The Fizz! Blog

Company income and expenditure to go on the public record

It’s recently been confirmed that, in a year or two, all limited companies will have to file a Profit and Loss Account at Companies House. For many years now, the vast majority have not had to do that, with only the largest of companies having to make details of the year’s income and expenditure publicly available. The snapshot of a company’s year-end position - its Balance Sheet - goes on the public record, giving a broad overview of assets, liabilities and solvency, but not the story of how that position was reached.

This is going to be unwelcome news to many company owners. Some may not want their rivals, customers or suppliers knowing the margins or the profits they’re making. Others may not want to give friends, family, staff or exes an insight into their personal finances! Your claim to be unable to afford to pay more than the National Minimum Wage is going to be undermined slightly if your staff can see you’re making £1m a year yourself.

There will also be people who don’t want the world to see how poorly they are doing! Maybe because they’re worried it’ll spook potential (or even existing) customers, or maybe they’re faking it until they make it at networking events and the like and would prefer the truth to remain obfuscated!

The change is a classic case of being seen to be doing something, even though anyone who understands the issue knows that the thing being done doesn’t actually address the issue. The idea is to try to take some action against rogues who hide behind companies. But those who file rubbish to conceal what they’re really doing will continue to file rubbish, of course, and Companies House will still lack the resources or mandate to do anything about it. And it’s argued that it’s important that the authorities can see in more detail what companies are doing - but HMRC have always received a full version of the accounts, with a far more detailed version of the P&L than is being proposed for the public record!

In any case, barring a u-turn by one government or another, the change is coming. So, if you’re concerned about it (and we should say that the majority of company owners we’ve discussed it with aren’t actually too bothered), is there anything to be done?

Some people will be perfectly happy and able to run their business without a limited company. The effective tax rates of limited company owners and those with unincorporated businesses aren’t that different these days (the main tax benefit of a limited company is the ability to shelter profits from higher rate tax if you don’t need them right now, whereas a sole trader or partner in a partnership pays tax on the lot in the year they make it). If you’re also comfortable giving up limited liability (which is no substitute for adequate insurance anyway), you might well just decide to operate as a sole trader or partnership instead.

Others won’t have the choice. They might be in an industry or a niche where a company is essentially compulsory as people won’t do business with you otherwise. Or sheltering income from higher rate tax might be important enough to them to outweigh any transparency downsides.

Finally, it’s just possible we might see the emergence of unlimited companies as a more popular choice. They give the tax regime (and therefore sheltering possibilities) of a company - but without the protection of limited liability. They don’t have to file accounts at all, but given that they offer no liability protection to their owners, they’re rarely seen in practice (the long-gone clothing chain C&A used to be the most prominent example!) - up until now, anyway.

We’ll all probably get used to it in the end. The exact format of the profit and loss account to be filed has not yet been set, and it may include less detail than people fear. In any case, looking at accounts at Companies House can already be highly instructive under the current regime, but it’s rare that anyone (aside from accountants, anyway) thinks to actually do it. Even if more information is made available, people probably will take less advantage of it than they could.

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The cash basis becoming the default for self-employed people’s taxes, why it’s happening, and why it’s stupid

The default for preparing accounts for sole traders and partnership is the accruals basis - or what we habitually refer to as proper accounts. That means they show how much profit you really made in a period, regardless of when you remembered to send an invoice, or when your customers actually paid you, or when you paid your suppliers and so on. Accounts are supposed to be a useful record of how a business is really doing, giving you important information about what’s working and what’s not working, and, in extremis, whether you’re wasting your life and should get a job. They’re not just a glorified bank statement or a reflection of the admin inefficiencies of you, your customers or your suppliers in sending out paperwork or making payments.

For a few years now, small sole trade and partnership businesses have been able to base their tax returns on cash in and out instead, so as to make preparing tax returns easier (and also as an acknowledgement that many of them were doing it already). Accountants will rarely use this cash basis, as preparing proper accounts isn’t hard and gives you useful information, though sometimes there can be some benefit to using it for a year or two in niche circumstances where the timing of payments happens to result in a worthwhile tax saving. But generally, proper accounting is the way to go. It’s nice if accounts can be useful AND as easy to prepare as possible - but if you have to pick one, it should be the first.

Anyway, regardless of all that, from 2024 the cash basis will become the default for unincorporated businesses, with an option to use the accruals basis.

The reason for this is basically Making Tax Digital and the ongoing intention (which may or may not ever happen - we’re nine years into the process now) to make sole traders submit quarterly updates to HMRC of their income and expenditure. The government has realised that this will be easier to sell if people are just submitting what their bank statements say rather than having to properly account for their real earnings for the quarter. Part of the drive to this reporting is so as to be able to make more regular assessments of entitlement to things like Universal Credit and Tax-Free Childcare, and a sole trader with smooth underlying income but erratic payments from customers could have interesting problems with their claims if and when this quarterly reporting ever comes in. But for now, we’ll just need to watch this space. For avoidance of doubt, we (along with most or all other competent accountants, we imagine) will continue to default to proper accounts!

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