Will the Non-Domestic Rating bill actually help business rates? Posted 05/12/2023 by Annie Makoff & filed under Climate change, Members, Sustainable Business. New legislation expected to be introduced in 2024 aims to create a fairer system that will be ‘more responsive’ to market changes. Currently going through Parliament, the Non-Domestic Rating Bill, which follows the 2020 business rates review consultation, aims to incentivise greener property improvements and encourage regular property evaluations to ensure rates are more in line with the current market. Stand for AAT Council We are searching for a diverse range of people from AAT’s membership to help us shape the future. Could that be you? Read more In essence, the measures set out in the Non-Domestic Rating Bill involve: Increased revaluations from every five years to every three. Administration reforms to encourage shorter revaluation cycles, creating more accurate rating lists and disclosure of information to ratepayers. Digitalising Business Rates project which will generate better data for central and local Government to help improve business rates compliance. Measures to help support decarbonisation and greener property investments, including a 12-month exemption of higher rates bill for qualifying improvements. Three-year Government-funded ‘Transitional Relief’ scheme to help businesses transition to changes to rate bills. So what sort of impact is this bill likely to have on UK businesses? Measures outlined in the Bill are positive and a step in the right direction Bev Flanagan MAAT, Director, Bev Flanagan Financial The Non-Domestic Ratings Bill will introduce more frequent valuations. This means that, with falling valuations, bills will be lowered sooner. It will also provide new business rates improvement relief, meaning that businesses that make qualifying building improvements will not pay higher business rates for 12 months. This will create a positive cash flow impact on businesses taking advantage of this tax break that wish to extend or upgrade their property. I believe this will be an effective measure for many businesses that have struggled post-pandemic, and owners who want to build their businesses back up. For the valuations to be looked at in a quicker timescale than it currently is and to adapt the rates bills according to underlying market conditions would be a big benefit. The more frequent valuations and the extension of tax reliefs are steps in the right direction for all. Businesses, livelihoods and jobs need to be protected after the recent period of sustained crisis. Verdict: Exempting qualifying businesses from higher rates for 12 months will create a positive cash flow for businesses. The Bill incentivises businesses to invest in eco-friendly property improvements Francis Fabrizi AATQB, Keirstone Limited The Non-Domestic Rating Bill aims to modernise the business rates system by improving the sustainability and environmental impact of commercial properties. It seeks to incentivise businesses to invest in eco-friendly improvements by linking business rates to the property’s energy efficiency rating. This means that businesses with more sustainable properties will pay lower business rates, while those with less energy-efficient properties will pay higher rates. Accountants should be aware of the new business rate system and the impact it will have on their clients’ commercial property’s energy efficiency as well as business financials. They will also need to work with clients to ensure they’re meeting the new energy efficiency standards, analyse clients’ property’s energy performance and recommend eco-friendly improvements that can increase their energy efficiency rating (eg energy-efficient lighting, insulation, renewable energy and other sustainable property upgrades). Accountants should also advise their clients on the potential financial benefits of improving the energy efficiency of their commercial properties. By investing in energy-efficient improvements, businesses can: Lower their business rates. Reduce their energy bills. Potentially attract more customers who are environmentally conscious. The bill’s effectiveness will depend on how successful it is in incentivising business owners to invest in sustainable and environmental property improvements. Primary beneficiaries of the Non-Domestic Rating Bill will be businesses that invest in sustainable and eco-friendly property improvements. However, businesses with less sustainable properties may face higher rates, which could impact profitability. There may also be a potential disadvantage for businesses operating in areas with low environmental standards or limited access to sustainable resources. Verdict: The bill incentivises businesses to invest in eco-friendly property improvements. Accountants have a key role to play in helping clients understand the Bill’s implications and benefits. Stand for AAT Council We are searching for a diverse range of people from AAT’s membership to help us shape the future. Could that be you? Read more
New off-payroll IR35 proposals are welcome, and not before time Posted 05/12/2023 by AAT Comment & filed under IR35, Pensions and payroll, Tax. Susan Ball, Employment Tax Partner, RSM UK and President of CIOT discusses proposed options to offset tax. The Government recently announced a consultation to address the double tax issue arising as a result of the off-payroll IR35 rules. The consultation runs until 22 June 2023. The announcement was part of several other potential measures looking to simplify the tax system and tackle the tax gap. The IR35 announcement is welcome news, and long overdue, as the off-payroll IR35 rules have been causing headaches for workers and hiring organisations for years, and this will at least see a change to one of the most significant issues. Stand for AAT Council We are searching for a diverse range of people from AAT’s membership to help us shape the future. Could that be you? Read more The off-payroll IR35 reforms were introduced for clients in the public sector in 2017 and were extended to include medium and large clients in the private and voluntary sectors in 2021. The reforms shifted responsibility for determining employment status to such a client, and for ensuring the right