Financial risk reporting strategy starts at the top
During the 1990s and 2000s, a series of financial reporting scandals catapulted the issue of ethics in accounting into every headline around the world.
Troubles at Enron and Tyco shook the confidence of investors everywhere when published annual reports and accounts, as well as other publicly available information, were found to contain misleading information about how affairs were being managed.
While it may be difficult to assign a ROI to reducing financial reporting risk, there can be little doubt that bad practice in the past has had a significant negative impact on shareholder value.
The above scandals can be considered proof of the failure of the corporate governance models and the risk of accounting standards not requiring relevant disclosure.
Many years later, regulations have tightened globally imposing new mechanisms of governance and increasing transparency through the issue of new and revised accounting standards that require more relevant disclosure.
Reduce financial reporting risk
To reduce financial reporting risk, organisations should start from the top, with the CFO taking ownership of the effort and assembling a cross-functional team of accounting, information technology, human resources, and operational resources to work together and understand where every department stands with respect to financial reporting risk.
These individuals should collaborate to design, plan, implement, execute and monitor risk managing activities and programs. Inherent and specific risk areas for their organisation should be assessed and identified with the goal of developing a future state based on the assessment. Like any other business process, it should be undertaken systematically with clear goals and objectives.
Ideagen has helped many companies worldwide over the past 25 years with their goals in reducing risk. With the group's automated financial disclosure tool, Pentana Disclose, companies such as PwC, EY and Grant Thornton have been able to safeguard their companies’ reputation, mitigate risk, increase efficiency and assure customers and regulatory bodies that they are up to date and compliant with relevant accounting standards.
Pentana Disclose provides accountancy firms, audit firms and finance professionals the confidence that they are working in line with up to date changes to companies legislation and UK accounting standards, including FRS 102 (or ‘new UK GAAP’) and relevant Statements of Recommended Practice (SORPS).
Ideagen will be at Accountex Summit North, Pod 21.
What tax reliefs remain for landlords?
Gradually reliefs and allowances relating to renting are being eroded away and with the Property Tax Campaign in its fifth year, it is obvious that HMRC believes that there is still more tax to be raised.
However, one relief that it would be difficult to withdraw entirely is the right to claim expenses incurred on the running of the property.
Renting is deemed to be a ‘business’ for income tax purposes and as such similar expenses incurred in the running of other businesses are allowable. Repairs, car running costs relating to the business use, council tax, management expenses, legal fees are all allowable.
The 'Replacement Furniture Relief' is a relief that had to be fought for by landlords and their representative associations as HMRC was intent on abolishing both the 'renewals allowance' as well as the 'wear and tear' allowance thatpermitted landlords of furnished residential properties to deduct 10 per cent of net rent from their profits to cover ‘wear and tear’ on their properties whether or not any furnishings, fixtures and fittings or repairs had taken place.
The 'Replacement' relief can be claimed by landlords of all residential lets (except furnished holiday lets) whether fully or partly furnished, as a deduction for the costs of replacing capital items such furniture, furnishings, appliances and kitchenware provided by the landlord for use by the tenant.
Note that this applies to replacement only, not the initial cost.
Another relief that is sure to remain, although restrictions have already been imposed, is the principal private residence relief (PPR). The PPR rules typically exempt the capital gain on the sale of a main residence.
The relief is clearly targeted at owner-occupiers, but landlords can take advantage (providing the property has been the individual’s only or main residence at some time) by claiming the last 18 months ownership (9 months following the autumn 2018 budget and 36 months for those moving into care homes) as occupation regardless of whether the landlord has been resident during those last months.
It is good tax planning for anyone purchasing a second property to elect for one of those properties to be the PPR and hence secure the 9 months tax relief. So long as the initial election is made, then it can then be varied (‘flipped’) as many times as desired by submitting a further election.
There is no prescribed form or wording for the election, but it must be made within two years of the change in ‘combination of residences’. Should the two-year time limit be missed, there needs to be a ‘trigger’ event in order to reset the election date.
