Are accountants really so incapable?

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AccountingWEB's Business Zone has covered David Drew's EDM on income shifting. What's really interesting though is the reaction of Grant Thornton's George Bull, who has said:

At the heart of this EDM are the same problems for HMRC, [which is] how do you value the contribution of different people in a small business? You end up with the same problem of having to find a statutory method of measuring an individual contribution to a business.

Amazing isn't it? Accountants are meant to be able to measure value, but profess they can't when it suiots them. Accountants are meant to believe in the market, but suggest that there is no market indicator in this case. Do they really believe that, because if they do I have a simple answer. Statute should provide the basis of apportionment if the market does not work.

Perhaps they'd like to reassess their capabilities in that case and work just how the market should indicate value arises. Let's start with these key performance indicators, some or all of which could be used to indicate a basis for apportionment, and none of which need take long to assemble on an annual basis:

1) What does the business do. Who of those sharing its rewards has the training or qualifications to provide that service?

2) How many hours does each participant in reward work for the enterprise each year, approximately?

3) Of the hours worked, what proportion were spent in dealing with customers?

4) Who runs the administration of the business? Administration includes (but not exclusively) billing, accounting, managing correspondence, liaising with suppliers, dealing with accountants, taxation and business regulatory issues. Separate estimates for each category of administration can be given if appropriate.

5) Does each participant in the rewards of the business have their own computer? If not, why not?

6) How many business emails were sent by each participant in the reward of the business each year? Can this be proven by the use of different email addresses?

7) Does each participant in reward have their own business mobile phone? From billing records can it be shown what proportion of business calls were made by each?

8) If the company has a vehicle who usually drives it?

9) Do any of the participants have other employment? If so, how many hours a week do they, on average, spend on that employment?

10) If neither has other employment do either have child care or other care obligations? Do these limit their capacity to work?

Answer these (and in the case of Tax Research LLP my guess is my wife and I could answer these questions, accurately, in less time than it took me to type them) and you'll have a very good overview of who is generating the profits in an enterprise.

That will be true for 97% of all businesses affected by income shifting, in my experience (and I've seen hundreds of this sort of entity in my time). The rest will have to create their own evidence. That's always true of all systems, so the exceptions are not a problem.

Having determined who is generating the profit it's then a matter of assessing the value of the supporting partner's services. I've suggested a de minimis be allowed, which I think is fair. Try to increase that and evidence must be given (and reasonable and supported answers to the above would be a good starting point in supplying relevant evidence). And if the rate to be attributed to support time is to be beyond market rates then again reason must be given for use of a non-standard, out of line with market figure.

Is this fair? Yes.

Is this what accountants do all the time? Yes.

Is it a burden? No.

Are those accountant who say it is not possible to do this simply hiding tax avoidance? You know the answer to that.


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