tax and National Insurance is paid, to the same client, or the fee payer if this is different. The proposed additional reform covers situations where HMRC considers a client or fee payer to be non-compliant, meaning they become liable for Income Tax and National Insurance contributions (NICs) that should have been deducted from the off-payroll worker’s fees. Currently there is no legislative mechanism under which the relevant amounts due to HMRC by the client or feepayer, such as an agency further down the labour supply chain, can be offset by amounts already paid by the intermediary, or an individual, for the same work. This can result in tax and NIC being paid twice on the same income. This issue had been raised by the professional bodies and other stakeholders, and was also highlighted more recently by the National Audit Office and Public Accounts Committee. Under the proposed new rules, the ability to offset depends on whether HMRC can trace the relevant records on its systems, therefore it’s essential for clients and feepayers to ensure they retain sufficient information. The worker and intermediary would be notified via a direction notice. The worker and their intermediary would not be required to pay any additional tax or NICs as part of this set-off. The different taxes and classes of NICs that would be included as part of a set-off are: Corporation Tax paid by a worker’s Personal Service Company (PSC) on the income from the off-payroll working engagement Income Tax and employee NICs paid on a salary to the worker from the worker’s intermediary, where the salary is paid out of income from the off-payroll working engagement class 2 and 4 NICs paid by the worker with respect to income from the off-payroll working engagement, where the worker’s intermediary is a partnership or another individual tax paid on dividends received by a worker from their own PSC, where the dividends are paid out of income from the off-payroll working engagement. These proposals would replace the current process whereby HMRC seeks to notify workers and their intermediaries regarding a potential entitlement to claim a repayment of taxes overpaid. Any set-off that reduces the deemed employer’s Income Tax and NICs liability will not affect the application of the penalty’s regime for inaccuracies. Where there has been an incorrect status determination, HMRC will consider whether to charge a penalty in line with its existing guidance. Assuming the proposals are implemented, they will come into force in April 2024 working in a similar manner to existing provisions in the PAYE Regulations 2003 (SI 2003/2682) that can allow “off-setting” of taxes already paid in certain circumstances where HMRC discovers that a directly engaged worker has been incorrectly classed as a self-employed sole trader, instead of employed, for tax purposes. Organisations currently subject to a compliance check by HMRC, or receiving one over the coming months, should note that where checks conclude before 6 April 2024, this new policy will not be applied, however if they are concluded afterwards, it will apply retrospectively. This means that in the meantime hiring organisations may be tempted to drag their heels with any HMRC compliance checks. Stand for AAT Council We are searching for a diverse range of people from AAT’s membership to help us shape the future. Could that be you? Read more
Help us take Council to the next level Posted 05/12/2023 by Sarah Beale & filed under AAT news, Members. CEO Sarah Beale MAAT reflects on the huge contribution of trustees to AAT – and the well-being of the nation as a whole. It’s that time of year when AAT invites volunteers to stand for election to our Council. I don’t think people realise what an amazing and special role is played by the trustees of charitable bodies. They bear a legal responsibility as the guardians and last line of defence in organisations in which a multitude of people have placed their trust. As such, they play a critical part in the charitable sector, which in turn makes a huge contribution to social well-being that our whole nation relies on. We are looking once again to broaden our skills and achieve an even better representation of our membership. Being responsible for a £33 million organisation is no small task. It’s a very different experience to operational management. In fact, aside from the role of the CEO, I can’t think of another job that involves such a range of responsibilities. Stand for AAT Council We are searching for a diverse range of people from AAT’s membership to help us shape the future. Could that be you? Read more Council’s role A good example of that is the guidance Council provided in putting together our 2030 Vision. As a result of that, we’ve been able to go back to Council with our suggested corporate plan, which it scrutinised. As it did, trustees reviewed each initiative and considered whether they align with our planning themes, our culture and values, and whether they provide value for money for our community. This is why AAT needs the broadest range of skills it can get. Understandably, very few people are going to come into this role with all the boxes ticked. And they don’t have to. I found that out for myself when I became a trustee. I assumed the role of trustee in a business about which I had no technical knowledge. The organisation researched, tested and certificated products for buildings. I was chosen for my financial skills, as they had operated a skills-based board and had a gap in that area. The organisation had some interesting business decisions to make, and the construction industry was dealing with some high-profile challenges. More varied than ever Last year we made another step forward. Thanks to the enthusiasm of our members, we had a record level of nominees and the intake further strengthened AAT Council in several ways. We have a better balance of age and gender. The new appointees have brought a wider range of skills, perspectives, and knowledge, including in useful areas such as social media. We now have a great mix of people at different stages of their careers, including people with great corporate experience and those who know what it’s like to run a fledgling business right now, as well as those more seasoned in