Even their electricity provider is a renewable energy supplier. Staff are also encouraged to walk, cycle or take public transport where possible – many volunteer “at the frontline” for organisations like the Samaritans.

Unified on ethical practice

“If you’re a profit-making company and you can afford to do your bit, you should,” says Godfrey. “We stand by that. Our energy supplier may not be the cheapest on the market, and there are other ways we could do things cheaper, but that’s not the point. As a firm, we’re unified on ethical principles. It genuinely runs through everybody’s values.” 

According to Diane Metcalfe, MD at Vegan Accountants, this approach – working with ethical and sustainable providers – is essential if businesses want to become more ethical. “You can’t claim to be ethical but not work with ethical people,” she points out. “We also have a responsibility as professionals not just to be ethical ourselves but to ask clients to be, too.”  

It’s why Metcalfe decided to set up her specialist business – she’d become disillusioned with the accountancy sector. Many of her clients in previous roles weren’t paying much tax and spent the money they saved on themselves. One client even admitted he didn’t want to pay tax at all because he wanted to buy a Ferrari. 

Recruiting people with the right attitude

“It’s about finding the right people,” says Orchard. “We are very particular about who we take on. We try to take on ten audit trainees a year, but if we don’t feel they share our values – even if they do have the experience and qualifications – we would accept less. Ultimately, you can teach technical skills, but you can’t teach values.”  

By hiring well, Sayer Vincent has maintained its ethical values throughout its 25-year history. Orchard returned to the firm after working elsewhere for several years – even though the staff had changed, the values hadn’t. They were hiring people with the same motivations and principles. “It’s the people who make it,” he adds.  

As Godfrey explains, it’s not just about looking for anyone who can do the job – they have to share the firm’s values. “We recruit directly rather than using agencies so we can be more selective. We also include personal statements as part of our hiring process so we can assess attitude and motivation,” she says.  

Finding your business niche

Metcalfe, though, believes that for businesses to become ethical, they need to find their niche. It’s why she decided to have “vegan” in her business name: not just to stand out, but to attract the “right” clients. Friends and professionals advised against her choice of business name – they felt it would alienate her – but she went ahead anyway.  

“The opposite happened,” she recalls. “Veganism has exploded over the past few years, and it’s the fastest growing industry there is. So it’s important to be niche. It’s about being honest with your values and not being scared to be different. But many practices don’t care who they work with.”  

Metcalfe’s approach may seem extreme to some, but it’s successful because it’s niche. As Orchard points out, more businesses realise they should operate ethically – appealing to environmentally-friendly companies, promoting fair tax schemes or donating to charity.  

3 tips for taking the ethical approach 

1. Find your niche 

“People warned me I wouldn’t get enough clients calling myself a ‘vegan accountant’ but because it’s niche, it’s attracted all sorts of like-minded people.” Diane Metcalfe, managing director at Vegan Accountants. 

2. Use a benchmark 

“There are lots of online tools that enable you to carry out ethical environmental audits on your own business. Rate yourself on how you perform in key environmental, ethical areas then use that as an action plan.” Alison Godfrey, partner at Godfrey Wilson. 

3. Find the right people 

“You’ve got to get the right people in. Yes, they need to have the right skills and qualifications, but they also need to fit your values. You can always teach technical skills, but you can’t teach values.” Jonathan Orchard, partner at Sayer Vincent. 

Further reading:

How to develop your staff with AAT

Posted by & filed under Employers.

As an employer, naturally you want the best for your staff and your business. So how do you demonstrate the benefits of being an AAT member to your employees?

If you have employees who are studying the AAT Foundation Certificate in Accounting (Level 2); the AAT Advanced Diploma in Accounting (Level 3) or the AAT Professional Diploma in Accounting (Level 4) then they are Student Members of AAT.

Once they’ve achieved the MAAT designation, your employee can progress to Professional Membership. Having employees who are full AAT members will not only help your employees’ marketability, but it will also help your business. AAT designations are the recognised mark of qualified financial professionals who have the skills and work experience your clients will appreciate.

Retention

What’s more, if you help your employees gain their AAT qualifications you stand a good chance of holding on to them. A recent survey* found that nearly a third of staff feel disenchanted by their lack of opportunity to develop their careers.

Another# found that the cost to your business of replacing an employee paid £25,000 is more than £5,000. Encouraging employees to gain AAT qualifications will help keep control of your bottom line too.

Key takeaway: As an employer, point out to your employees the demonstrable benefits of studying for AAT qualifications and student membership. Your business will gain too.

Leading by example

Victoria Cooper FMAAT runs her own accountancy practice, Red Shoes Accounting. She says: “I do encourage my team to study for the AAT qualifications as it gives them good foundations and really useful skills for a solid career in the accountancy profession as well as benefitting my firm”.

