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By Manj Kalar, ACCA’s Head of Public Sector

The momentous decision that was taken by the UK on 23 June to leave the EU will no doubt reverberate for a number of years. Dismantling all the legislation, government funding frameworks developed over 40 years will take quite some time to fully unravel.

It will call for the public sector to use all their expertise and skills and develop many new ones to achieve a successful transition. Some of the key areas where there will be an impact are outlined below:

Change in focus?

Over the last 6 years the key focus has been austerity so that a public spending surplus would be achieved by 2020. A tough Spending Review settlement was agreed by the public sector, providing certainty over funding over the next 4 years continuing the efficiency agenda to 2020.

Many leading economists including the influential Institute for Fiscal Studies were questioning whether the ongoing scale of cuts to government spending could be achieved before the result under two weeks ago. After the result it became a whole lot more difficult: Government lost its triple A rating. Why does this matter? Although the UK government has net liabilities over £2 trillion per the latest UK Whole of Government Accounts; it has, by and large, maintained the triple A rating which has translated to lowest level of interest payable on government borrowing. The Office for Budget Responsibility’s ready reckoner suggests that in general a 1 percentage point increase in both gilt rates and short rates in each of the next five years would increase central government debt interest spending in 2019–20 by £5.3 billion (in 2019–20 terms). This will make achieving the agreed public sector spending reductions even more difficult.

EU funding

In 2015 the UK Government paid £13bn to the EU budget which is net £5bn of the instant rebate; the EU spending in the UK was £4.5bn; so the net contribution was £8.5bn. Therefore, in theory, there will be additional funding available for the many demands including:

Cost of dismantling EU legislation and Regulation

EU funding has been channelled to support many areas of spend across the UK. For example support for agriculture through DEFRA. Farmers receive funding through the Common Agricultural Policy (CAP), In 2015, UK farmers received almost €3.1bn (£2.4bn) in direct payments, according to the NFU. There is no doubt that similar levels of funding or potentially more will be sought to supplement what they will no longer receive from the EU. It may surprise some to note that one of the biggest recipients of the CAP funding is the National Trust (almost £12 million in 2015). Similarly those receiving support as a result of the Common Fisheries Policy will be seeking the same assurances and/or relaxation on fishing quotas. UK has 16% of total EU fish processing jobs, the highest of any EU country. These may be easier to identify and potential solution for a way forward. However, there are many other areas where unravelling the web of EU funding may not be so easy.

Take for instance the significant sums provided for regional development funding and infrastructure investment such as road networks and rail. European Investment Bank loan investments in the UK economy came to €29 billion over the 5 year period 2011-2015. This was €7.8 billion in 2015:  energy projects accounted for 24% of total investments, while transport and water claimed 22% and 21% respectively. In Northern Ireland funding has been negotiated to support the development of the road network. The Northern Powerhouse was going to receive funding to supplement government investment in bringing the high speed 3 rail network and in London the cross rail project (£1bn) linking the west of London to the east of the UK. Some of these are underway and funding has been committed and others negotiated. A departure from the EU will require all of these to be assessed. Will the projects underway continue? One would assume so. But what does this mean for those in the discussion phase? Given changes in interest rates payable this will change the original business cases for the infrastructure investment.

Another significant area is the cost of dismantling the legislation. The number of Acts of parliament and statutory instruments over the last 43 or 44 years that refer to EU legislation will all need to be reviewed and potentially amended.  This raises potential capacity issues as it will require more legal experts to consider what elements of EU directives and regulations should be retained in UK law. The number of lawyers across government have fallen as the public sector has contracted by 15% since 2010 as a result of civil service reform and meeting the spending review efficiency targets. The civil service is now smaller than at any time since the end of WW2 and stands at 406,140 according to the latest figures available. This is before the Parliamentary timetable to considered legislative changes is considered. This will impact on the timing of legislative changes and the impact on Parliament’s capacity to consider and debate issues unrelated to the impact of the EU referendum.

Passports

Linked to foreign travel is the EU passport. Questions that will need to be addressed include will a new UK passport be required? What about the EU passports in circulation? Will there be a period of grace before these are withdrawn or will there be a cliff edge cut off point? One has only to think back to the summer 2014 when there were significant backlogs to processing passport applications. Of the 56.1 million usually resident population of England and Wales in 2011, 76 percent (42.5 million) held a UK passport. Any change to the current approach therefore has the potential to be significant

Not all these decisions can be made unilaterally and in devising policies around this will require interaction with the EU as well as making practical changes, requiring upfront investment by the UK Passport Service into technology as well as staffing to manage the transition.