The private rented sector has become a very different place over the past few years and although steps can be taken that may reduce the impact of the various restrictive changes that have taken place, research shows that the rules have affected the smaller landlords who have between three and five properties (89% of the sector) rather than the professional landlords who have emerged relatively unscathed.
Inside track on HMRC tax-gap strategy
Reducing the 'tax gap' is at the heart of HMRC's digital strategy . The "tax gap" is the difference between the amount of tax that should be paid and what is actually paid.
According to HMRC's Official Statistics Release of June 2018 the 'tax gap' is about £55bn, which is 5.7 per cent of the total tax take, equivalent to half of the annual defence budget. Approximately 10 per cent of this is lost as a result of tax evasion.
Although HMRC says that any taxpayer could be the subject of an inquiry, the reality is that they are either based on computer-generated risk-based selections or as a result of information received from sources.
Sophisticated computer systems
HMRC has one of the most sophisticated computer systems in the world, with its analytics team winning the award for the Best Big Data Project at the 2017 UK IT Industry Awards for its 'Connect' project.
Connect looks at data using a mathematical technique known as 'social network analysis', which ploughs through disparate, previously unrelated information to detect otherwise invisible networks of relationships.
Other digital technology used includes web-trawling software as well as social media search tools.
However, there is still a place in HMRC's investigation world for good, old-fashioned, investigatory skills – it is not unknown for undercover investigators to have lunch in a restaurant suspected of hiding small value cash transactions.
Rogue operators
Most holiday or short terms lets and parking spaces to rent are all invariably advertised on the internet.
Landlord licensing schemes are popping up all over the country as local authorities attempt to crack down on rogue operators.
HMRC have use of these council databases and would welcome licensing for all landlords to make their search for landlords who do not declare that much easier.
Tip-offs are still a vital source of information and tend to generate the biggest returns.
Tax fraud hotline
HMRC has a hotline enabling the public to report evasion and tax fraud direct to which 40,695 calls were made in 2017/18.
As an incentive to expose, HMRC offers rewards to those who provide information about suspected tax evasion and confirm that last year £343,500 was paid. In addition, every three months HMRC publishes a 'name and shame' list of taxpayers who evade more than £25,000 in tax.
With far more information available than ever before HMRC is able to target investigations on a more efficient and cost-effective basis. But the department is not being complacent - it is intent on extending its data gathering powers.
A recent consultation on HMRC’s civil information powers proposed that HMRC should be able to seek information from third parties without the agreement of the taxpayer or a tax tribunal, with no right of appeal.
The change proposed is essentially to bring HMRC’s powers in line with those of tax authorities in the rest of the G20 group of countries and although the number of taxpayers affected by these proposals will be relatively small the fact the taxpayer will not be consulted is a worrying point.
7 secrets of successful change management
We have high expectations of technology: according to Deloitte research, 67% of CIOs expect IT to deliver increased efficiency and reduced costs and 70% expect it to deliver business process improvements.
The implementation of new software in your accountancy practice has to be the best it can be to achieve these challenging targets. Follow these seven best practices to give your next technology project its greatest chance of success. And be a change management champion.
1. Get early involvement
You can’t please everyone, but you can encourage a wider sense of ownership by involving your team as much as possible.
Even if final decisions are taken by senior managers and partners, look for ways your staff can make a genuine contribution to the process. Could they help frame the questions that need to be addressed? Or determine the criteria against which contenders will be measured? Or help set project priorities?
2. Spell out the benefits
Be specific and be personal so everyone understands what they, personally, will get out of the change. So what if the software makes it easier to prepare tax returns? What matters to most people is that their own working lives in December and January will be less fraught!
Even more general benefits to the practice will, ultimately, bring benefits to the staff, such as greater business stability, opportunities for more interesting and challenging work, and enhanced career prospects. It’s worth spelling these out.
3. Find a champion (or several)
Project managers can’t be everywhere at once! You need to enlist the help of some project champions.
Champions have to be fully behind the project. They need to really understand the advantages of the new software solution and the intended outcomes of the project. They work with stakeholders to keep them engaged and happy with the process, combatting the inevitable “project fatigue” that affects many projects, particularly longer ones.
