Contractors' Questions: Are contractors' accounts about to get simpler?
Contractor’s Question: I’ve read that the EU is supposedly simplifying the accounting requirements of small businesses. As a UK-based contractor, does ‘small business’ mean me? In other words, will the smallest, one-person businesses here in the UK benefit from these reforms from Brussels?
Expert’s Answer: The European Union’s financial and economic affairs council agreed a new directive on Tuesday February 21st 2012 that allows member states to exempt very small companies from mainstream accounting and financial reporting obligations.
A recent consultation document on company law reforms said the UK will look to implement the changes “as soon as possible.”
When the EU directive is enacted in the UK, companies will be allowed to apply the simplified reporting regime if they stay below two of the following thresholds:
- balance sheet total of €350 000 euro (£292,000)
- Net turnover of €700 000 euro; and
- average of 10 employees during the financial year.
Our research suggests that those companies remaining below two of the three thresholds look likely to be required to produce:
- A simplified, cash-based trading statement to replace the profit and loss account;
- A statement of position; and
- A simplified annual return.
It is estimated that around 1.5m micro-enterprises will be able to take advantage of the changes, many of whom will be contractors or freelancers.
Reducing the regulatory burden on micro businesses is something we strongly support, especially as we hope common sense will prevail and these statements will be aligned to the tax rules already in place.
However it is necessary to temper this optimism. While those contractors who are filing accounts on their own (without the assistance of an accountant) may find some benefit in the new process; such advantages are likely to be cancelled out by HMRC's requirement for iXBRL coding.
With this in mind, the benefit of the new 'simplified' process is at best neutralised by HMRC's increasing requirements and, many are saying, is almost irrelevant when considering the increased work iXBRL has generated. To a growing number of advisers, iXBRL is just another way of HMRC making freelance contractors use accountancy firms, as then tax inspectors will only receive 'easy to read accounts'. In a way it is making us do HMRC's job for them, while it is also taking the gloss off the promised simplification.
The expert was Martin McKechnie, a director at the Low Tax Group, a chartered business advisor specialising in contractors’ tax affairs.