the role of a trustee. That said, there is still more to do. I would really like to see better representation with regard to ethnicity and those who are neurodiverse putting their names forward for election. This could really help AAT be more representative of our membership and to give us a greater range of thought. We also have some independent seats on our Council, and that’s very healthy. It provides an opportunity to bring in people from outside our sector, with completely different experiences and knowledge. As our membership is made up of accountants, the skillset will coalesce to some degree, and having outside voices is important. Ultimately, AAT Council is driven largely by its membership. We talk a lot about being inclusive, and need your help to achieve it. Being a trustee is a significant commitment, and I know we are asking a lot. However, one of my biggest lessons in my time so far as CEO of AAT has been the willingness of members to give back. I hope you will prove this again by standing for election this year. Stand for AAT Council We are searching for a diverse range of people from AAT’s membership to help us shape the future. Could that be you? Read more
There’s a job you can do that’s as broad as CEO Posted 05/11/2023 by Calum Fuller & filed under AAT news, Members. Trustees in Council are responsible for overseeing AAT’s operations. Are you up to the challenge? You may not think the role of CEO is something you are qualified or equipped to carry out at this point in your career. But you may be surprised to learn there’s an exciting role you could fulfil in a matter of months that has a similar breadth of oversight and responsibility. We’re referring to standing for election to AAT Council to act as a trustee. Stand for AAT Council We are searching for a diverse range of people from AAT’s membership to help us shape the future. Could that be you? Read more “Aside from the role of the CEO, I can’t think of another job that involves such a range of responsibilities”, says Sarah Beale MAAT, AAT’s own CEO. “Trustees look at every single initiative, and make sure they align to our priorities, our values and ask, ultimately, are they good value for money?” she explains. Joining Council is a challenge because you’re forced to make yourself think in a “much bigger way”, confirms Lucy Cohen FMAAT, who joined Council in 2022. “You’re not just thinking about your own business, your own goals, you’re thinking about the greater goals of an organisation and how that’s going to affect learners and fellow AAT members. As a business owner myself, it’s been fascinating for me to learn how other organisations handle their corporate governance, their budgets, their reporting.” Council’s responsibility “Council is ultimately responsible for the strategic direction of AAT”, explains Andy Murray FMAAT, who in 2020 became the youngest Council member at the age of 27. He notes Council has responsibility for governance, meeting charitable objectives and working in the public interest. “I served on the management board and we were very involved in setting that vision in collaboration with the executive team. That became Securing Future Relevance, and it was really rewarding to be part of that.” Could it be you? AAT is keen to invite as diverse a range of people as possible to help guide it into this new era by putting themselves forward for election, bringing with them their skills, insights and experiences, as well as contributing and challenging ideas. “We would like people of all ages and all backgrounds,” says Murray. “That only adds to the diversity of Council, which is absolutely what we need.” Not only that, but 2022 saw the highest number of applications made by members to join Council, and AAT is keen to see a repeat this year. What does it do for candidates? While trustees are volunteers, for members joining Council there are significant professional benefits, especially in setting them up for future roles, including at board level. “Council deals with such a variety of different things, and it really equips you to do that. It could be you’re talking about the pension scheme, and shortly after, your focus turns to the provision of CPD”, explains Becky Glover FMAAT, who is finance director at VNC Automotive and joined Council in 2022. It’s that broad view over the entirety of AAT’s operations that members are unlikely to find elsewhere, Glover says. Not only that, she emphasises, but Council is drawn from a wide range of members, which means the body, covers a wide range of expertise, such as business owners from a variety of sectors. What do candidates need? Members considering putting themselves forward for election should, naturally, bring something to the group. The role of a trustee is a serious one with significant responsibility. “Treat it like a job interview”, Murray advises. “You need an inquisitive nature. It’s not our job to give the executive a hard time for doing something. We need to understand the thought process.” “You’ve got to be yourself”, says Francesca Tricario FMAAT, co-founder of Future Cloud Accounting, who also joined Council in 2022. “It’s important to be a good communicator and collaborate with others.” Council: the Presidents’ pathway Current AAT President Christina Earls FMAAT has served on Council for a number of years. “A lot is asked of volunteers in Council, and that can be daunting”, says Earls. “There are reports to read, digest and understand, and some decision-making. I think the first time you’re given those reports, it can hit home for some. “It’s great to play a part in forging the strategy of AAT, and you’re a director of an organisation. That brings with it some obligations. “It’s about making your voice heard, and representation. We need diversity in the sectors that Council members are drawn from, such as the public sector, for example. That’s in addition to other forms of diversity, such as ethnic and neuro diversities, which we would like more of on Council.” Stand for AAT Council We are searching for a diverse range of people from AAT’s membership to help us shape the future. Could that be you? Read more
