We set out some thoughts on simpler reporting for the smallest companies last week, responding to BIS and the FRC’s consultation on how to reduce the burden on them.
One of the key suggestions in the consultation is to move to cash-based accounting.
We welcome measures to cut red tape for micro-companies, those with fewer than 10 employees – which comprise 95% of UK enterprises and are crucial to much of our innovation and entrepreneurial start-up activity.
However, we don’t think the cash-based accounting proposals in the BIS/FRC consultation paper will work.
Our Financial Reporting Faculty conducted a wide consultation with ICAEW members and the message was loud and clear: reliable accruals-based information about performance, assets and liabilities is both the foundation of effective management information and is essential for providing useful financial information to third-party stakeholders, including trade creditors, other lenders and investors.
Were the UK to move to a cash-based accounting regime for micro-companies, this information could well be lost.
And given that it will be necessary for most companies to still maintain accruals-based records and reporting, the potential savings from removing the requirement to file ‘true and fair’ accounts would not be significant.
We’re also unhappy about the proposal to standardise filing dates: micro-companies can currently set their own dates for their accounting year, which is of particular benefit to seasonal businesses. We suspect that standardised filing dates might also prove problematic for HMRC.
We think the Government might be better off looking at employment regulation, health and safety, planning regulations and Office for National Statistics reporting. We think these areas could yield significantly greater savings than any to be achieved in the accounting arena.
Nevertheless, there are reporting efficiencies to be had that would be warmly welcomed by business. Much demand for company financial information comes from HMRC. Tax information requirements are not limited to the annual accrual accounts; a range of records, calculations and supplementary schedules are also necessary for tax purposes. Some of these, such as certain requirements around allowable and disallowable expenses, are onerous to administer. Such requirements could be simplified and the benefits from doing so are likely to significantly exceed any realised by providing new accounting exemptions.
This consultation paper comes at a time when Brussels too has been actively working on proposals to cut red tape for micro-companies, and BIS needs to consider the impact the expected legislative changes will have on their own proposals.