The abolition of abbreviated accounts and the FRSSE (Financial Reporting Standard for Smaller Entities) at the end of 2016 may seem like something just for accountants, but small business owners need to be aware of the change as they need to decide what accounting format to use in future.

The most popular options are FRS 102 section 1a (the small entity option of the full FRS 102) or FRS 105.

Companies with annual sales of less than £632,000 and a balance sheet value of less than £316,000 are classed as micro entities and can use the simplified FRS 105 “micro entity” accounts. Whilst this may be tempting they need to decide whether it meets the needs of their business.

Advantages of FRS 105:

• Directors can decide to use FRS 105 without shareholder approval.
• The accounts format is clearly defined and easy to follow.
• No additional information is required although additional lines are permitted
• There are no “notes to the accounts” required other than those required by other legislation.
• It allows small businesses to ignore changes to accounting treatments required by FRS 102.
• The income statement does not need to be filed with Companies House

Disadvantages of FRS 105:

• Accounting formats are highly prescriptive and different descriptions or layouts are not allowed.
• Third party users of accounts such as banks or other lenders may want to see accounts that give more information.
• The business will have to change to FRS 102 section 1a if it exceeds the turnover or balance sheet limits.
• Revaluations are not allowed so any of these would have to be reversed which could affect the net value of the company and therefore the view of lenders and credit rating agencies.

Company directors therefore need to be aware of the potential implications before making a decision to use FRS 105.

HMRC has announced that digital tax reporting will be introduced for income tax in 2018 and other taxes by 2020.

All individuals will have a Personal Tax Account summarising their tax information online. Where information is provided by third parties (banks, etc) then this will be included automatically so does not need to be declared on a tax return. The system will be developed so that changes in circumstances are submitted online thereby avoiding the need to submit annual tax returns.

Businesses will be expected to use digital record keeping for VAT from 2019 and for corporation tax from 2020. Quarterly updates will have to submitted to HMRC using chosen software. HMRC argues this gives taxpayers a clearer view of their tax position during the tax year.

The biggest change will be felt by small business who currently only prepare accounts and tax returns once a year. HMRC has promised they will provide an alternative to digital reporting but it is to be expected that they will still have to report quarterly.

HMRC believes that by making taxpayers report quarterly online they can clamp down on tax avoidance and reduce the tax gap as well as the difference between the tax HMRC estimates should be paid and what is actually collected. It is advisable to anticipate that once they have this information, there will be an expectation for the tax to be paid quarterly as well.

Whilst these changes are still some way off, HMRC’s intentions are clear and all taxpayers need to be aware of the administrative and cash-flow implications.

Shareholders should be aware that since April 2016 they have had to pay tax on their dividends. Previously they only paid tax on dividends if they were a higher rate taxpayer.

What they may not know is that HMRC is amending their tax codes in order to collect the anticipated tax due through the PAYE system in the current year. This adjustment is based upon the assumption that the dividends receivable will be the same as in the previous tax year.

As dividends can only be paid where there are sufficient distributable reserves there is no certainty as to how much will be available. So if there is likely to be a reduction in the dividends or if the taxpayer has made payments on account they may need to contact HMRC to get the tax code changed.

Even if the tax code is correct taxpayers need to be aware that it is likely to have a material impact on cash-flow as the dividend tax will be paid much sooner than if it was paid through the self-assessment system.