Should you trust ChatGPT at your firm? Posted 05/10/2023 by Annie Makoff & filed under Artificial intelligence, Members, Technology. Generative AI can be a useful tool for finance professionals, but any output must be analysed carefully. Barely six months since its launch, ChatGPT (Generative Pre-trained Transformer), the latest artificial intelligence chatbot platform, has caused both excitement and controversy across the consumer and business world. Its functionality, which allows users to ask questions and input data through a simulated chat, can perform a multitude of complex tasks such as creating articles or essays, summarising text, writing or debugging code, analysing data and even composing music. If you’re going to use ChatGPT, get it right Learn how to write specific prompts for ChatGPT to get the best results. Find out more In theory, ChatGPT can help accountants and finance professionals to: write business pitches process invoices automate tasks interpret data and/or summarise complex information give tax advice create financial reports identify market trends. Inevitably, the platform has serious pitfalls and there are many ethical issues as well as accuracy concerns. Students have already submitted essays ‘written’ by the chatbot, while the platform often provides inaccurate information due to obsolete or outdated data, or because it has misinterpreted the context or points of law. In some cases, it simply makes things up. Since ChatGPT is already disrupting the business world, utilisation of this platform will only become more widespread, so it’s vital accountants and their clients are aware of its limitations if they are to effectively benefit from ChatGPT’s powerful technology. We asked accountants for their views. Stand for AAT Council We are searching for a diverse range of people from AAT’s membership to help us shape the future. Could that be you? Read more Trust it like an intern James Poyser, CEO, inniAccounts and Provestor We’ve always used machine learning at inniAccounts and we’re currently piloting ChatGPT. It’s clear it has excellent potential for productivity improvements. We’ve used it for first drafts of emails, summarising phone calls, divergent thinking (brainstorming) and helping with writing performance objectives. It’s a very versatile tool and we’re confident, even at this stage, that tools like this will soon become embedded in our everyday activities. We’re positioning it internally as great for first drafts – we see it like an intern with endless energy, but occasionally overconfident and with the potential to make errors. As such, we expect our team members who use it to be accountable for its output. If you’re going to be accountable, you need to know if it’s right or wrong. For students specifically, I think it’s a technology that cannot be ignored. Use it. Understand it. But understand its limitations. So remember, if you’re using it to take a shortcut (ie letting it write assignments) then you will become unstuck in the future if you cannot confidently take responsibility for your AI assistant’s output. If I were studying today, I’d think of ChatGPT as an infinitely patient personal tutor, with exceptional recall. Use it to help you learn – ask it questions, explore topics together, ask it to test you, if you don’t understand, tell it what you don’t understand and it will help you. Ask it to explain exam questions to you, get it to teach you exam technique, get some tips on overcoming procrastination. Verdict: ChatGPT should be viewed like an intern – a source of help with boundless energy that’s occasionally overconfident and with the potential for making errors. Trust it for accountancy support Martin Horton, Director, Rivington Accounts ChatGPT can be used to gain better insights into clients and their businesses. If you’re due to have a meeting with a new client and you’re not too familiar with who they are or what they do, ChatGPT can summarise the business and prompt some interesting questions. ChatGPT can also help with business plans and budgets as well as creating content. There does need to be some degree of common sense, caution and due diligence applied here, however; accountants need to use their own judgement and not take ChatGPT at face value. ChatGPT also cannot provide a nuanced opinion. There are lots of grey areas in accounting and some situations where context is everything. One particular transaction may need to be treated in one particular way, but a similar transaction may require different treatment. For these situations you need the benefit of experience and human cognition. I’d also caution anyone using ChatGPT for tax advice or changes – legislation changes so quickly, ChatGPT can’t and shouldn’t be relied on to interpret it. Ultimately, you cannot know if what ChatGPT tells you is correct – you always need a second opinion and to have some working knowledge of the issue you’re using ChatGPT for. As accountants, we have a responsibility to get information right. Verdict: ChatGPT can provide accountancy support but due diligence and common sense are still needed. Accountants are responsible for ensuring they are correct. Not for subjectivity or interpretation Radeep Mathew, Partner, Innovation and R&D Tax, BDO Recent Generative AI models (like ChatGPT) have created an explosion in innovation and investment. There are numerous applications for generative AI frameworks in the accounting industry including: handling of repetitive accounting tasks such as inputting data into excel generation of tax due diligence and advisory reports preparation of financial statements and reports lead generation and enhanced customer centricity. However, it’s important to be aware that the underlying source data is not verifiable and complete. Many ChatGPT statements are not factually correct or have inherent bias, and reference links are often not relevant or don’t work. Lack of transparency, accountability and data privacy are all concerns. Current models and applications don’t have the appropriate controls and protections for compliance. Caution is advised, particularly around subjectivity or interpretation, where human validation or intervention is needed. Regulated accountancy firms require sign-off by approved license holders – not robots. Verdict: ChatGPT has huge potential but it should never be used in tasks where subjectivity or interpretation is needed, and its output should be fact-checked. If you’re going to use ChatGPT, get it right Learn how to write specific prompts for ChatGPT to get the best results. Find out more
