While many people are off enjoying their summer holidays, July and August see many accounting professionals wishing that they could extend theirs indefinitely rather than going back to the office and trying to sort out the latest ’jumble in a shoe box’ that some of their clients hand to them as part of their year-end records.
That’s because for many small businesses, their year-end was either March 31 or April 30, and it’s around now that accountants will start to prepare their annual accounts. These accounts will form the basis of their tax computations for the year, and so ultimately determine how much tax they owe.
This is when the proverbial chickens come home to roost, and all of those strange transactions which were never really explained during the year, or which the accountant didn’t even know about at all, have to be put somewhere. And sometimes it’s even worse than that.
Take one example: a retailer who’s been trading for a couple of years as a sole trader sends his latest annual paperwork to the accountant. The first few months look normal, but then the accountant spots that some of the purchase invoices in the latter part of the year are made out to a limited company. And the bank statements now carry the name of that company. There follows a very urgent call to the client. The client explains that he took some advice from a relative "who did Business Studies at college" as a result of which he decided to transform his business into a limited company "in order to save tax". Unfortunately, he decided to make this rather significant change about two-thirds of the way through the year, and didn’t bother to discuss it with his real accountant before doing it.
In one stroke, he’s unwittingly managed to potentially increase his immediate tax liability, left the accountant with a lot of extra work to do urgently and probably just doubled his accounting costs for the year. Because, as we’ve explained on these pages before, while setting up a business as a limited company isn’t rocket science, and operating one isn’t brain surgery, the accounting (and tax) treatment is significantly different and you can’t mix the two types of operation in one set of accounts ever!
In this example, the accountant will first have to establish a cut-off point at which the old sole trader business ceased. Hopefully this will be a calendar month end, although typically the change most likely happened mid-way through a month just to complicate matters further. Having found a date, the next step will be to prepare ’cessation accounts’ for the sole trader. That raises the next issue: the tax computations of the previous year or two will now have to be re-calculated taking the last few months’ worth of trading results into account. The resulting figures may then be significantly different to those already declared to the Revenue for those years. Potentially the client could suddenly find himself facing an additional tax liability simply because he ’closed’ his sole trader business at the wrong time. Oh, and in general, a ’shorter’ accounting year doesn’t make for a lower accountant’s fee for the period. The amount of accounting work isn’t directly related to the length of period, and even if it were, then the additional tax work would more than justify a higher fee.
Once the sole trader accounts are completed, the limited company’s accounts will have to be set up correctly. That means identifying where and how the client transferred the assets and liabilities of his sole-trader business into the new company. Not always the easiest of tasks, especially if the client continued to use his ’personal’ bank account to pay bills, wages, VAT, etc, on behalf of the company for any length of time. Of course, the company will also most probably have a different year-end to the sole trader business the first one being expected 12 months from the date of incorporation. And being a limited company, the record keeping and accounting requirements are a bit more rigorous, so the cost is higher.
An extreme example perhaps, but we’ve seen a few. Part of the reason is the large increase in the number of new commission operators running sites for the independent retail networks that have appeared over the past few years.
These are usually hard working and determined individuals, but with little previous experience of coping with the formal paperwork side of a business. Many of them have never had a face-to-face meeting with an accountant before, and are perhaps apprehensive that if they ask a professional any question, they’ll receive an invoice alongside the answer.
In days gone by, most of the major oil companies used to organise financial awareness or financial management-type courses for both their retailers and their area managers. We would go into their meetings and spend a day or so covering the basic requirements of running a small business at least one ’major’ still does this and it seems to help keep their operator-churn down to low numbers. Most of the newer, independent networks have grown too quickly to have given much thought to bringing accountants into their retailer training programmes, but those financial management courses gave the new-to-business retailer a chance to ask all the questions that they needed and receive a professional answer before they made any drastic decisions about their business.
If nothing else, those financial awareness courses prove to retailers that accountants aren’t inhuman. Ask us a question and we’ll try to answer it without immediately producing a stopwatch and invoice pad. Asking that question before making your move, and obtaining an answer from someone more qualified and experienced than a friend or relative may save you a lot of hassle (and cost) in the long run. Accountants don’t bite although sometimes the mess that we’re asked to sort out may indeed provoke a bark or two!