4. Keep communicating!
Good project management relies on effective communication, not just at the launch and end of the project, but at every stage.
Rumours and negativity can spread quickly – regular, open and honest communication will help you to overcome these. Find milestones along the way that you can mark and celebrate, but be honest about any challenges and delays, too. This will help to avoid unexpected shocks later on.
5. Provide a range of training resources
Training is vital to project success. It’s not enough to simply launch a new software system, you have to make sure that people are using it, and using it efficiently.
These days it’s relatively easy to generate material in different formats to suit different learning styles: physical documents and printed guides; simple FAQs; pages on your intranet; demo data for those who learn best by using the software; classroom training; live, online webinars and recorded videos.
6. Evaluate the project
Many software projects aren’t evaluated until they’re finished, by which time it’s usually too late to change outcomes.
Instead, break the project down into manageable chunks and evaluate each phase as it’s completed. There are lots of ways of gathering evaluation data, formally and informally, from face-to-face debriefs, “lunch and learn” sessions, a quick email, a form on the firm’s intranet or an online survey.
7 . Don’t forget new starters!
Of course it’s important to train your current team, but don’t forget training for new staff so that everyone adopts best practice.
Make sure you build sufficient training into your induction programme, but remember that “training” doesn’t mean leaving someone alone in a room for a day and hoping they’ll emerge as a fully-fledged expert in the software. If you followed the suggestions in step 5 above, you’ll already have training material in a variety of formats to help different people learn in the way that suits them.
Greg Gillet is communications manager at Wolters Kluwer. The group will be at Accountex Summit North, Pod 35.
A call for clear HMRC direction on VAT import taxes
Recent press surrounding the proposed controversial changes in VAT on goods imported from the European Union after Brexit will no doubt be a keen discussion point for many businesses. If the changes currently passing through parliament become a reality, it could result in some 200,000 UK firms, who are required to import goods as part of their core business, having to find a solution to covering the cost of VAT duties upfront.
Presently, UK firms who import machine parts or any goods ready for sale from the EU can register with HMRC to bring them in free of VAT. They simply register the VAT charge and reclaim it, as VAT is only added to the price of the product when it’s sold to the final customer. Once the UK leaves the EU, however, that could change, and by frontloading VAT, it will no doubt create additional cash flow burdens for UK businesses, along with potential delays to the customs process.
Greater assurances on import taxes
The British Retail Consortium, which represents 70% of the UK retail industry indicates that there are potential mitigation measures to be considered, including suggestions that the Treasury either provide greater assurances on VAT deferment schemes, look to introduce postponed accounting periods for VAT payments, or alternatively, that businesses explore revolving credit facilities with banks and other financial providers to navigate these changes.
Either way, as a nation with great history in trade, it’s vital that whatever the outcome, both our ability to trade and the success of our economy must be protected.
With Brexit front of mind for business leaders, it feels like another blow for small businesses and the pressure is on for government to quickly remove the uncertainty and provide businesses with clarity around this subject. Whilst changes remain a possibility however, businesses should look to explore the options available to them to meet these obligations.
LDF’s short-term business loans can be used for a variety of businesses purposes, including assisting small business owners to spread the cost of VAT. We continue to help thousands of business to spread the cost of essential outlay such as Corporation Tax, Personal Tax and VAT every year.
Written by Peter Alderson, managing director of LDF. Exhibiting at Accountex, Stand 298.
Is the HMRC on a fishing expedition?
A new law allows government departments to investigate your financial affairs if they can’t see where your wealth came from. So does this mean HMRC can now go fishing in your tax records when it wants to?
Tax inquiries. There are strict rules that say when HMRC is entitled to start an investigation, or inquiry as they are now referred to. It is allowed to make a relatively small number of random checks into self-assessment tax returns, otherwise it must have a reason to start an enquiry. “Unexplained wealth orders” (UWOs) widen these powers.