How has joining the council challenged you? Posted 05/09/2023 by AAT Comment & filed under AAT Governance, Members. We spoke to current Trustees about their time on AAT’s council. AAT is looking for record nominations to follow up on our success last year. Find out more
Government scraps the cap on small business apprenticeships Posted 05/08/2023 by Gareth John & filed under Apprenticeships. Accountancy firms to benefit as the Government ends ‘the cap of 10’ for apprenticeships. As of last month, the cap that limited many SME employers to no more than ten apprentices at any time has been lifted, writes Gareth John, Director of First Intuition. This is excellent news for employers, apprentices and the economy. For several years, employers who don’t pay contributions to the Apprenticeship Levy (those with annual payroll bills below £3 million) have suffered a limit on the number of apprentices they could reserve levy funding for through the Apprenticeship Service. At first, such companies were permitted just three learners at any time. Thankfully, this was later increased to a ‘cap of 10’ – but there it has remained since 2020. Accentuating the skills gap This artificial limit has created significant issues for SMEs. We’re already in a time of growing skills shortages, where commercial demand is gradually recovering from the difficult period under COVID. A lot of accountancy firms are also what I term ‘large non-levy’ employers. They are big enough to have substantial recruitment needs but are below the £3 million payroll threshold for the levy. Penalising progression A specific problem many of these firms suffered was that the accountancy sector enjoys strong levels of student progression, particularly those studying for the AAT. A school leaver might typically start at level 2 and then progress onto levels 3 and 4 to complete their AAT qualification, and even progress further onto level 7 to study for the ICAEW, ACCA or CIMA qualifications and become a fully qualified chartered accountant. Whilst this is fantastic for the career prospects and social mobility of those young adults, it means that a single learner can ‘use up’ one of those precious 10 available places for up to six years. You can imagine it doesn’t take a large annual intake of new trainees to quickly fill the ‘cap of 10’. This was compounded by the glitch in the system where, if an apprentice started and then dropped off their programme, they were often still counted towards the ‘cap of ten’ and so didn’t even free up a place for funding their replacement. Government reset In response to significant pressure from the skills sector, the Department for Education (DfE) reset the numbers on the Apprenticeship Service to nil in the first half of both 2021 and 2022. This allowed SMEs to continue recruiting and starting apprentices, but was only a short-term fix implemented one year at a time. There was a lack of long-term planning by the DfE around the position of non-levy employers. By early 2023, much like a dreaded anniversary of an unpleasant event, the annual worries about the ‘cap of 10’ resurfaced yet again. Will the numbers be reset as in past years? Will it be an annual reset or is it a one-off? Will the limit be increased above ten? This was causing a number of problems: Employers were forced to reduce recruitment expectations at a time when they needed more and more talent Young adults were being denied career opportunities SMEs – which tend to be significant employers in small towns and rural areas, and of young adults from disadvantaged backgrounds – were being limited Employers had to make tough and unfair choices about which of their trainees they start as apprentices, and which they don’t There was a lack of consistency in how a trainee is supported when they move from one level with an apprenticeship, to another level without There was a lack of consistency between the treatment of one cohort and the treatment of the next The perverse situation where learners for whom the pandemic apprenticeship incentives had been claimed were now unable to progress to their next level Businesses plans hampered In some respects, the biggest issue was the lack of clarity about what would or wouldn’t happen with the reservations cap. Even by March 2023, there had been no announcement on the matter by the DfE which left SMEs unable to effectively plan their recruitment and support plans for apprentices through the rest of this year and into 2024. I was fortunate to meet the Skills Minister Rob Halfon in February which gave me the opportunity to lay out these issues, and the impact they were having on a growing number of employers. He took what I said seriously and said it was something he would look into. I was therefore extremely pleased when he announced in late March that the ‘cap of 10’ would not just be reset again, but was to be scrapped entirely as of 3 April 2023. There would be no more artificial limit on the ability of non-levy employers to plan and implement their recruitment and training plans. Benefits from removing the cap Removing the ‘cap of 10’ has given non-levy SMEs the clarity they need to plan recruitment, and the flexibility to start as many apprentices as they need. This is fantastic not just for them and for the wider economy, but also for the young adults and other individuals who will be able to benefit from such a great start to their careers. AAT shared my relief as this will affect many of the firms who train students for their qualifications! Anthony Clarke, Business Development Manager at AAT, said, “This is welcome news for SMEs as we know that some have previously had to put Apprenticeship recruitment plans on hold due to the cap. Removing the cap will allow SMEs to recruit and train more apprentices across all levels of the Accounting Apprenticeships and help develop the future workforce.” I would like to thank all of those voices across the skills sector who joined mine in tirelessly raising this issue with the DfE over the last three years, and to the DfE themselves for listening and acting in the sensible way that they have.