Cooper adds: “My first employer was keen for me to complete AAT qualifications and I was able to learn via one day a week at college for three years. It did give me huge amounts of confidence as well as fundamental skills and knowledge to take my career forward. I always recommend AAT to aspiring, ambitious accountants”.

Encouraging study

As an employer, you could help your employees to get their qualifications by offering paid study leave to attend classes or revise. You could also suggest that they find a mentor at work to help them study.

They can also access e-learning and study aids through their MyAAT account. Online resources include sample assessments and tests. Employers can also encourage staff (including non-AAT members) to attend AAT courses and events at regional branches. Students also get AAT magazines and an emailed newsletter – there are also AAT discussion forums offering support and help.

Key takeaway: Employers can offer practical help to those studying for AAT – and there is also invaluable assistance from the AAT online and through regional branches

How my employer helped me with AAT

Richard Matthews MAAT was encouraged to study for his AAT qualifications by his employer, HMRC. Matthews says: “My employer gave me time off to attend college for tuition and revision sessions as well as my exams.

They also made sure that my progress was reviewed regularly both in terms of actual exam passes but also to make sure I was coping. They also let me know about other AAT students within the organisation so that we could support one another”.

Why you should encourage Professional Membership

Once an employee has MAAT (and after four years, FMAAT) they are professional members of the AAT. Such designations are proof that the holders are qualified accounting professionals. Clients will know they are dealing with professionals who are covered by the AAT’s Code of Conduct and are subject to the AAT’s disciplinary process.

Key takeaway: Support your staff to Professional Membership and your business will benefit. Your clients will appreciate the professionalism that comes hand in hand with AAT membership

Carry on learning

Continuous Professional Development (CPD) is a prerequisite to maintain AAT professional designation. As an employer, if you support and encourage your employees’ CPD your business will benefit from staff who aren’t just treading water but are improving their skills all the time.

Key takeaway: CPD is the responsibility of the employee rather than the employer – but employers who support and encourage their staff with their CPD will see demonstrable benefits

Progression to Chartered status

Once your employees have attained Level 4 AAT Diploma in Accounting (Professional) they can progress their careers by studying for chartered status. About a third of all AAT students follow this route. There are more details on how AAT members can become chartered accountants without having to go to university via the links below.

From the point of your business, having chartered accountants on your payroll will enhance your attractions to clients. Importantly as an employer, you will have a role in encouraging staff members who take the route towards chartered accountant status as it’s a serious commitment and will take at least three years’ study.

Key takeaway: Encouraging staff to go for chartered status is beneficial for your company – and you will need to be committed to supporting employees’ studies.

Summary

Your business will benefit from having staff with internationally-recognised AAT qualifications. And your clients will enjoy the services of professional staff covered by a rigorous code of conduct who continually keep their skills up to date.

Further reading:

Are you really as ethical as you think you are?

Posted by & filed under AATPowerUp, Ethics.

Ethics are at the heart of professionalism and are particularly important in financial services – where transparency and trust are crucial.

As part of a new #AATPowerUp on Ethics, we’ll be providing a range of ethical scenarios to help you navigate tricky situations in your day to day work life. As well as providing the resources you need to enable you to deal with unethical behaviour correctly.

Understanding ethics

Research indicates that almost two-thirds of employees have been asked to do something that made them feel uncomfortable at work.

There are lots of different types of unethical conduct. Some are easy to define. For most people, for example, actions such as lying and stealing are unethical wherever they take place. Others depend on the context.

Here, we kick off with some guidelines to help you recognise what unethical conduct looks like.

What does AAT say about unethical conduct?

Whether you are managing the financial affairs of a company or providing services to an individual, accounting professionals should act ethically at all times.

Under the AAT Code of Professional Ethics, every member must, therefore, follow five fundamental principles.

The 5 fundamental principles

  • Integrity – be straightforward and honest in all professional and business relationships.
  • Objectivity – do not compromise professional or business judgment because of bias, conflict of interest or the undue influence of others.
  • Professional competence and due care – maintain professional knowledge and skill (in practice, legislation and techniques) to ensure that a client or employer receives competent professional service.
  • Confidentiality – do not disclose confidential professional or business information or use it to your personal advantage, unless you have explicit permission to disclose it, or a legal or professional right or duty to disclose it.
  • Professional behaviour – comply with relevant laws and regulations, and avoid any action that may bring disrepute to the profession.

By following these principles, AAT members should be able to ensure:

  • the client’s needs are met
  • the public interest is not compromised
  • risk is properly managed
  • all parties are treated fairly

Over the next month, we’ll be looking at the worst ethical accountants in history, how to spot the signs of corporate crime as well as providing resources and flashcards to help test your ethical knowledge!

First up we look at a selection of ethical accounting dilemmas: