Limited company contractors are unlikely to see much benefit from the new micro-entity accounting exemptions arising from the UK’s adoption of the European Union 4th and 7th Directives into UK company law.
“When the changes take effect, which is likely to be in 2015, there will be exemptions of what micro-businesses have to report to Companies House and shareholders,” explains James Abbott.
The owner and head of tax at contractor accountant Abbott Moore continues: “At the moment, contractor limited companies must submit an abbreviated balance sheet to Companies House and a fuller set of accounts to HMRC. My understanding is that the proposed changes will see the disclosures cut down and adjustments, such as certain accruals and prepayments, may disappear.”
According to Abbott, this is the latest of a series of government moves to reduce the administration and financial reporting burden of the UK’s small businesses. “It seems like a good idea, but there are a few question marks about the detail. And some contractors may be worse off as a result,” he adds.
Abbott notes that to qualify for the exemptions, a small business must tick two of the following three boxes:
- It must have sales turnover of less than €700,000 per year
- Gross assets, which is fixed assets plus current assets, must be below €300,000
- There must no more than ten employees.
“Are the changes likely to save tax? No, and they may prevent contractors from obtaining early tax relief on some expenses,” highlights Abbott. “Will they result in accountancy fee savings? Also unlikely, because the final accounts are a small part of an accountant’s overall costs.”
Contractors still have to prepare a full set of accounts for HMRC, as there is no gurantee that the HMRC will relax its requirements in any way, so there will be administration and time savings, but they will be minimal.
If HMRC does align with the proposed changes, so it is not possible to enter accruals to the accounts prepared for the taxman, Abbott believes that contractors may be unable to claim tax relief on costs as they relate to the current accounting period.
He explains: “Contractors who, for example, pay their accountant annually in arrears normally have an accrual added to the accounts by the accountant allowing for the accountant’s fees before they are invoiced, in the year when the services were actually delivered.
“That enables contractors to benefit from tax relief on the fees in the financial year to which the fees related. Without the ability to enter accruals into the accounts, contractors will only be able to benefit from tax relief in the accounting period in which the fees are actually billed.”
Abbott concludes: “Measures to reduce the burden of red tape on the UK’s smallest companies are to be applauded. However, it looks like the government may rush through new micro-entity reporting legislation that does not actually benefit those it is supposed to help.”