HMRC is consulting on extending the cash basis system Posted 05/04/2023 by Annie Makoff & filed under Making Tax Digital, Members, Tax reform. How sensible would this be? The cash basis accounting system, which was first introduced in 2013/14, allows businesses to declare money at the point it either comes in or goes out of the business rather than by the date displayed on invoices or bills. It’s an alternative to traditional, accrual accounting and is much simpler to use, yet many accountants are concerned about the method becoming more widespread. That’s because it relies on bank statements rather than strategic, forward-thinking accounting methods which brings deeper understanding and insight into a business. Stand for AAT Council We are searching for a diverse range of people from AAT’s membership to help us shape the future. Could that be you? Read more There are strict limits around the types of businesses that can and cannot make use of the cash basis system. At the moment, limited companies, limited liability partnerships and companies with annual sales or turnover of over £150,000 can’t use this system. Nor can specific businesses including waste disposal companies, those who have claimed R&D allowance and farming businesses with a current herd basis election. HMRC wants to encourage more businesses to use cash basis accounting and believes there are three million businesses that are already eligible but do not use it as a method. The proposals set out in the HMRC consultation include: Making cash basis accounting a default option for trading income. Increasing the turnover thresholds to allow more businesses to use cash basis accounting. Relaxing current restrictions on using relief for losses made in the cash basis, which would particularly help start-up businesses. Increasing the £500 limit on interest deductions to either £625, £750 or £1,000, reflecting higher borrowing costs since 2013. HMRC are keen for accountants to share their views and give suggestions on how else the cash basis accounting method can be made more attractive for larger numbers of businesses. The consultation closes on 7 June 2023. So what do accountants think of these proposals? Why do some businesses use cash basis while others don’t? And what’s behind HMRC’s push to encourage more businesses to use it? We spoke to accountants for their thoughts. Relaxing cash basis restrictions will make accounts and tax returns easier for small clients Tom Fisher MAAT, Client Manager, Abbeygate Accountancy Accountants and clients need to be aware of the potential benefits and limitations of using cash basis. HMRC proposals are around simplifying accounting for small businesses and reducing the burden of record-keeping, which can be particularly helpful for those with limited resources or accounting expertise. The current cash entry threshold is up to £150,000. HMRC is looking to extend this to match the £1.35 million threshold that the VAT cashing accounting has. Relaxing these restrictions will make it easier to prepare accounts and tax returns for smaller clients, while providing an overview of how the business is running to date based on its ins and outs. It also allows HMRC to gain more accurate returns submitted to them, resulting in lower costs for the Government and, likely, more accurate accounts sent to HMRC due to simplification. Some businesses use cash basis accounting because it can be eaier, less time-consuming and require less expertise than accrual basis accounting. It can also be beneficial for businesses with irregular income and expenses. Other businesses may prefer the accrual basis of accounting because it provides a more accurate picture of financial performance over time. Businesses considering adopting cash basis accounting methods should first determine if they are eligible. They should also ensure they are keeping accurate records of cash transactions, separating business and personal finances, and keeping track of outstanding invoices and bills. Verdict: Relaxing cash basis restrictions will make it easier for small businesses to prepare accounts and tax returns. Extending cash basis may help streamline taxable profit calculations Neil Parsons, Managing Director, Wolters Kluwer Tax & Accounting UK Extending the cash basis is another simplification-focused suggestion and may prove a helpful way of streamlining the calculation of taxable profits for a larger number of businesses, moving the upper limit from £150,000 to £1.35 million. It’s important to note that both the consultations for modernising income tax and expanding the cash basis are open to responses and queries until 7 June 2023. This is a chance for taxpayers and advisors alike to influence the tax framework. Verdict: Extending the cash basis may be a helpful way of streamlining calculation of taxable profits for more businesses. Cash basis accounting can help reduce tax liability for businesses Tom Walker, Partner, Wellers Extending the cash basis is a really interesting area, with the consultation looking at several options. The first is aligning the threshold with what is currently used for the VAT cash accounting scheme. This means that businesses with a turnover of less than £1.35 million can benefit. Another suggested avenue is to remove the turnover threshold entirely, which would allow any-sized business to use the cash basis – so long as they are not prevented from doing so for another reason. Additional options include setting the cash basis as the ‘default’ method of calculating trading income for eligible businesses, increasing the £500 limit on interest deductions under a cash basis, and relaxing restrictions on using relief for losses made under the cash basis. Fundamentally, the cash basis is a simpler and easier method to calculate tax than traditional accounting methods as it only requires recording money when it comes in and out of a business. It helps reduce the tax liability of businesses that have long payment terms or slow-paying customers, as they will only pay tax on money received during the accounting period. This further helps businesses manage their cash flow, as they do not have to pay tax on income that they haven’t received yet; of particular interest to industries such as manufacturing where there is often a delay between supplying the products and receiving payment. Verdict: The cash basis is a simpler and easier method to calculate tax and can help reduce tax liability of businesses with long payment terms or slow-paying customers. Making cash basis the default approach for trading businesses won’t sit well with some accountants Andrew Constable, Tax Partner, Moore Kingston Smith The cash basis is a significant simplification for trading businesses that choose to make use of it. The potential benefits will increase with the introduction of Making Tax Digital (MTD), as