It may not be a major priority for directors of small companies but the format of their accounts is set to change. Small company accounts are currently prepared using the Financial Reporting Standard for Smaller Entities (FRSSE) but for accounting periods starting on or after 1 January 2016 this is being replaced by FRS102.

Whilst this will not impact many company owners there are some significant changes that may affect their balance sheets value and the amount of information that needs to be shown.

The major changes are:

• Goodwill should be written off over five years which is a shorter period than allowed at present
• Revaluation gains or losses on investment properties must be shown in the profit and loss account
• Financial instruments to be shown at “fair value” and any gain or loss shown in the profit and loss account
• FRS102 accounts must include a cashflow statement

There is an alternative for very small companies. Companies that have sales turnover of under £632,000 can elect to prepare “micro entity” FRS105 accounts which have much simpler rules and do not require investments, etc to be included at market value.

Deciding to use the FRS105 format may appear the simpler choice but it may not be right for everyone, particularly where you are looking to grow the business or attract outside investment.We recommend discussing with your accountant before making a decision.

The Annual Investment Allowance has been fixed at £200,000 for the next five years – a welcome relief to small businesses with high capital expenditure. Business owners can now plan capital expenditure with some degree of certainty, knowing the timing of those payments will no longer affect the amount of capital allowances that can be claimed against taxable profits.

If you provide your personal services to a client through either a limited company or partnership then you may be liable to an IR35 charge. Each contract should be reviewed individually to see whether IR35 applies and this will depend on whether the worker is really independent or an employee.

The basic rule in deciding whether IR35 is applicable is whether an individual would be considered an employee of the client had it not been for the existence of the personal service company or partnership.

If the client pays you by the hour, week, month, etc and tells you what to do, where to do it and how to do the work then you are likely to be considered an employee.

If however you have to provide equipment, tools or materials, can make a loss on the contract, have other people to do the work or have to put right any unsatisfactory work at your own expense then it is unlikely that you will be caught by IR35.

If IR does apply then there will be an additional tax charge will be payable based upon the IR35 “deemed payment”. This “deemed payment” is not paid, it is merely a calculation to assess the additional tax. Below is an example of how this may be calculated.

1	Total of all income and benefits from contracts subject to IR35 Less 5% for unspecified expenses	£40,000   (£2,000)
		£38,000
2	Add any other payments or benefits	–
3	Deduct any expenses actually paid for by the worker which would have been tax deductible had they been an employee	(£3,000)
		£35,000
4	Deduct capital allowances on any equipment paid for by the worker personally	–
		£35,000
5	Deduct any pension scheme contributions	(£2,000)
		£33,000
6	Deduct Class 1 or Class 1A national insurance paid by the company on salary and benefits	(£867)
		£32,133
7	Deduct any salary or benefits paid by the company that have already been taxed as employment income	(£10,000) (£2,000)
		£20,133
8	Multiply by 100 / 113.8 to find DEEMED PAYMENT	£17,692
	Employer Class 1 national insurance payable on deemed payment at 13.8%	£2,441.50

Given the potential additional tax liability payable it is important that anyone operating through a personal service company or partnership should have their contracts and working practices externally reviewed to see whether they could be caught by the IR35 legislation.

If you think that this may apply to you, then contact us as we work with Taxwise who can provide impartial contract reviews at a reasonable price.