Streamline your compliance process with our premier Director & PSC Data Services
In today’s fast-paced business environment, staying compliant with regulatory requirements is more critical than ever. The Economic Crime and Transparency Act requires companies to identify individuals whose identities require verification and registration with Companies House. Our specialised service is designed to make this process as smooth as possible, ensuring your business remains compliant without compromising on efficiency.
Comprehensive Data – At an Unbeatable Price
For just £1.00 plus VAT per company, we provide you with a detailed list of directors and persons of significant control (PSCs) from your list of company numbers. This essential information enables you to quickly pinpoint individuals requiring identity verification. With accurate data at your fingertips, you can be confident in addressing regulatory obligations while avoiding costly oversights.
Expert Identity Verification and Registration
Once you’ve identified the individuals through our comprehensive lists, we’re here to take the next step. Our service extends to performing thorough identity checks and managing the complete registration process with Companies House for **£25.00 plus VAT per person**. Our experts handle the nitty-gritty details, ensuring that every verification is precise and each registration is compliant with the requirements of the Economic Crime and Transparency Act. This two-step process not only safeguards your business but also reinforces your commitment to transparency and accountability.
Why Choose Our Service?
Cost-Efficiency: With our competitively low rates, you can access critical compliance data without straining your budget.
Expertise: Our dedicated team understands the intricacies of the Economic Crime and Transparency Act, enabling us to deliver reliable and proactive solutions.
Time-Saving: By entrusting us with both data provision and subsequent identity verification, you free up valuable time to focus on your core business operations.
Risk Mitigation: Ensure your company avoids regulatory pitfalls and fines by keeping your records current and in full compliance with Companies House requirements.
A Partnership for Peace of Mind
Transparency is more than just a regulatory obligation—it’s a cornerstone of good corporate governance. By partnering with us, you demonstrate to stakeholders, investors, and regulators that your company is committed to adhering to the highest standards of accountability. Our seamless process is designed with your business in mind, eliminating unnecessary complexity while ensuring all legal requirements are met.
Get Started Today
Enhance your compliance framework and protect your business from potential risks by taking advantage of our tailored services. With our straightforward pricing and expert support, maintaining transparency and legal compliance has never been easier. Contact us now to learn more about our data extraction, identity verification, and registration services, and experience the peace of mind that comes with full compliance.
Embrace a simpler, more effective approach to regulatory requirements—partner with us to ensure your company stays ahead of the curve in today’s dynamic business landscape.
By Adrian Smart, First Corporate Law Services
Taxation Made Easy: Navigating the Complexity of Tax Laws
Taxation is a crucial component of running a business, but the complexity of financial tax laws is frequently intimidating. Businesses have many difficulties in accounting taxation, from comprehending complex legislation to guaranteeing compliance. Tax accounting services can be useful in this situation. Businesses can traverse the complexity of taxation and guarantee convenience and accuracy in their tax-related endeavours by making use of the experience of professionals knowledgeable in financial tax legislation.
1. Understanding Financial Tax Laws: The reporting and payment of taxes by firms is governed by a complex web of financial tax laws. It might be challenging to stay current with these laws. To ensure that businesses stay compliant and make wise decisions, tax accounting services specialise in comprehending and interpreting financial tax legislation.
2. Expertise in Accounting Taxation: Tax accounting services are valuable company partners since they have knowledge of accounting taxation. They are well-versed in tax laws, exemptions, deductions, and credits.
Now, let's delve deeper into how tax accounting services facilitate the navigation of complex tax laws:
1. Tax Planning and Compliance: Accounting for taxes helps firms plan for and comply with tax laws. They aid in identifying the many tax breaks, credits, and incentives that are available and are relevant to the business's particular sector and line of work.
2. Accurate Tax Preparation: For accurate tax preparation, tax accounting services are essential. They oversee tax return preparation and filing, making sure that all required forms and schedules are filled out and delivered on time. Due to their experience, firms can avoid mistakes and oversights that could result in fines or audits.