under the cash basis the quarterly update figures will tie more closely with those used in the final tax calculations, meaning quarterly updates could generate a more meaningful understanding of tax liabilities. The cash basis was introduced with restrictions relating to the deductibility of interest and loss relief, which have never seemed entirely logical. Their removal would be sensible, eliminating a disincentive to join the regime for those who would otherwise benefit. However, the cash basis won’t be appropriate for all businesses. Some will always prepare their accounts on an accruals basis (such as those with significant stock, WIP, debtors or creditors who need to understand their results in light of these) or because stakeholders require them to. Larger businesses are likely in this position, so increasing the turnover threshold (or removing it) may not make much difference to take-up of the cash basis. HMRC has suggested making the cash basis the default approach (as has been the case for unincorporated property businesses since 2017). While this could increase take-up, the idea that trading businesses would be nudged into an approach not in accordance with accounting practice won’t sit well with some accountants. Verdict: Making cash basis the default approach for trading businesses won’t sit well with some accountants. Encouraging businesses to adopt DIY cash basis methods in lieu of finance professionals is a huge risk Claire Bartlett, Director, Arden Bookkeeping HMRC needs to make the benefits of cash basis accounting clearer. My understanding is HMRC is telling business owners ‘you don’t need accountants or bookkeepers, you can do it yourself with cash basis accounting.’ In my view, cash basis accounting doesn’t provide any sort of forecasting – it’s about historical records and bank statements. Cash flow and forecasting are critical to business success – bank statements don’t tell you anything. It also creates a culture where business owners don’t fully understand their business, because they’re only focused on bank statements. It doesn’t help create the right business mindset and it completely eliminates the forward-thinking, advisory, strategic side of things. For some very small start-ups, there are some benefits of using cash basis accounting, but this should only be a short-term solution. The accounting function can be daunting, so it can take the pressure off new business owners initially. But from my perspective, accrual accounting is much more strategic, beneficial and effective for business growth. Ultimately, extending cash basis accounting is part of HMRC’s MTD strategy – they’re doing everything they can to minimise pressure on the department. They’re currently on a path to eliminate as much human interaction as possible in the accounting space. But I think leaving sole traders to do their own accounts opens up the potential for errors, so HMRC will still need to find resources to sort the errors out and send out related communications. I’ve seen the mess that happens when people try to do accounting themselves and come to us to try and resolve things – so HMRC telling people they can do it themselves will cause more issues later on. It’s a huge risk. Verdict: Encouraging more businesses to adopt DIY cash basis accounting in lieu of accountants and bookkeepers is a huge risk and will cause more problems later on. Stand for AAT Council We are searching for a diverse range of people from AAT’s membership to help us shape the future. Could that be you? Read more
Scenario-planning could have saved Silicon Valley Bank Posted 05/04/2023 by AAT Comment & filed under Members. Silicon Valley Bank collapsed within 36 hours and US federal regulators seized control. In that time, the bank’s stock fell over 60% and a $42bn bank run was sparked. Silicon Valley Bank’s (SVB) journey from its founding in 1983 to its collapse in March 2023 mirrors Icarus. At the time of its collapse, it was the 16th-largest bank in the US, and its failure is eclipsed only by that of Lehman Brothers in 2008. It took just a day and a half to fall apart. SVB’s abrupt collapse spurred other banking closures, spooked global markets and threatened thousands of tech and life sciences start-ups. Take your leadership to a new level This interactive, 90-minute webinar uses neuroscience to develop your leadership skills, helping you support your business. Find out more The bank was originally founded to serve fledgling tech companies. Eventually, nearly half of US venture capital-backed tech and life sciences companies would be banking with SVB. Companies such as Roblox, Roku and Rocket Lab put millions of dollars into SVB, helping it become one of the largest in the US. Some of these clients would be considered risky and fast-moving, however, and when things started to go wrong, they were quick to withdraw their funds. After the banking crisis of 2008, then-president Barack Obama introduced the Dodd-Frank Act, placing tighter regulations on banks. However, some of those restrictions on smaller banks (those with under $250 billion (£201 billion) in assets) were rolled back during the Trump administration. It took just a day and a half to fall apart. SVB fell into that ‘smaller bank’ category, and as such was operating under looser rules. Flooded with cash ($189 billion by 2022) as businesses deposited more during the pandemic, 2021 was SVB’s most profitable year ever. The bank then took that cash and purchased tens of billions of dollars of longer-term US bonds and mortgage-backed securities. While these products are usually safe, this is where its problems began. SVB’s securities portfolio rose by $100 billion in under a year, but all of a sudden, interest rates rose. When interest rates rise, bond prices tend to fall, and that’s what happened in this case. Very quickly, banks that held a lot of bonds were sitting on some hefty losses. Soon, SVB’s investments were worth $17 billion less than their initial purchase price. Having not been required to stress-test under the looser regulations, this was SVB’s undoing. Making matters worse, as interest rates rose, new deposits shrank, falling nearly $30 billion between March and December 2022. The vast majority of the bank’s deposits were held in just 37,000 accounts. Those accounts all had more than $250,000 – the amount insured by the US’s Federal Deposit Insurance Corporation. In a filing on 8 March, SVB announced it had sold a large number of its securities at a loss of $1.8 billion to help it cover the fall in deposits. That announcement rattled the markets, and the bank’s stock fell. Start-up executives began receiving urgent calls from concerned investors and the run on the bank began. In just 36 hours, $42 billion had been withdrawn by customers. SVB ran out of cash. The key lesson in all this is to challenge assumptions as much as possible, and regularly engage in scenario planning. SVB’s fatal mistake was assuming that bonds and securities are always safe and would not fall in price, thus over-committing to them and sealing its fate. Take your leadership to a new level This interactive, 90-minute webinar uses neuroscience to develop your leadership skills, helping you support your business. Find out more