Foreign and Commonwealth Office is another department that has seen a significant reduction in embassy staff. This was part of the efficiency drive under austerity and was possible due to sharing these duties and support from other government departments (DFID, NCA and BIS). This will need to be reversed to meet the growing need to ensure the embassy network is fully functioning.

Health

There are many practical questions around health ranging from staffing to travel. Currently, there is the E111 to guarantee medical health care provision if UK citizens fall ill when in an EU country. Will this still service still be available? Will UK citizens need to take out travel insurance to cover any medical bills? Or will government be required to pay this back? What will the service look like, and how will it work, will need to be developed. Presently, the Department for Health reported £434m payable for UK travellers requiring medical treatment in the EEA and received £50m for EEA travellers requiring medical treatment in the UK. Will they need increased administrative support to invoice and chase non-payment?  This will potentially (inevitably?) create an additional overhead.

Education

There has been EU funding for teaching hospitals and the ERAMUS programme, an exchange programme that fosters mobility for talent flows. Higher education institutions will be seeking assurances to ensure new rules allow for such cultural exchange and talent transition to continue.

There are many demands on the £8.5 bn funding that ‘would have gone to the EU’ and more will be required to consider the impact on trade negotiations. As noted in the newly created Brexit unit, ‘bringing together the brightest and best’ across the civil service to be headed by Olly Robbins, a significant proportion of resources will need to develop policies and procedures to ensure the UK has the trading relationship it seeks from the EU and other countries. Given the time taken to negotiate TTIP and other trade agreements (e.g. the EU-Canada Comprehensive Economic and Trade Agreement has taken almost 8 years to agree) any changes will undoubtedly require time and expert negotiation skills.

The risk is that government spirals into inertia as the focus is on the impact of Brexit. But service improvement, continued public service delivery and savings delivery plans need to remain in focus if public services are to be delivered effectively, efficiently and economically to meet plans to meet the public spending reductions.

Therein is the challenge how to focus on ensuring a successful transition and extraction from the EU and maintain government finances which are likely to come under severe pressure. The Governor of the Bank of England has already allocated £250bn to support the banks if there is another repeat of the 2008 situation. The level of government support is £1,174.5bn (short term £235.2bn and long term £939.3bn) in the 2014 Whole of Government Accounts (an increase of £78.4 billion on the previous year.) This will come at a cost – increased interest payments.

As Gus O’Donnell remarked this is what the civil service does best and will manage but based on the projected costs it will be a number of years before the benefit of the ‘additional’ £8.5bn is going to be felt if at all if there is a cost associated with keeping access to the EU.

This article first appeared on Politics Home.

By by Jason Piper, ACCA’s Senior Manager, Tax and Business Law

It’s a question that’s come back into the limelight in the UK in recent days, and I was on Radio 4’s Money Box on Saturday with George Turner of the Tax Justice Network discussing this very question.

And it’s a question that that deserves careful consideration. After all, when the issue was first looked at in Pakistan, they found that most of the sitting MPs couldn’t publish their tax returns – not because of any legal prohibition, but simply because they hadn’t registered to pay tax at all, claiming instead not to earn enough to have to.

But if we were to ask elected officials and representatives to publish their tax returns (this question obviously doesn’t apply in Finland, Sweden, Norway or Pakistan, all of whom now publish everyone’s tax information), what would we hope to achieve? After all, it’s a good idea to understand why you’re doing something before you do it.

One argument for publication is where the tax burden itself is discretionary – that is, the taxpayer and tax officer agree the liability between them through a process of negotiation, rather than applying fixed laws. There’s a clear benefit to transparency and accountability if you publish in that situation, as a check on the tax authority’s exercise of its discretion.

But there are very few areas of tax law left with that sort of flexibility; the vast majority of systems now apply fixed treatments to particular sets of circumstances. Once you’ve earned money, or carried out given transactions, the tax office has to treat it in a particular way. What’s important is what the taxpayer has done, and of course that it gets reported accurately on the returns.

