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Be careful what you wish for when it comes to help

06 October, 2011
It seems the Department for Business, Innovation and Skills' ideas to help small firms might make more work for them!
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Almost every economic analysis published during the past few months has warned that the UK, the Eurozone, and probably the rest of the Western world, are on the brink of financial meltdown. Small-to-medium UK businesses in particular are being hit from all sides including: problems obtaining bank funding; poor payment terms from much-larger corporate customers; very little sign of any real reductions in red tape; absence of demand for all but essential products and services from consumers... the list goes on.

Given this background, any sort of 'assistance' being offered to small businesses would no doubt be seized upon with relish although sometimes the 'promise' may not be quite what it seems.

Take the recent announcement about accounting requirements for small businesses.

Simplified accounts for small businesses?

The Department for Business, Innovation and Skills (DBIS) has recently floated an idea that small businesses those employing fewer than 10 staff, and with an annual turnover below £440,000 might soon be allowed to file much-reduced and simplified financial statements (in other words year-end accounts) at Companies House.

According to the Minister for Corporate Governance, Edward Davey: "Reducing unnecessary regulatory burdens on the smallest businesses can give them the freedom to innovate and grow which ultimately benefits the entire economy," and few people would disagree. So we looked a little closer to try and find just what this simplification involves, albeit that the DBIS announcement was a little short on detail.

As far as we can see at the moment, the profit and loss account which for most small businesses is already much reduced in comparison to that required by larger companies is to be replaced by a shorter trading statement.

The balance sheet gives way to some sort of 'statement of position', which is supposed to provide information about assets and liabilities. Now it may seem a bit like splitting hairs, but that's exactly what a balance sheet already does, so maybe the DBIS thinks that just by renaming something it can make it seem like a new, improved, helpful development.

But the really odd part of this proposal is that it could actually add to the accounting work that these businesses need to do at the year-end. You see, while these 'simplified' accounts could become the preferred format for Companies House, apparently HMRC will still require the 'traditional' version to support tax returns. Then there are the various credit-rating agencies, which may simply down-grade the credit worthiness of businesses for which only limited financial information is filed.

So the hard-pressed small business could end up having to prepare financial statements in several different formats, just to keep all of the users happy.

From an accountant's perspective, we'd be churlish to complain about this opportunity to charge for more work, but somehow that seems to be beside the point.

As for DBIS, staff there are busy explaining that the plans are currently under review, and not intended to come into force before 2013. Meanwhile, in another part of the same forest

HMRC extends targeting of poor record keepers

After an initial test in eight areas earlier this year, HMRC has announced plans to extend its crackdown on the financial record-keeping of small businesses.

The results from the test-run were apparently appalling. Some 44% of those examined had some 'problem' with their record keeping, while 12% of them had 'serious issues' on the same front.

These results would not surprise most accountants who deal with small-business clients. Despite a couple of decades of automation, the basic quality of record keeping has not improved much since the 1980s. Yes, PCs and assorted software mean that there are few addition or transposition errors in sets of figures these days. However there's been a trend, over the same period, for small businesses to think that they can avoid employing book-keepers who know what they're doing when recording transactions in prime records.

Consequently while things 'add up' a lot more often than they used to, the quality of descriptions and explanations of items going into the accounts is quite possibly a lot worse than it was 25 years ago.

So, HMRC will be taking a closer look at the records of an additional 12,000 small businesses in the final quarter of 2011, before rolling out the programme nationwide next year. The additional attention comes with the threat of financial penalties fines of up to £3,000 for out-of-date or inadequate tax records are being mentioned.

If that isn't enough, many accountants will probably also be having a quiet word in the ear of any clients in this position.

The rough gist would be to tell them that if HMRC has already got doubts about the quality of their bookkeeping, then the rest of the information in their accounts and tax returns will probably also be scrutinised with additional interest when those papers are filed.

Penalties for late business tax returns

And if the threat of having their books examined with more vigour wasn't enough to worry most small businesses, there's been another 'reminder' from HMRC. This time it's to businesses that have to file paper tax returns by October 31.

Even if no tax is actually due, any late filing will result in a fixed fine of £100. After three months this rises to £10 per day, with escalating penalties beyond there.

If there's tax outstanding as well, this will attract a separate penalty starting at 5% of the balance due after 30 days, plus interest, rising by an additional 5% after three months. The deadline for online returns remains January 31, as does the payment due date for any tax liability.