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Kestrian Small Practitioner 60 Second Round-Up

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Kestrian Small Practitioner 60 Second Round-Up Kestrian Small Practitioner 60 second round-up February 2017 Tax and new UK GAAP business taxpayers who pay their due taxes It seems obvious that a change in account- came into effect on 1 January 2017 – p 5. ing framework, such as a move to any of INSIDE the standards in new UK GAAP, might re- HMRC consult on draft regulations THIS ISSUE sult in a change in reported accounting for apprenticeship levy profits. But there are other possible ef- HMRC have opened a technical consulta- 60 second round-up 1 fects, too, and Helen Lloyd picks out some tion on draft regulations for the apprentice- Diary dates 1 interesting points about tax treatment of ship levy. The apprenticeship levy comes profits, in particular places where there is into effect in April 2017 and some employ- Accounting & Audit a difference between companies and oth- ers will be required to contribute – p 5. New developments 3 er businesses – p 2. Readers ask 4 Revised LLPs SORP issued Taxation The Consultative Committee of Accountancy Bodies (CCAB) has published Business tax 4 a new edition of the LLPs SORP – p 3. Income tax 4 Tax anti-avoidance 5 Impact of exempting small companies from statutory audit International tax 5 The Government has published a research Employment tax 5 report which assesses the scale of take- Stamp taxes 6 up of the small companies audit exemp- Value added taxation 6 tion – p 3. Excise & duties 6 New penalties for tax evasion Tax agents 7 enablers come into force Readers ask 7 A new raft of measures intended to cre- Useful figures 8 ate a level playing field for individuals and Diary dates 2 February 2017: 14 February 2017: Content feedback: l A penalty of £300 or 5% of the Employees with more than one employ- liability, whichever is the higher, ment who wish to make an application for [email protected] may be due if the 2014–15 income deferment of some of their Class 1 NIC General enquiries: tax self-assessment return is still where their combined earnings exceed outstanding. the upper [email protected] l Deadline for submitting earnings limit must make an application 0844 561 8166 P46(Car) for employees who have by today using form CA72A. www.wolterskluwer.co.uk received a new car or had one Filing date withdrawn during the quarter to 28 February 2017: 5 January 2017. Year ended 31 August 2016 pub- ‘The essential tax and lic companies, year ended 31 May 2016 accounting update for private companies and limited liability the smaller firm’ partnerships www.wolterskluwer.co.uk 1 Kestrian Small Practitioner – February 2017 Tax and new UK GAAP It seems obvious that a change in accounting framework, such as a move to any of the standards in new UK GAAP, might result in a change in reported accounting profits. But there are other possible effects, too, and this article picks out some interesting points about tax treatment of profits, in particular places where there is a difference between companies and other businesses. Helpfully, HMRC themselves have issued several documents For businesses (not companies), there is instead a key distinc- looking in detail at the tax effects of the new framework. The tion to be drawn between financial instrument items that are latest to be updated is on income tax implications of FRS 102, capital in nature, and those that are revenue. Once this has been meaning that it applies to individuals, partnerships and certain identified, it drives their treatment, and there is no need to go non-resident companies. on to the additional layers of legislation that apply to compa- nies. When a business determines that an instrument is capital, it is adjusted out in the tax computation and has no effect on General accounting issues profits – although interest is always a revenue item, even if the In general, the papers both for companies and non-company loan that it is payable on is capital. businesses make it clear that calculation of profits for tax pur- The idea of a capital/revenue distinction is not new to anyone poses usually follows accounting profits set out in GAAP. They who has wrestled with tax law before, but there is no exact defi- are helpful in drawing out the changes from old to new UK nition to apply. HMRC do give indicators that an item is capital, GAAP – for instance, the section on property, plant and equip- such as borrowings that are not temporary, fixed in amount, and ment reminds readers that renewals accounting, which was al- available for use in any of the trader’s activities and not merely lowed under FRS 15, is not permitted under FRS 102. For some the day-to-day trading operations. So we can see how a typical preparers, this will lead to accounting adjustments and they will bank loan would be treated as capital, but a bank overdraft as in turn have tax consequences. revenue. In general, the language used is informal and easily under- This distinction runs through all the guidance on financial stood, and preparers could do worse than using the document instruments, and affects issues such as hedge accounting and as a general primer on the application of the new standards, the treatment of changes in fair value (including derivative con- quite aside from the tax aspect. tracts which previously would not have made it on to the balance sheet, such as forward currency contracts). Hedge account- ing specifically is another area where the tax consequences for Financial instruments companies are more complex than for those in income tax – the Perhaps the most significant point of difference outlined in the Disregard Regulations are relevant to derivatives, and effectively paper on income taxes relates to financial instruments. All enti- require a company to make an election under the Regulations if ties reporting under FRS 102 need to recognise all financial in- they want the tax treatment of a derivative not to simply follow struments on their balance sheets. This in itself may give some the profit and loss account. changes, because items such as forward currency contracts, It is worth noting that the paper covering corporation tax, commonly used to reduce risks arising from overseas sales or which was also updated in December 2016, does not yet address purchases, are classified as derivative contracts and are not Finance Act 2016 changes in the loan relationship and derivative exempt from recognition. Many smaller entities may also find rules. that their external financing has some unusual terms in it (per- haps an interest rate cap, or conditions triggering early repay- ment) which need to be carefully understood. Instruments are Other specific considerations classified as being basic or not, and this determines whether In most cases, the tax consequences of financial reporting they will (broadly) be measured at amortised cost or fair value. changes are quite intuitive and a review of the papers will sim- For companies looking at the tax consequences of these ply confirm a reasonable understanding. Another area to be financial instruments, there are some complex pieces of legisla- careful on, though, is the treatment of transition to FRS 102. tion, including that on loan relationships, non-lending money For accounting purposes, in many ways this is straightforward: debts and derivative contracts. This means that even when the the first set of new UK GAAP accounts will show the current accounting is fully understood, there is a separate job to per- period and comparative period using FRS 102 recognition and form in understanding the tax treatment, and ideally a company measurement. They will also include a reconciliation showing would look at the full tax consequences before entering into any adjustments that were needed to opening equity (i.e. at complex financial instruments, since what seem like minor the start of the first comparative period), whether these were changes in terms and conditions might have a significant effect because a change was required by FRS 102, or because the pre- on tax. This is in addition to all the careful work needed in under- parer had taken a one-off option, such as using a valuation of standing the requirements of sections 11 and 12 of FRS 102, properties as their deemed cost without being committed to which are already much more nuanced than they were in old an ongoing policy of revaluation. But looking at it from a tax UK GAAP. perspective, both papers make it clear that a change from old 2 www.wolterskluwer.co.uk Kestrian Small Practitioner – February 2017 GAAP to new GAAP is treated as a change in accounting policy balances’!). This is a vital point to consider. More information on and the effects need to be included in a tax computation some- treatment of transitional adjustments is included in the papers. where (there is no tax equivalent of ‘adjusting it in the opening Helen Lloyd, Technical Consultant at SWAT UK. ACCOUNTING & AUDIT New developments offset potential negative consequences, such as the impacts on lenders. Revised LLPs SORP issued The research identified examples of audits being required as The Consultative Committee of Accountancy Bodies (CCAB) has preconditions for loans, which was always an area of concern for published a new edition of the LLPs SORP. The underlying pur- audit experts and the professional institutes when the original pose of the SORP is to deal with issues that are specific to LLPs decision was taken to slash the audit threshold. and ensure that, as far as possible, LLPs present financial state- There is also some reticence on the part of eligible compa- ments that are comparable with those of other entities.
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