Obviously we want to be comfortable that public officials aren’t making the wrong payments under the law, whether through lack of care or knowledge, or deliberate dissimulation. There’s a legitimate need for society to be certain that the politicians who want to frame the laws which govern the tax system for everyone, and spend the money that gets contributed under that system, are shouldering their share of the legally imposed burden as the money goes in.

But that again should be the job of the tax office, and if we don’t think it’s well enough resourced to do that job then the answer must surely be to fund a properly enabled independent inspectorate to check on things. A crowdfunded approach to fault finding, where we have to rely on the public to spot problems because the tax office can’t, doesn’t sound particularly appealing, especially if it only applies to politicians. The benefit of a properly functioning tax inspectorate is that it works for the benefit of the whole population.

Of course, as an individual voter, a citizen may want to understand a little more about the motivations of the people in charge of their tax laws. We don’t want anyone involved who’s not prepared to abide by the law at all as it stands, but as a voter I might want to decide who I do want based on their approach to tax planning.

One way to establish that is where there is still an element of discretion in the system, which is how the taxpayer has decided to structure sometimes complex affairs – do they appear to have taken the path which minimises tax, or opted to pay more?

The problem with trying to work that out from a tax return is that it’s not really designed to tell you that.

There is a box to tick on the UK tax return if you’ve engaged in a notifiable tax avoidance scheme that’s registered with HMRC, and that would be a fairly clear indicator of a willingness to test the limits of the law. But what of a return which indicates a “middle of the road” tax planning structure? There’s no way you can tell from the return whether the taxpayer really wanted to do something more aggressive but couldn’t afford the fees, had to structure things that way for other commercial reasons, or didn’t fully appreciate that some people might consider the structure “aggressive” in any way, and wouldn’t have done it if they’d realised.

If the problem is that we don’t think people should be using complex arrangements which impact on their tax liability at all, then the answer is to simplify the system, not just shame politicians into steering clear. After all, there are far more celebrities, footballers, businessmen and city high-fliers who can still go ahead and use those structures, who wouldn’t necessarily have to publish details of their personal financial affairs.

And that highlights another aspect of publishing tax returns – they won’t necessarily give you the full picture. You won’t know about any non-taxable income, which doesn’t have to be declared – and someone who’s been paying into the various tax-exempt UK structures (TESSAs, PEPs, ISAs) for a long while could easily have well over £1m of capital earning away; if that’s not making £40-50k pa, tax free, then they’ll be having stern conversations with their IFA. Inheritances, gambling winnings – none of those would typically show up. Even the humble feed in tariff could account for up to £2k of tax free income.

Even more importantly, you won’t get a full picture of the household’s wealth. It’s easy to find examples of politician’s who’s spouses have independent careers which are more financially successful than their own (Tony Blair and Cherie Booth, or Nick Clegg and Miriam González Durántez are just two which spring to mind). We won’t necessarily be able to reconcile the politician’s lifestyle to their own tax return if they share wealth with a successful other half – but why should details of their spouse’s independent career be in the public eye?

And in any event, is it a politician’s absolute wealth, in isolation that’s relevant? Surely it’s as much their attitudes to wealth and tax (how they earned it, what they do with it) that matter – but you just won’t get that from a tax return, which after all was never designed to capture that sort of information. At best you’ll get an incomplete indication, and at worst it might be misleading – an innocent mistake, or unusual family circumstances, might present a picture that looks like an aggressive tax avoidance scheme. Releasing a tax return might work as a symbolic gesture, but it won’t necessarily on its own meet any of the legitimate goals that society, or the politician, might have around transparency and accountability.

If society thinks tax is important (and it should) then understanding properly how those who write the tax laws and spend the tax receipts approach those obligations is just as important.

We need a coherent approach to accountability and transparency around that, as well as a coherent approach to designing tax systems that are properly administered by well resourced authorities. Perhaps we could try judging politicians by how they’ve increased tax authority staff and funding levels, or striven for simplicity, certainty and stability in the tax systems we all rely on to deliver the funds to maintain society?

 

Another year, another conference season, this year to sunny Brighton for Labour, and the Northern Powerhouse, Manchester for the Conservatives. As the mix of politicians, journalists, business representatives and the lobby headed off, several of ACCA’s team were there to represent our member and student views.