The clock is ticking on the 10-year plan Posted 05/03/2023 by Adam Harper & filed under Members, Policy. The Government is undermining its own efforts in ‘Building a Trusted Modern Tax Administration System’. 27 April marked Tax Administration & Maintenance day. It’s a date in the calendar that tends to only draw the attention of those interested in future tax policy, though it has ramifications for the whole economy. This year, the annual announcement had three main planks: simplification and modernisation, tackling the tax gap and a set of further policy and administration announcements that feed into the Government’s 10-year vision of Building a Trusted Modern Tax Administration System. When the Government published its initial vision document in 2020, there was a sense of urgency around the desire to overhaul and update the UK’s sometimes archaic tax system, setting out a clear vision for the future of tax administration in the UK. The ambition was to improve resilience, effectiveness and support for taxpayers, bringing the UK’s tax administration in line with more forward-thinking countries such as Denmark and New Zealand and reflecting the growing impact of technology. The vision therefore centred on the role of a progressive extension to the Making Tax Digital (MTD) programme of work, harnessing systems and technological infrastructure to support taxpayers, and conducting a review of the overarching tax administrative framework. There is little to dislike about a desire to improve the experience for taxpayers and businesses, supporting the scope for easier navigation of the tax system and the resolution of issues at first contact. If you also throw in the intent to eliminate paper-based communication and improve the tax gap, the vision’s appeal is further enhanced. A little less consultation, a little more action This Tax Administration day, the Government announced new consultations in a number of areas, including potential new options when considering how to pilot and test legislative changes as well as simplifying and modernising HMRC’s Income Tax services. That means that, nearly three years on from the publication of the vision document, we’re still in the consultation phase. As a core stakeholder in the process, it seems fair to ask how much progress has been made. The short answer, regrettably, is not much. The decision to postpone MTD for ITSA just before Christmas was the latest indication that this plan is falling behind. Even without further delays, the 2026 deadline allows little time to really deliver tangible improvement by 2030. Equally, it’s difficult to discern much progress in the move away from paper-based interaction, despite many in the profession being keen to see that gather pace. Losing confidence We support the Government’s vision but it needs to be deliverable, and to achieve that it will rely heavily on the accounting profession, software providers and others to buy into a realistic strategy that they are confident will come to fruition. Take MTD for instance – we have been staunch in our support for the transition right from the point at which it became clear that the Government was set on that as its course of action, but having made that commitment, the Government now needs to deliver. Many stakeholders are affected. Unless software providers have confidence in timelines and plans, HRMC cannot expect them to invest the necessary resources in updating and adapting their products and services to help accountants and taxpayers reach compliance. Are they really going to buy into and push through solutions, having already been burnt by the delay to MTD implementation? Providing reassurance Given the slow progress to date, how can the accounting and tax community buy into the ambitious vision that’s been laid out but not backed up so far? First, there needs to be recognition that little progress will be made without the necessary investment in HMRC. The Revenue’s current performance levels are well below what most of us would view as ‘modern, effective and efficient’, and any discussions about future developments will be moot for as long as existing systems and services fall short of reasonable expectation; the resourcing problem is nothing new, and remains a real issue. We raised this directly with the Chancellor ahead of the Spring Budget and it was disappointing to see no commitment to address the resource shortages at HMRC. It’s likely that confidence will rise if HMRC delivers some quick wins. Stakeholders need to see real progress for reassurance that there’s a commitment to address and respond to customer challenges. This isn’t a call for a symbolic gesture, but some clear and discernible improvements in the short term. Vital national interest Because make no mistake – this is critically important to the UK’s economic future, and the risks of it failing are significant. If we don’t modernise our tax system, the tax gap will inevitably widen. The PAC report Managing tax compliance following the pandemic released today (3 May) shows just how vital this overhaul is. With levels of non-compliance rising, the highly critical report states that HMRC must ensure it is never easier to cheat the tax system than comply. The report finds that over 2021-22, tax revenue yield dropped £9 billion compared with pre-pandemic performance. There’s a risk that, since HMRC “cannot demonstrate a credible deterrent effect of its tax-compliance work,” non-compliant taxpayers will continue to escape paying their fair share – meaning the tax gap could continue to grow. No Government can hope to fund its programme without increasing the tax yield so modernising tax collection is imperative – especially in such a challenging economic environment. Similarly, failure to deliver will severely damage the trust between HMRC and its customers. Accountants in particular need to see, not just a commitment to change, but also a realistic ability to deliver on that change, along with tangible results in order to maintain their engagement with the process. Real and lasting change is never easy. Reforming a system as resistant to quick fixes as the tax system is a big task and requires patience, commitment and political skill. As a voice of the profession, we have backed the Government’s plan right from the off. But as a critical friend, it’s important we speak clearly: more needs to be done, and soon, to ensure this ambitious and vital process really delivers for everyone.