3. Tax Audit Assistance: Tax accounting services are a vital resource during a tax audit. On behalf of the business, they interact with tax authorities, obtain necessary documentation, and assist enterprises in navigating the audit process.
4. Tax Compliance Reviews: To guarantee that firms stay in compliance with evolving tax rules, tax accounting services conduct recurring tax compliance reviews. To find any potential compliance holes, they perform in-depth reviews of financial data, transactions, and processes.
5. Tax Advisory and Strategy: Tax accounting services offer more than just preparation and compliance; they also offer tax counselling and strategic direction. They provide information on the tax ramifications of corporate actions including mergers, acquisitions, and expansions.
The complexity of financial tax legislation is ultimately made simpler by using tax accounting services. Businesses can negotiate the complex web of regulations, guarantee compliance, and maximise their tax strategies by utilising their accounting taxation experience. Accounting for taxes helps with strategic planning, correct tax preparation, audit support, compliance reviews, and audit support. Businesses may confidently handle their tax responsibilities with their assistance, reduce tax payments, and concentrate on their main activities.
If you're interested in learning more about Global FPO, contact us today!
We also invite you to visit our stand D-20 at the upcoming Accountex Summit 2023 in Manchester.
By Srijan Banerjee
Global FPO will be exhibiting at the Accountex Summit in Manchester on the 19th of September 2023 at stand no. D-20
You can register for a free ticket here.
4 ways to find out whether your project qualifies for R&D tax credit
Often businesses are unaware that the projects they are working on qualify as R&D and thus allows them to claim R&D tax credits. They might be too preoccupied with the actual running of a business to investigate. They might not even be aware of the opportunity to claim R&D tax credits on their projects.
It’s therefore especially important for SMEs to know what projects they can claim for, as they will benefit the most from the financial boons.
(headline in bold) What qualifies a project as R&D (headline in bold)
To break it down, your client should consider if they can answer the following four questions. This will help them figure out if a project qualifies for R&D tax credits. If the project achieves any of the following, it can qualify as R&D.
1. Does the project overcome uncertainty?
Uncertainty exists when an expert in the relevant field doesn’t know how something gets done, or if it is even possible. All available evidence should be on hand when deciding if there is uncertainty. It will help to get experts from within the company to review whether there was uncertainty or not. It is also possible to enlist the judgement of external experts. However, those that have worked on the project themselves will be most knowledgeable.
In overcoming this uncertainty, your client’s project will be on the frontline of technology within the field. Furthermore, the existence of uncertainty shows your client’s company has forged wholly original ideas and methods in the project.
2. Has it sought a scientific or technological advance?
The purpose of the project must be to benefit the field as a whole, not only your client’s business. In other words, every business within your client’s industry should be able to utilise the advancement their project will result in. For example, developments in food technology resulting in vegan alternatives that are easier to produce. This will lead to lower production costs, allowing food companies to reduce prices for consumers.
What if a service, product or process gets developed by another company? It can still be an advance even if it is not publicly available or known about.
3. Can your project show research, testing and analysis have taken place?
This is the equivalent of showing your working in a math question. Your client should be able to prove their project has undergone changes and overcome obstacles. The trial and error of researching, testing and analysing shows the difficulty of the work. It also justifies the importance of the project.
This is an essential aspect of the technical narrative, which is a crucial part of the R&D tax credit application. Therefore, it’s worth considering at an early stage if your client has the necessary project data to support their claim. Detailing the inner workings of the project will also help show how your client overcame the uncertainty in their project.
4. Could another professional in the field conduct this work?
The answer here should be no, as it shows your client’s advance is covering new ground. Keep in mind your client will have their own professionals working on the project. They will be able to explain the difficulties and uncertainties they face. Otherwise, finding previous unsuccessful attempts at finding a solution will provide an answer.
Unsuccessful projects or projects currently in progress can still qualify for R&D tax credit claims, so don’t dismiss these out of hand.
