Change is afoot for the way micro-businesses report their finances. Guiding us through the regulatory minefield is Clive Lewis, head of enterprise at ICAEW
Government is currently consulting on plans to change reporting regulations for the UK’s smallest businesses. There is, though, a lack of evidence at the moment that the benefits will outweigh the costs and some reporting rules actually help businesses clarify their financial position.
Removing certain accounting requirements from the Companies House returns of micro-businesses sounds like a good idea until you consider the needs of other users – banks, other financiers, customers and suppliers. Banks lend out people’s savings amongst other things and therefore need to know a lot more about a business, including its trading record which can only be gleaned from the full accounts. So as always with proposed changes there may be unintended consequences.
Creating a simpler reporting system is actually just creating another lot of paperwork because the business community wants detail even if Companies House doesn’t. These proposals point at another tier of accounting requirements other than the existing ones called FRSSE. The Micro Entities proposals give less information than financiers need and means that a new business will need to change its entire financial reporting method as it grows to be a strong, successful organisation.
The exemptions offered would allow micro-businesses to prepare simpler balance sheets and profit and loss accounts, and also reduce the amount of disclosures required. There would also be no requirement for these businesses to file their accounts with Companies House.
For many of the smallest businesses the proposed changes would be limited, but some will be impacted by it and we are also concerned that the mix of accruals and cash accounting proposed may cause confusion. There are several areas still being considered and the implications of the proposals are not clear, for example in relation to tax.
ICAEW is a supporter of cutting unnecessary red tape to help small businesses but it is important that this does not have a negative impact on the usefulness of the financial statements produced by this group of very important businesses to the UK economy.
The proposals may suit very small businesses with no ambitions to grow or any need to raise finance. However, given the extensive use of accounting software the savings even for these businesses are likely be very limited. ICAEW will be consulting some of its 140,000 members and formally responding to the minister’s proposals.
Micro-businesses are defined by EU law as those meeting two of the following three requirements: net turnover of maximum €700,000, cross assets not exceeding €350,000 and no more than ten employees.
Further details on the proposed changes, can be found on the Department for Business, Innovation and Skills’ website: www.bis.gov.uk