This year, ACCA joined forces to hold a joint business reception with the FSB, IoD, BCC, EEF, ICAEW and IPSE. The the newly appointed Shadow First Secretary of State and Shadow Secretary of State for Business, Innovation and Skills, Angela Eagle MP addressed the crowd and talked about her desire for business to be part of the policy conversation in the coming months and talked about the need for a new, kinder politics.

Further engagement at Labour included a private dinner on pensions supported by Aviva with Alison McGovern MP and a PWC event on fiscal responsibilities with Rebecca Long-Bailey MP, shadow exchequer to the Treasury. These events offered ACCA the opportunity to highlight our position on pensions and our policies on tax, both areas we will continue to engage with Labour in the coming months.

Straight after Brighton, ACCA went up to Manchester for the Conservatives. Again we hosted a joint business reception, this time with the guest speaker being the Chancellor of the Exchequer, George Osborne MP, who offered words of thanks for the continued support from the business community. The Chancellor welcomed the contributions of all the organisations – including ACCA – and their commitment to working with the government to build long term economic growth.

Again at the Conservative conference, ACCA was represented at private dinners on pensions with David Rutley MP, PPS to Iain Duncan Smith, Secretary of State, Department for Work and Pensions, an event on tax with Greg Hands MP, Chief Secretary to the Treasury. And we also attended a further two events on the rising phenomenon of the self-employed with David Morris MP, Peter Aldous MP and Charlie Elphicke MP.

ACCA was of course quick to point to the fact accountants are consistently rated as the most trusted advisers by SMES and colleagues highlighted the advisory role our members play in supporting the self-employed.

Whilst approaching the issues from different angles, both Conferences had lots of events on devolution, public sector reform, Europe, skills and the economy. With the Spending Review set for 25 November, much of the chatter around the conference was around what would stay and what would go, with some departments facing cuts of up to 40%. A lot of MPs discussed the need for a new relationship with the private sector and the role that public procurement can play in shaping this. As we’ve seen with the government’s approach to the living wage and apprenticeships, we expect to see more use of procurement as a model for getting business to behave in a certain way, and there is certainly a growing recognition that the relationship between business and government is changing.

Arguably one of the most forward-looking events was held by the Big Innovation Centre, which is designed to bring together business, public agencies and universities, which hosted events on intangible assets and intellectual property, an area of particular interest to ACCA UK. With studies suggesting that up to 80% of a listed company’s share price is no longer supported by the presence of tangible assets on their balance sheets, ACCA has been conducting work into how SMEs can account for and understand the effect that their intangibles and innovation is having on their business. Our Malaysian pilot is already available to download here but do keep your eyes open for our UK study.

If you would like more information on any of the above or our government engagement programme, please contact rosalind.goates@accaglobal.com

Accountants are good with numbers, almost by definition. It’s what they do. But many of the biggest markets where the numbers have done the most to shape society now seem to be asking for more than just the bottom line, more than just the shareholder return. And worse yet, it may even be that the focus on financials has gone beyond a positive influence and is leading us down the path to global disaster.

The focus on meeting numerical targets has driven two business scandals to break this summer – the Toshiba accounting issues, and Volkswagen’s diesel engine emissions troubles. And while they look on the surface to be very different affairs, the underlying issues are disturbingly similar – set an apparently impossible target, individuals in business are driven to bend or even break the rules just so that they can disclose a set of figures at one point in time which superficially make the grade. But in both cases, in straining to reach that artificial goal they’ve missed their way and lost sight of what society sees as their real objective.

And the pattern repeats at a macro level. On a global level, countries are ranked by GDP. And yet eternal exponential growth, which is what focussing on GDP entails, will break the planet. So what are we going to measure instead as our “target” if financial numbers have had their day?

The change is coming already – businesses aren’t just being measured on how much profit they make; how much tax they pay back into society is growing in importance. And how they make the profits, and divide up what they haven’t paid in tax, is a focus of interest. Even if investors in developing markets are still focussed on the value of audited numbers, the global multinationals who drive the extractive industries and world spanning supply chains are being forced to declare whether their profits are built on the back of slave labour. The EU is bringing in a whole raft of non-financial reporting disclosures on everything from board diversity to respect for human rights. The rise of the integrated report, and focus on the triple bottom line, reflect the calls of stakeholders to understand more about the motivation behind the numbers, and where they might be taking us.