This is a guest blog from made.simplr. They are exhibiting at Accountex Summit North 2021 on stand H12.
Where next for MTD?
VAT represented the biggest change in accountancy since iXBRL. From record keeping to making quarterly submissions and payments. However, this is just the beginning. In the coming months MTD for VAT will become business as usual, and the focus will move to Income Tax and Corporation Tax.
In advance of her Accountex Tax Theatre seminar on 2 May at 10:15am, Jenny Strudwick, Senior Product Manager for IRIS Software Group shares her thoughts as to where next for MTD for VAT.
MTD has arrived
We’ve made it. From initial discussions, concerns, interim solutions and technology changes, MTD is now in place and the move to a digital economy is evident. In 2015, Companies House received 9.04 million submissions, of which 86.5% were electronic. Skip to 2018 and 90.7% of the 11.4 million submissions were completed online.
Some accountancy practices have fully embraced the digital revolution, while others are cautiously observing the industry and Government to see if there will be any further changes before they step into the MTD water.
Much as this is logical, we also need to be mindful of more digital changes over the coming years including the move to Income Tax and Corporation Tax.
Beyond MTD
The MTD journey starts by profiling clients; understanding which of them need to file into the HMRC VAT portal and who will be first in line to make quarterly submissions after April 2019. However, there is far more to gain from client profiling which will help inform the strategic direction of their business, so it’s worth adding both Income and Corporate Tax to the analysis of the client base.
Understanding your clients’ needs makes it far easier to incorporate changes, especially when the practice knows where the client’s business is heading. Talk to them about the big picture – what will their business look like in the next three years? What digital platforms do they anticipate using? Explore other areas of the business such as CRM and database systems, as integration to financial systems will be key to efficiency and productivity gains in the future.
Use practice data to shape your future
The advent of MTD has compelled practices to look at their structure and systems to ensure they have the right skill sets and services for the next decade. With more legislation around the corner, it’s worth creating capacity and skill for Income and Corporation Tax services, not just MTD. This doesn’t mean to say you must structure your practice for these services but understand (just as we did with MTD) staff experience, profit margins and capacity. Depending on the outcome of your investigation and decision, consider partnerships with other firms who can offer complementary or outsourced services for your clients.
Digital connectivity
The technology choices available to support clients to meet their obligations without using excess budget and team skills on routine processing is of course, front of mind. Connectivity solutions are available for bookkeeping, file sharing and client communication, so you should consider what’s best for the practice and clients.
The wonderful world of ‘big data’ has provided businesses with more data than they can cope with. In fact, they don’t know what to do with it. And here lies the opportunity for accountancy professionals. Using real-time technology tools, you – as their trusted advisor, can bring it to life and provide the intelligence to help them thrive in the digital economy.
Lifelong learning
Enabling the practice to be ready for MTD has required staff training, client training and a whole-practice approach. But the learning doesn’t stop there. Consider the additional advice clients will require for Income Tax and Corporation Tax, as well as other changes that could occur in the future. For example, accountancy professionals could be the new breed of bank manager, helping to develop business plans and obtain funding for start-ups or clients requiring more investment.
Structure training around the strategy for your business. The opportunities to broaden service provision are not only available today but are likely to be endless in the future.
Taking the lead
At Accountex 2020, I expect MTD to be ‘business as usual’. We will have submitted electronic quarterly returns for a full financial year. Firms will see increased practice efficiency and productivity and depending on the desired vision and strategy, new services will be in place to create strategic partnerships with clients.
This time last year, MTD perception across the industry was comparable to eating an elephant. It’s long trunk; large, floppy ears and wide, thick legs looked too daunting to eat in one go. However, with strategic planning and a little change management, we’ve seen the industry evolve into an exciting, critical service for UK Plc. As we ask ourselves ‘where next for MTD’ we should also seriously consider how our expertise can shape the future digital economy.
