Nichola Ross-Martin, editor of AccountingWEB has written a tetchy response to an observation I made on that web site in which I criticised her call for cash accounting for micro-enterprises in the UK. She had in turn criticised Professor Judith Freedman of Oxford University for being on my side in this debate and had been somewhat disparaging of Judith's right to comment on this issue as an academic in her review of Judith's recent lecture on small business taxation for the English Institute of Chartered Accountants.
Nichola says (and I quote only in part even though I know some people will not be able to read the linked article as AccountingWEB make access difficult):
Richard, the idea we suggested was that micro (tiny) businesses cash account. No accounting standards and no performance indicators are needed (or wanted). As these are very small businesses all they need to know is cash in, cash out.
She added:
Protecting the revenue? Well the great thing about these types of micro business is that they generally spend all they earn, and so it is highly unlikely that they would suppress their receipts in a material way to pay less tax.
What will these accounts look like? No reason why you should not analyse payments into normal expense headings to get to net trading income. In most cases the accounts will look pretty similar, just no debtors, creditors or depreciation. Really not that tricky, but then again, that is the whole idea!
There's almost no logic to Nichola's argument, starting from the fact that everyone knows that large numbers (but I accept not all) of these businesses do suppress receipts to pay less tax. as evidence I offer the fact that the tax refund after an investigation is almost unknown in this sector. I wonder why if Nichola is right?
The simple fact is that Nichola is wrong about this, and about cash accounting. It's almost as if she's living in a fantasy, regulation free world. But if she is, I think she should get over it and live with reality. In that case she needs to answer how in her world of unregulated accounting for taxation you:
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Tackle the obvious issues of tax avoidance, such as banking cash the day after the year end?
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Tackle up front loading of payments?
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Account for the transition from one system of accounting to another (and back again) without some rules being required?
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Account for VAT for the micro enterprise that is VAT registered? I understand that about 40% of all VAT registrations are voluntary and in this category therefore.
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Account for drawings?
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Regulate how this information is presented?
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Provide for the carry forward of losses from a cash accounting system to an accruals basis, or vice versa?
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Stop the profession preparing two sets of accounts as a matter of course and submitting the one that suits the client, who has in the meantime paid two lots of fees?
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Deal with partnership admissions and departures when cash accounting does not accord with profit earned (to which partners will consider they have equitable claim?)
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Deal with the transition to incorporation? Transferring the whole trade requires the debts and creditors to be transferred, but what if they have been untaxed? Who will be liable for them?
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Manage the PII nightmare of making the wrong election for the client at the wrong time, and reviewing this every year?
I could go on. But you get my point, I hope. This is not simple. You're asking for a whole new area of complexity applicable solely to micro-businesses and their accountants. In whose interest is that?
Let's get real. Cash accounting can only make our lives worse. More than that though, it is not needed. If you really only want cash accounting for the domestic plumber/handy-man/gardener/cleaner/cabbie/driving instructor/dog walker/childminder...etc who has (she says) no debts, stock or liabilities then accruals accounting will do the job very nicely for them. The result using that system and her assumptions will, by definition, be the same as cash accounting (given that Nichola is not suggesting that capital allowances for fixed assets be abolished). In which case I have to assume that these are not the interest group Nichola really has in mind and that she actually wants to have cash accounts because she thinks someone will benefit from them, presumably by paying less tax. Well, they might pay less tax, but if so it will be at the price of enormous complexity, matched by additional profit, risk and hassle for accountants.
Is that what she really wants? Is that what AccountingWEB members want? I doubt it. In that case please drop this request Nichola. It makes no sense at all and will bring no credit to AccountingWEB.
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One of the comments you have picked up that Nicola made Richard was ‘Well the great thing about these types of micro business is that they generally spend all they earn’; if they spend all they earn how will they pay their tax bill?
More importantly, like you say Richard Taxi drivers etc already use ‘cash accounting’, okay, I know their accounts are prepared under the accruals concept (i.e. accrue for accountancy fees etc) but otherwise its income and expenses.
I think Nicola has jumped on something and now won’t let go. It is not needed, like the taxi driver example these small business are already effective under a ‘cash accounting’ type arrangement, therefore, there is no change needed.
However, let’s assume we did have cash accounting, and these small businesses one day grow, what a nightmare that will be moving from one set of rules to another.
I agree this needs dropping, those who Nicola is saying will benefit effectively work under this type of arrangement anyway in so far the have no debtors, creditors etc so why push for yet more rules for the poor accountant to handle and explain to the already confused and bewildered client, or are we looking at a case of jumping on the band wagon of an idea someone raised to gain notoriety?
[…] There’s a rare old ding dong going on between Nichola Ross Martin and Richard Murphy about whether cash accounting is a good or bad thing. I agree with Richard that Nichola’s argument is based on fuzzy logic and poorly articulated assumptions. But Richard’s riposte also falls short. He says: There’s almost no logic to Nichola’s argument, starting from the fact that everyone knows that large numbers (but I accept not all) of these businesses do suppress receipts to pay less tax. As evidence I offer the fact that the tax refund after an investigation is almost unknown in this sector. […]
My goodness – I’ve been working away from the office and have missed this.
Richard, what is your view on the simplifications to the tax system for micro businesses as suggested by Mike Truman, please? I’d be interested to hear.
M
Simon Sweetman sent me a mail which I think was meant to go on here, so I’ll add it:
Whoa !!
The median yield from a small business enquiry is much closer to £500 than £5000 – that was based on a large sample of enquiries handled by Abbeytax for FSB members. In my local area HMRC reckoned £850 was their figure.
No, there are not often refunds after an enquiry because most small business enquiries are handled by small accountants and HMRC officers are not these days likely to offer changes which favour the taxpayer.
I am horrified to see Richard Murphy subscribing to the “all small businesses fiddle their tax” notion. HMRC don’t even believe that any more.
Simon Sweetman