Wealth v income. Since 1 February 2018 UWOs can be used to allow government departments, including HMRC, to investigate an individual’s financial affairs if it appears their wealth isn’t backed up by sufficient income to justify it. However, HMRC can’t act on a whim; UWOs will only be issued if:
- You own assets worth £50,000 or more; and
- HMRC, or other government departments, can prove there are “reasonable grounds” to suspect something is awry.
Vague condition
Only then will the High Court (Court of Sessions in Scotland) issue a UWO. In our view “reasonable grounds” is a rather vague condition and it probably won’t be difficult for HMRC to convince a judge.
Untested. Only time will tell how HMRC will make use of UWOs, and the willingness of the High Court to assist, but at face value our view is that they don’t offer HMRC an easy way to start a fishing expedition.
Written by Duncan Callow of Indicator-FLM. Exhibiting on stand 786 at Accountex 2018.
Top takeaways from the World Congress of Accountants
The World Congress of Accountants (WCOA2018) was held in Sydney, Australia, this month. With the theme of Global Challenges, Global Leaders, it highlighted how global issues are driving change in the accounting profession that will change the role of accountants in the future.
Three areas that are going through significant change at a global level at the moment are the economy, demographics and technology.
According to historian Professor Niall Ferguson of Harvard university, Brexit and the rise of populist and extremist governments is creating financial upheavals that will challenge the global economic order for a long time to come.
Looking to history, he argued that there will be an increasing need for good standards of business conduct in the future to maintain business confidence and safeguard against corruption.
Critical role to play
The accounting profession has a crucial role to play in this new world. But our role will extend beyond ensuring individuals and business are compliant, to making sure that we all do the right thing.
At a demographic level, we’re already seeing the impact that baby boomers are having on the ageing sector, but there is less discussion about the effects of the baby bust. The Australian government has been counter-acting this decline in national fertility rates with immigration.
According to Bernard Salt, these demographic changes will continue to drive every aspect of our lives. If we’re going to share in the prosperity to come in the future, Salt believes that people need to become knowledge workers.
Future generations
We need to upskill and train our future generations in technical skills that have global application. According to Helen Brand, CE of the Association of Certified Chartered Accountants (ACCA), the accounting profession is ahead of the game because we have a common technical language that is already global, but there’s still much more that we need to do to keep up with the rate of change.
One of the most important factors driving the need for new skills is technology. A hot topic at the WCOA2018 was artificial intelligence (AI) and its potential to transform how accountants work.
Kriti Sharma, VP of AI for Sage, highlighted small businesses spend a shocking 120 days a year on administration. This is an area where she believes AI can make a real difference in the near future.
Value added tasks
Another is in compliance, which Carol Barnay Head of AI R&D programmes at Xero believes will become something that is done passively in the background. This will leave accountants more time to focus on value-added tasks for their clients.
To thrive in this new world, we all need to develop new skills. Matt Tindale, managing director of LinkedIn Australia and New Zealand, highlighted that core professional technical skills like accounting, management, finance, reporting, auditing and even Excel remain the backbone of the accounting profession.
Essentials for the future
But technology and data analysis skills are emerging as essentials for the future. This includes knowing things like python, javascript, customer relationship management tools, strategy and digital marketing. The only constant skill that accountants require both today and in the future was communication.
These skills agree with a survey that the ACCA took of its members that highlighted the professional accountant of the future needs vision, ethics, intelligence, creativity, emotional intelligence, digital savvy and experience.
My key takeaway from the WCOA2018 was that the skills that accountants have relied upon in the past will no longer be enough. To face the future we need to take stock of the changes that are occurring at a global level and grasp the opportunities before us.
Being aware of how the economy, demographics and technology will change our industry is the first step in starting to prepare your organisation for the changes ahead. I believe this will change our industry for the better, which means it’s an incredibly exciting time to be part of the accounting profession.
Can a director claim redundancy when their company is insolvent?
When a company enters insolvency and there is no hope of rescue or restructure, a director may be entitled to claim redundancy pay and other statutory entitlements following the company’s liquidation.
It is not commonly-known that directors can claim redundancy under certain conditions, but if they are also an employee of the company, they may meet the required conditions. So how does a director prove their status as an employee, and what are the other criteria?