Ten myths about MTD for VAT
BTCSoftware has put together 10 myths about MTD for VAT that will help to clear the way
- “ I cannot use bridging software after the 12-month soft-landing period ”
Answer: HMRC recognise the need for bridging software as an important form of digital transfer, and it is not just for the soft-landing period
- “I cannot use spreadsheets for digital record keeping”
Answer: HMRC now recognises spreadsheets as an acceptable form of digital record keeping. Again, this is not just for the soft-landing period.
- “I cannot make adjustments to the VAT data once exported from the bookkeeping software”
Answer: HMRC recognises that some of the more complex VAT adjustments, e.g. Flat Rate Scheme must be made outside of bookkeeping software, generally, once the base data has been exported to a spreadsheet. Any such adjustment must be documented in the spreadsheet to preserve the digital trail.
- “I must submit to HMRC all of the transactions that make up the VAT return”
Answer: HMRC now only wants the nine boxes of numerical data that make up the VAT return.
- “I must upgrade my older bookkeeping package to use MTD enabled cloud accounting bookkeeping software.”
Answer: Any record keeping software can be used if it keeps the individual transactions in a digital form, and it can transfer the VAT return data in digital form (e.g. CSV file or API link) to MTD enabled bridging software.
- “My specialist, a record keeping software, must interact directly with HMRC for MTD”
Answer: It is perfectly acceptable for your specialist record keeping software to utilise bridging software to submit the MTD VAT return to HMRC.
- “I can just type in the nine boxes of data”
Answer: To comply with MTD for VAT, you must keep your accounting transactions in a digital format, and the transactional data must be used to calculate the nine boxes of the VAT return automatically.
- “A CSV data file transfer is not a digital link”
Answer: HMRC recognises a CSV file as an acceptable form of digital link between the record keeping software and the MTD submission software.
- “I cannot Copy and Paste data into an MTD VAT return”
Answer: HMRC does not consider the use of ‘cut and paste’ or ‘copy and paste’ to select and move information, either within a software program or between software programs, to be a digital link.
- “I can leave MTD for VAT when I like”
Answer: Once you have submitted your first MTD VAT return you cannot go back to the old VAT 100 submissions, even if you fall below the VAT registration threshold. The only way to leave is to de-register for VAT.
Contact BTCSoftware
For more information or would like to talk to us come and see us on Accountex Stand 530, contact the Sales Team at BTCSoftware on 0345 241 5030 (Option 1) or email [email protected]
Preparing for your first submission in an MTD world
The 1st of April has come and gone but the transition to Making Tax Digital for VAT filing is far from over. The true impact of the change will be felt at the first VAT return submission. What should be top of mind for you is keeping digital records, reviewing your VAT clients and assessing your current processes to ensure they are fully compliant.
While it may seem overwhelming at first, start with these simple considerations as you prepare for your first submission.
How are you submitting VAT returns today?
Firstly, consider how you submit VAT returns today. Are you submitting on behalf of your client using a bookkeeping product, or using a spreadsheet to come to the nine figures only to manually type them into HMRC’s online service? Do your clients prefer to submit their own VAT returns using a bookkeeping product or HMRC’s online service? The final question should be, are these processes compliant and if so, do you want to maintain them?
How will you maintain digital records?
The next fundamental step should be to start maintaining digital records to ensure the first VAT return submission is compliant. The good news is that spreadsheets remain acceptable for digitally capturing data. For some, this might be the logical first step to digitalisation. Providing you use API-enabled or bridging software to make the final submission, you have the freedom to keep spreadsheets with valuable historic data and calculations in the process.
How do your clients currently submit their VAT returns?
Finally, in preparation for the first submission, whether you submit monthly or quarterly, you should be completing your final reviews on all your VAT clients to establish:
• Do they want to complete and file the VAT return themselves?
• Do they want your practice to prepare and file on their behalf?
• Do they want your practice to validate and file the return after they prepare the data?