So how are accountants supposed to respond?

What we cannot ignore is that society wouldn’t exist without business. From the very first time someone realised that if you measure and record the grain going into the granary then you can identify, allocate and trade the productive surplus of society we became reliant on numbers. Fast forward a couple of thousand years to the development of the corporate entities which underpin the fabric of the modern world, and methodologies for monitoring the behaviour of owners and managers by other owners and by creditors are essential to the health of the Corporations which allow for the use of investors’ capital, opening up opportunities for achievements and returns that would otherwise be unattainable. Society is built on business, and business is built on trust in the business forms and business relationships which the numbers and narrative encapsulate.

The speed and size of modern markets, modern transactions, can’t change the underlying reality that society is made up of humans, some trustworthy, some trusting, some neither. Society still needs assurance that the individuals managing and controlling the flow of productive capability are doing it not just in their own interest, but with the broader good in mind. Accountants are indispensable for giving investors that trust in business.

Whether it’s the numbers in the back half of the accounts or the narratives we read in the front half of the accounts, it’s accountants in their role as auditors who sign off on the company reports. And increasingly it’s the real time operation of the business which concerns stakeholders. Who is better placed to analyse the data, to balance the likely impacts of the external environment, to critically assess and balance the competing pressures which assail the modern business?

However ethically pure an organisation’s motives, it won’t survive without a realistic view of the numbers and how they fit into the supply chain – and that’s a view which has to come from a trained and experienced mind. An English idiom, highlighting that actions are better than words, describes this situation well: “fine words will butter no parsnips” – and good intentions will balance no statements of financial position.

The world needs ethical and professional accountants, taking the wider view of business that society demands, and nothing can take the place of that ability to work with the numbers. What accountants need to do now is show how their talents and training fit into the modern economy in a way that no other skillset can emulate.

By Martin Brassell, co-author of Banking on IP and Inngot CEO, on the new financial reporting standard and its implications for intangible assets

The new Financial Reporting Standard 102 (‘FRS 102’) comes into effect from the end of 2015 (where a company’s accounting year is the calendar year) and April 2016 (where it is the fiscal year). It changes the treatment of intangible assets for small and medium-sized enterprises (SMEs), who will now follow substantially the same rules as multinationals.

It’s therefore a good time to brush up on the identification and valuation of this category of assets, which is responsible for driving the majority of value in most companies. The main changes fall under two headings.

Buying or ‘merging’ companies

Currently, when two companies are combined, either merger accounting (adding the two existing balance-sheets together) or acquisition accounting (placing a fair value on all acquired company’s assets) might be permissible. FRS 102 states acquisition accounting must be used in nearly all cases (bar group reorganisations).

Also, acquisition accounting rules are being updated. Any excess paid over and above the fair value of the fixed assets and liabilities can no longer simply be characterised as ‘goodwill’. Instead, it needs to be broken down into goodwill and identifiable intangible assets, in a very similar manner to IFRS 3 (with some minor wording differences).

This means that the sources of intangible value that have never previously appeared on an acquired company’s balance-sheet will need to be identified and quantified.

The useful life of intangible assets and goodwill

FRS 102 preserves the option, previously available under SSAP 13 (which it replaces), of either amortising qualifying development costs of new products and services over a suitable period, or expensing these costs during the year in which they are incurred.

However, UK GAAP currently permits ‘goodwill’ to have an indefinite life, as long as the value is tested annually for impairment. Under FRS 102, the concept of an indefinite life falls away and a lifespan has to be specified for amortisation purposes.

If an asset’s lifespan cannot be determined reliably, a ‘default’ figure of five years must be used. This is much shorter than existing UK GAAP, under which it would have been customary to amortise some assets over a much longer period (up to 20 years).

Combine these changes with the reduced role of ‘hard’ assets, which are increasingly outstripped by spending on intangibles, and the number of businesses looking to reflect their real investment profile on their balance-sheet looks set to rise.

ACCA is currently running a UK pilot of the National Corporate Innovation Index methodology, which looks at the value created by intangible asset investment across a range of categories. ACCA members engaged with SMEs can participate and obtain a report for their client company by emailing rosalind.goates@accaglobal.com. Interest in participation needs to be expressed by 28 August 2015.