Eligibility criteria for director redundancy
To establish their entitlement to redundancy pay, directors will need to complete a form for the liquidator to determine whether:
- A written, oral, or implied employment contract is in place
- The company has been incorporated for at least two years
- The director worked for a minimum of 16 hours per week
- Their role within the company was practical rather than advisory
Although it is more straightforward to prove a director’s employee status when a written contract is in place, the liquidator will look closely at their overall relationship with the company if they have been working under an oral or implied contract.
The office-holder will identify whether the director is paid through the PAYE system as are other employees, for example, and if they worked comparable hours to members of staff on a day-to-day basis.
How much redundancy pay could directors claim?
For directors who can prove they are a company employee, the amount of redundancy pay they can claim depends on a number of factors. These include their age, length of continuous service, and final wage.
Redundancy pay can be calculated as follows:
Aged under 22
Half a week’s pay for each full year of service
Aged 22-40
One week’s pay for each full year of service
Aged 41 and over
One and a half week’s pay for each full year of service
For redundancies occurring on or after 6th April 2017, the government has placed a cap on the length of service at 20 years, weekly wages at £489, and the maximum amount of statutory redundancy pay is capped at £14,670.
What additional statutory entitlements can be claimed by directors?
Eligible directors and employees are entitled to claim other statutory payments when a company is liquidated. These include up to eight weeks’ unpaid wages, and up to six weeks’ arrears of holiday pay.
Pay in lieu of notice can also be claimed at a rate of one week’s pay for each full year of service, up to a maximum of 12 years. Tax and National Insurance becomes due on arrears of wages and holiday pay, but redundancy payments under £30,000 are not taxable.
How directors can make a claim for statutory redundancy
Directors will need to discuss their situation with the liquidator, and if eligible, make a claim from the Redundancy Payments Service (RPS) within six months of the liquidation date. In some cases this timescale can be extended to 12 months. If a claim is accepted, it will be paid from the National Insurance Fund (NIF).
Claiming redundancy as a director provides a vital financial lifeline when their company has failed. The payment could also cover the cost of the professional fees involved in a voluntary liquidation process, and depending on how much is owed, potentially some of the debt.
It is not widely known that directors may be able to claim redundancy pay when their limited company is insolvent, but working under a written contract of employment makes the process easier to navigate.
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Written by Gary Addison; a director at Redundancy Claim. Gary advises company directors on issues related to director redundancy, employee redundancy and statutory entitlements.
How apps can help to keep your clients happy
Today’s businesses face an uphill battle to keep their customers loyal. With the Google effect meaning that competitors are only a click away, instilling loyalty among existing clients is the new imperative.
The role that Apps can play in boosting client loyalty in today’s increasingly mobile world cannot be underplayed. Globally, time spent in apps has nearly doubled over the past two years and, on average, consumers spend two hours a day in apps. According to App Annie, the market data and analytic company, in 2021, users will spend more than 3 trillion hours in apps globally and rapid, sustained growth is expected across the app economy.
How do apps affect client loyalty?
Mobile apps provide a highly targeted channel for open two-way communication that can be a powerful driver of customer loyalty.
For example, with your own branded app, it is much easier to send individual messages that are called ‘push notifications’ that are tailored to your specific client. Evidence already suggests that triggered push notifications in particular deliver remarkably high ROI and according to ZipStripe research, it takes a recipient an average 6.5 hours to view an email, but only 15 minutes to view these instant messages.
It’s important to remember your competitor is only one mouse click away.
When users see that a business is going the extra mile to speak to them personally, it can make all the difference in terms of their loyalty. Then, armed with data on what works, it is easier to continually optimise to make targeting and messages more and more effective.
Putting your app platform the centre of your client’s business activities also helps to drive customer loyalty and is made easier with useful tools that become part and parcel of their day.
One great example of this is when information from Smartphone cameras is integrated and processed within a native app and used to record copies of receipts and invoices, which can then be sent directly to the accountant. Everyone likes to that feeling of achievement and of a job being completed and the receipt management tool really helps to forge that all -important link between the client and accountant.