Once you have agreed on how to proceed for each of your clients, the next step is reviewing the system you use today and even setting up a new system for monitoring your deadlines. This will ensure that you know when all the different activities are due and are alerted to filing deadlines ahead of time.
How do you currently monitor your VAT returns?
Research shows that most practices have been using spreadsheets to monitor returns, which tend to list out the key milestones and deadlines. One solution that practices are looking at is being able to set up an automated workflow within their tax and accounting software which incorporates the alert data, the activities and when they need to be completed.
The key question to ask yourself would be, is the process you have efficient and compliant? If the answer to either question is no, join us, Wolters Kluwer, at stand 1060 at Accountex on 1 and 2 May to find out how you can achieve both.
Why failing to digitise will hit the value of your accounting practice
The move towards digitisation is being pushed by both regulatory and client-focused requirements, which means that accountants need to clearly identify their relationship with the client.
Making Tax Digital is a clear example of a regulatory imperative – with its subtle but important difference in the way information is submitted to the taxman, setting a path towards linking the practice with its technology platform of choice to submitted data.
From the client perspective, some will embrace the idea of a digital relationship with their accountant; others will wish to continue the same contact and personal service. However, the regulatory push means that maintaining the status quo is not an option.
From a compliance perspective, the accountant will need to consider carefully the processes and workflows of their practice and those of their clients. Fortunately, technological advances mean that information can be shared over the cloud seamlessly and in a timely fashion – if both parties take the data capture/sharing project seriously.
At this point, there are two things to consider. Firstly, how can I take advantage of closer and more frequent contact with my clients to provide a more valuable service, if I evolve my offering? And secondly, if I carry on focusing on tax compliance, what impact will that have on my practice as HMRC continues to drive digital record-keeping and filing?
The first point has been covered by Foulger Underwood here. The second point is worth considering from a ‘tax return revenue stream’ point of view.
We developed an analysis model to categorise personal tax returns into five categories:
- Simple forms that will all be prepopulated;
- Entries where there will be some input required from non-HMRC captured information;
- Those with input from SME dividends or other non-earned income;
- Multiple sources of income from non-captured sources including overseas dividends etc; and
- Non-resident or high net worth individuals.
From this analysis it became clear that the simple tax returns 1 and 2 might be at risk from HMRC’s ongoing personal tax return digital initiative and possibly the workload in preparing tax returns for category 2 would also be reduced.
For practices, this means a focus on continuing to ‘do as you’ve always done’ will erode your practice’s value.
This is an interesting example of one of the negotiation issues in selling and buying practices, but whereas in the past there has been a reasonable consistency in approach and methodology we have seen: increased audit thresholds; the MTD effect on VAT; and the further digitisation of self-assessment tax. The values of these services, in terms of sustainable returns, need to be considered and re-evaluated.
If practice transformation is an issue for you and your practice to resolve, then come and meet the Foulger Underwood team on stand 490 at Accountex on 1-2 May. If you’d like to speak beforehand, please email Julia Whistler at [email protected].
Foulger Underwood are M&A and strategy consultants focused on the accounting, legal, trust and corporate service and wealth management sectors.
Gifts with reservation of benefit - an essential guide
The ideal in inheritance tax (IHT) lifetime planning would be for the owner of a main residence to gift the property to another such that the property does not form part of the donor’s estate but at the same time allowing the donor to remain living in that property.
Unfortunately, the ‘Gifts with Reservation of Benefit’ (GWRB) rules come into play in such an instance. These provisions are designed to catch individuals who aim to reduce their exposure to IHT by making lifetime gifts, surviving seven years, yet continue to have the use or enjoyment of the gifted asset. As such, the transfer of a whole or even part of a property to another whilst the donor remains in residence (i.e. ‘reserves a benefit’) will be caught. If such a transaction takes place the property is treated as remaining within the donor’s estate on death. Exemptions are available but they are necessarily restrictive.
