Co- Accounting

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The End of Year End?

There was little of great immediate significance in this year's budget for small business.

However in years to come we may look back at it as the beginning of the end of year end accounts.

George Osbourne announced that by early 2016 - in other words, in less than a year, all small businesses and 10 million individuals will have access to their own digital tax account.

The present system requires tax payers to keep documentation of all their forms of income (P60s from PAYE, Accounts for trading income, Interest Statements for savings) and then transfer all the data onto the Self Assessment form which then gets submitted to HMRC.

As the Government's document 'Making Tax Easier' sets out, the new system will be integrated so that instead of having to hold onto your P60 and put it on your tax return at the end of the year, you will log on and find that the information has been sucked into your centralized records the moment your employer submitted your wages report to HMRC. Presumably at that point you will simply need to check that it tallies with your records.

In this way the process of calculating tax due will become automatic. And instead of finding out the tax you owe once a year, the expectation is that you will pay tax month by month.

Most people agree the present system is a headache. Accountants experience a nightmarish crush of information being dumped on them in January. Individuals scrabble about collecting documents and finding the tax due. Everyone suffers.

Perhaps we like the pain because the announcement has been met with as much criticism as applause, but we suspect that once we have experienced the ease of a joined up system, the idea of returning to the current one will seem ridiculous.

The bit of this that has caused most confusion in the accounting profession is how the information for trading income will be fed into the system if there is no 'year end' process. To understand the problem, one first needs to demystify what accountants do to get to year end figures.

The process starts with what are known as primary records - the building blocks of financial reporting. By these we mean bank statements, purchase receipts, sales records. These records are then categorised into lists in a process we call bookkeeping. At the end of the year these lists get given to the accountant to create a set of accounts.  The accounts are nothing more than an accepted, formalised way to present the numbers. Accountants check that the bookkeeper has categorised the transactions correctly than makes various adjustments - for example pushing income into the next year if there is money received in advance for work. Depreciation is added and so on.

The trouble is that these adjustments affect the amount of tax you pay.  So the question becomes how to reconcile the desire for a joined up rolling calculation of tax with this 'year end' process. The alternatives are:

  • leave trading income out of this automated rolling tax calculation (but tax works on thresholds of income so without trading income the whole calculation is wrong)

  • do the process more often (but this will increase work and cost which automation is supposed to reduce)

  • let go of the year end process

One of the issues is that whilst year end process affects the timing of tax getting paid, over the life of a small business it probably affects the amount of tax actually paid very little.

For us, the direction of travel is unmistakable. Two years ago the Government gave dispensation to sole traders below the VAT threshold to dispense with the year end process, other countries are already bringing this in for small businesses across the board. We predict that by 2020 year end accounts will be a thing of the past for small business.

If we are right, there will be various consequences for small business and, of course, accountants. One thing implicit is the use of cloud computing. Increasingly small businesses are going to have to move their systems into the cloud. We can see a time when this could become a requirement.

And what will accountants do if they are no longer collecting Self Assessment information and doing Year End Accounts? It looks to us like accountants will be redundant for some small businesses. But where they continue the role must surely change. The roles we foresee are

  • experts in setting up and maintaining these cloud systems,

  • overseeing the bookkeeping (which becomes more important since it is the final process before tax is calculated)

  • business adviser

  • interface between HMRC and business owner

We welcome the change. The less time spent dealing with admin the more time we can all spend creating something of value.