How to stay first in the app world
Your app does not have to be a single offering as there are many useful apps in the thriving add-on community in this powerful eco system. By incorporating these add-ons in your app, along with cloud accounting login portals, you can make sure that your clients will see you as the main link between them, the principal software accounting companies and the add-on community.
How access is managed is a major consideration in this new appy world and it is important to keep control and not give away trusted adviser status. Having the firm’s own branded app protects the accountant’s status as it provides the mechanism to link to the others from within the app. It also helps to alleviate confusion for clients as their home screens become more streamlined and your icon becomes the place to go for all financial and tax tools.
With adults spending the majority of their time on their smartphones in apps, accountants have it in their grasp to boost customer loyalty by delivering a tailored app experience that reaches out and makes the client feel valued.
The old adage "Customer satisfaction is worthless. Customer loyalty is priceless" stands true, even in this new app-driven world.
Joel Oliver, is CEO of www.myfirmsapp.co.uk. Exhibiting at Accountex 2018, Stand 798.
Cashflow clarity: Five essential metrics for accountants
Tracking margins, KPIs, sales data. These are most commonly associated with retail or e-commerce based business. Professionals such as accountants miss out on a host of information they have at their disposal. In this sector you’re unlikely to have a warehouse full of inventory or logistical tracking. So what metrics should you be measuring... and why?
1. Project profitability
A project in the professional space can take many forms. It could be a particular contract for a set period or an outcome-based agreement. Either way you need to track and review your profitability on a project basis. It can be easy to overlook losses on individual projects if you are making a profit in your business overall.
By getting specific about individual projects you can learn what went wrong. Then you can revise processes and procedures for future work. You may even be able to improve your margin on already profitable projects.
2. Staff costs as a percentage of revenue
We all know the mantra of more billable hours. In many professional firms, this is one of the only metrics that is tracked extensively. But one of the most useful metrics is the ratio of total staff costs to revenue (or net revenue if you have significant third-party costs that are passed through). A typical professional services firm would likely find that overheads – office rent, marketing and general running costs – might amount to 18-20% of revenue. So, for a professional services firm looking to make a 20% profit margin, staff costs should be a maximum of 60% of (net) revenue.
3. Repeat business rate
We have all heard the saying that it is five times more expensive to attract a new client then it is to keep an existing one. Clients like to work with professionals they trust. Combining this will excellent customer service usually means great repeat business rates. Unfortunately, without tracking these rates it can be difficult to know how successful your business really is when it comes to retention.
Put in place a system to monitor repeat business and if it is not as good as it could be you can take action and implement changes. A small percentage increase in repeat business could add a lot of revenue to your bottom line.
You’ll want to measure repeat business both in terms of percentage that repeats by value year-to-year and also the percentage of recurring income each month.
4. Stay on top of billing
Every business needs to be paid. All too often this can be much more complicated than it sounds. Especially in services businesses where typically some proportion of the bill is in arrears so it can be difficult to have any leverage when it comes to getting paid.
If the issue is large enough it can be damaging to your business and create issues with cashflow. This can put you under pressure with your bank and create headaches for all concerned.
Automating billing, call follow-ups and reminders using debtor management software can improve your payment rates and reduce your need for an overdraft or other financing. Stay on top of this metric to keep your business moving forward.
5. Cashflow – number of weeks of trading
And we already looked at getting paid above. Of course, that is one of the major contributors to the health of your cash flow. With overheads and payroll commitments, it’s essential to always be managing working capital. Late or erratic client payments, uneven pipelines of work and even VAT payments all create peaks and troughs in your cash flow that must be navigated.
One metric to track here is the number of weeks’ trading the business has. This takes into account the current bank balance and upcoming commitments to see how long the business could continue to trade for if no future sales came in. A 12-week buffer or more of cash is prudent.
By using cashflow software you can manage this and plan accordingly.
So these are some of our favourite metrics to track for professional services firms like accountants – what are yours?
Written by Caroline Plumb OBE, Fluidly. Exhibiting on stand 1170 at Accountex 2018.