One’s possible exemption is where the gift is made and both the donor and donee occupy the property. The restriction is that the donor must not receive any benefit from occupation other than a negligible one, which in itself must be paid for by the donor. The consideration for this benefit must be in the form of market rent paid in full throughout the period of occupation. The rent paid would need to be reviewed regularly with clauses to this effect being included in the agreement. In addition, the expenses of occupation must be shared. It is not necessary for the expenses to be proportionate, but the donor must at least bear the full share of the expenses attributable to him or her. It should be noted that the rent will normally constitute taxable income in the hands of the recipient.
Other exemptions include the situation where a freehold is gifted and the donor either takes out a lease on the property at full rent or a lease at full rent had been carved out before making the gift.
There is no requirement for the donor to be completely excluded from visiting the property but the restriction is to one month if the donee is also present or two weeks if not. Should what is termed in the rules as 'unforeseen change in circumstances' arise then the GWROB rules will be disregarded but only in the situation where the donor has become unable to maintain himself, the occupation represents reasonable provision by the donee for the donor’s care and maintenance, and the donee is a relative of the donor (or his spouse or civil partner).
Check out Tax Insider HERE
Times a changin' for Class 2 NICs
Class 2 NIC is finally being abolished from 6 April 2019, which means that self-employed people with losses or low profits who want to protect their state pension contribution record will have to pay Class 3 contributions, which are considerably more expensive. Will there be any alternatives?
At the same time that Class 2 NIC is being abolished, changes will be made to Class 4 NIC that may be of assistance – but not in all cases. We have no legislation as yet and so the following comments are based on the information available but may be subject to change.
Class 2 NIC currently gives entitlement to state pension, maternity allowance, bereavement benefits and the employment & support allowance. From 6 April 2019, payment of Class 4 NIC will give entitlement to these benefits.
For 2018/19, Class 2 NIC is payable at £2.95 per week or £153.40 a year, whereas Class 3 is payable at £14.65pw or £761.80pa. Class 2 NIC is payable where profits exceed the ‘Small Profit Threshold’ of £6,205, but the legislation allows the self-employed with profits below this to pay Class 2 NIC voluntarily.
From 2019/20, it has been announced that Class 2 NIC will be abolished but that for those self-employed persons with profits that fall between a new Class 4 NIC Small Profits Limit and the Class 4 NIC Lower Profits Limit will be deemed to have paid Class 4 NIC, thereby giving the person a qualifying year for benefit entitlement purposes. The Small Profits Limit will be set at 52 weeks times the Class 1 NIC Lower Earnings Limit – currently £116pw or £6,032pa.
Using 2018/19 rates as an illustration this gives the following effects:
- Profits below £6,032: No Class 4 NIC Payable
- Profits between £6032 and £8,423: Class 4 NIC deemed to have been paid
- Profits between £8,424 and £46,350: Class 4 NIC payable @ 9 per cent
- Excess of Profits over £46,350: Class 4 NIC payable @ 2 per cent
The 2019/20 rates will of course differ but the principle involved is clear.
As the question points out, it is not only those self-employed individuals with continuously low profits that will be affected, but also those traders who occasionally make losses or whose profits occasionally fall below the new Small Profits Limit.
Consideration will need to be given to a particular individual’s contributory record for various benefits, which will affect the decision whether to partially reduce available capital allowances claims to ensure profits reach the Small Profits Limit – something that will not be possible for those using the Cash Basis of assessment.
It would also appear that the averaging of profits (available to farmers and creators of literary or artistic works) will add to the complications.
- Thanks to CronerTaxwise for this article
FRS 102: How to account for government grants
Government grants are dealt with in FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland in Section 24 Government Grants.
Section 24 of FRS 102 deals with the accounting requirements for all government grants.
The term ‘government grants’ is defined in the Glossary to FRS 102 as: “Assistance by government in the form of a transfer of resources to an entity in return for past or future compliance with specified conditions relating to the operating activities of the entity.
Government refers to government, government agencies and similar bodies whether local, national or international.”
