It is not a question many people will ask but changes to the accounting landscape have ramifications across the board. So although it is a little dry or complex for your tastes it is worth knowing what direction accountants will be moving in the year ahead. If you prefer to leave accounting to the accountants then this blog comes with a high level of technicality – you have been warned!
First, 2015 is an election year. There will be plenty of nice offerings made in the budget to secure your vote later in the year. Possibly, or maybe it will be a standard budget to remind us that nothing is free and that there are more cuts ahead to secure a stable economy. Whatever the political drama that is almost certain to unfold with an incredibly close election there will likely be change in its wake – how big that change will be will come down to the result and whether there are any big policy U-turns by those who come to power. Best not to make too many predictions at this stage!
The most significant change to UK GAAP in a generation will be brought about by the single standard, FRS 102, Financial Reporting Standard applicable in the UK & Ireland. It is based on the IFRS for SMEs and will replace all exant FRSa, SSAPs and UITF Abstracts.
One of the biggest challenges for many businesses will be understanding the treatment of financial instruments. This is particularly relevant for companies with derivatives, such as forward contracts or interest rate swaps – or hedging activities. There may also be significant challenges presented by accounting for business combinations, defined pension plans, deferred tax and investment properties.
James Roberts, senior audit partner, BDO gave this comment to Accountancy Live on the new UK GAAP – FRS 102:
‘This year will mark a pivotal year for accounting standards as, after 18 months of preparation, new UK GAAP – FRS 102 – becomes effective for accounting periods beginning on 1 January 2015. However, people are very late to look at it. For large groups with choices about FRS 101 or 102 there are quite a lot of complicated tax issues to consider, particularly around pensions accounting, foreign currency and distributable reserves, with the potential for organisations to come unstuck.’
On the back of these landmark changes there is also consideration to be given to Information systems. These may need upgrading or even replacing. The ramifications could involve redesigns, employee training, and investor education.
The long term prospects of this will be a more succinct, coherent and internationally unified regime that will cut down the complexity and tax avoidance vulnerabilities of the current scheme. But, there will be challenges along the way. There could be significant implications on bank covenants, tax payable, profit related pay schemes and dividend planning. In the short term, the change is likely to bring a few headaches with it.
Another issue on the horizon are the proposed changes to small business accounting and the limited time allocated for the necessary transition. Late in 2014 it was announced that small entities would be brought within the scope of FRS 102 (with fewer disclosures requirements) and the FRSSE (Financial Reporting Standard for Smaller Entities) would be withdrawn. A separate highly simplified accounting standard for micro-entities was also issued by the Financial Reporting Council (FRC). These changes will become effective on or after 1 January 2016. The final revised accounting standards will not be finalised until midway through 2015 which will leave small businesses a very short length of time to prepare – the right level of support will be paramount.
Charities – FRSSE SORP
A mention is required here on charities as there is concern that the withdrawal of the FRSSE SORP could catch some out. For smaller charities reporting information is not always a priority until audit time. The new charity SORPS will apply to all organisations with accounting periods starting on or after 1st January 2015. These changes will not affect charities with a March year-end until 2016.
There is uncertainty surrounding the future of the FRSSE SORP. Some organisations will need to consider adopting the full standard (FRS 102 SORP) now. Acting now, and avoiding complacency, could give charities an opportunity to account for some of their pension’s liability ahead of the SORP’s introduction. This could minimise the potentially massive impact on stakeholders when the full extent of their liability (which could also be back dated two years) is reported in the accounts.
How much tax should a multinational pay in any given country? The global tax rules again came under scrutiny towards the end of 2014 for inconsistency and giant holes as far as the digital economy and cross border work is concerned.
The Organisation for Economic and Co-operation and Development (OECD) will continue to push for international tax change in 2015. Worldwide jurisdictions are likely to clamp down quickly on perceived loopholes as the tax world is finding a unified approach. Admittedly there is a long way to go but small steps towards a harmonised system are being made.
The challenge lies in the complexity of The BEPS (Business Erosion Profit Shifting) project. There is global agreement that some of the old, formulaic, rules are not a realistic match to a communication driven, digitised world. Coming up with new agreements, legislating them and enforcing them on a global scale is no easy task!
Perhaps the most hotly debated proposal of 2014 was whether HMRC should be given the power to recover tax debts directly from bank accounts. On the 24 November those plans were watered down with greater safeguards amidst concerns that this power was a step too far. HMRC were targeting the bank accounts of individuals who owed more than £1,000 in tax and had at least £5,000 in their accounts.
There was just something instantly alarming about the fact that HMRC could be granted access to anyone’s bank account. Nobody condones those who have the funds and refuse to pay but concerns grew over HMRC’s track record where administrative errors were concerned. These powers could have left taxpayers vulnerable to mistakes.
The watered down proposals included the following safeguard:
- HMRC must have actually met the debtor to check the debts were theirs and explain the procedure and proposals for payments
- HMRC must offer a ‘time to pay’ arrangement
- There will be a right to appeal to the county court on specified grounds
The government appeased concerns and if we are honest these powers are unlikely to be used in most cases. They may come across as a deterrent but perhaps they will recoup HMRC even more wasted funds if they were in fact shelved altogether.
From 1 January, businesses selling digitised goods to EU consumers will have to collect VAT at the consumer’s country rate and account for it to the tax authorities. There are two ways to do this: the hard way and another way.
The hard way would be to register for VAT in each country where you have consumers, produce VAT returns for each and account for VAT collected in each. There is no VAT threshold for registration in other EU countries, so one sale in a country will result in registration, VAT returns and payment in that country.
The other way would be to register for the UK MOSS and produce one return (in addition to the normal VAT return, for calendar quarters even if your VAT return is on a different schedule) and send it to HMRC with payment of the total VAT collected. HMRC will deal with accounting to other tax authorities.
There is a snag – registering for the UK MOSS requires a UK VAT registration, which might not be entirely desirable for a small business below the VAT registration threshold with price pressures. The government has promised guidance for small businesses to try and make things easier.
There is also another snag – the MOSS return and payment is needed within 20 days of the end of the relevant quarter, not the usual 30 days plus seven days grace for filing online.