Recognition and measurement
A reporting entity cannot recognise a government grant until the recognition criteria has been met. In order to meet the recognition criteria there must be reasonable assurance that:
- the entity will comply with the conditions attaching to the grant; and
- the grants will be received.
Accrual and performance models
An entity receiving (or expecting to receive) a government grant that meets the recognition criteria laid down in paragraph 24.3A of FRS 102 is required to recognise the grant based on the accrual model or the performance model. This is an accounting policy choice and must be applied on a class-by-class basis. Note – micro-entities reporting under FRS 105 The Financial Reporting Standard applicable to the Micro-entities Regime can only account for grants using the accrual model.
Accrual model
The accrual model of grant recognition will be the most familiar to accountants. This model requires the grant to be classified as either a revenue-based grant or a capital-based grant.
Grants which relate to revenue shall be recognised in income on a systematic basis over the periods in which the entity recognises the related costs for which the grant is intended to compensate.
Example: Capital-based grant
Autumn Ltd (Autumn) has purchased a new item of machinery for £100,000 outright in cash, which has an estimated residual value of £nil at the end of its useful economic life. The machine is being depreciated in accordance with the company’s accounting policy for such equipment, being ten years’ on a straight-line basis with a full year’s depreciation charge in the year of acquisition, but none in the year of disposal.
Summer applied for a government grant towards the cost of this asset and the government have confirmed that they will meet 20% of the cost of the equipment in the form of a grant (i.e. a grant of £20,000). This has been received by the company two weeks’ after the purchase of the machine.
The entries in the books of the company in respect of the new machine and the grant are as follows:
Purchase of the machine
Dr Property, plant and equipment additions £100,000
Cr Cash at bank £100,000
Being purchase of new machine
Dr Depreciation expense (profit and loss) £10,000
Cr Accumulated depreciation (balance sheet) £10,000
Being depreciation of new machine in year 1
Government grant
Dr Cash at bank £20,000
Cr Deferred income £20,000
Being initial receipt of the government grant
Dr Deferred income £2,000
Cr Profit and loss account (other income) £2,000
Being 1/10th of the grant released to profit or loss
It should be noted that paragraph 24.5G of FRS 102 specifically prohibits the value of the capital-based grant from being deducted from the cost of the asset (i.e. Dr Bank, Cr PPE additions) and hence recognising the grant in profit and loss by way of reduced depreciation charges.
This is because such an accounting treatment is incompatible with company law as the statutory definitions of ‘purchase price’ and ‘production cost’ make no provisions for deductions from such amounts.
Performance model
The performance model works by allowing a company to recognise a grant immediately in profit or loss; however, there are certain criteria that have to be considered as follows:
- A grant which does not impose specified future performance-related conditions on the recipient can be recognised in income when the grant proceeds are received or receivable.
- A grant which imposes specified future performance-related conditions on the recipient is recognised in income only when the performance-related conditions are met.
- Grants which are received before the revenue recognition criteria are satisfied are recognised as a liability.
Example – Performance-related conditions met
Winter Ltd has set up a new branch in a deprived area of the country and has an accounting reference date of 31 March each year and chooses to apply the performance model of grant recognition. In order to entice businesses to set up operations, the government have introduced a scheme whereby they will provide a grant to the company once certain conditions have been met. The conditions are as follows:
- The company must be trading to full capacity by 31 December 2018.
- The company must have successfully employed at least 150 people on a full-time basis by 31 January 2018.
- The company must take on at least 25 people under the age of 25 on an apprenticeship scheme.
The company successfully achieved all the conditions imposed on them by the government and the grant was duly received on 26 March 2018.
The financial controller is unsure whether to recognise the whole grant in profit or loss or defer it in the balance sheet.
The company has complied with all its performance-related conditions imposed on it by the government where the grant is concerned. Provided none of the grant is, or may become, repayable in the future, the entire grant can be recognised in income for the year-ended 31 March 2018.