April 2015
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THE VOICE OF ALL NQs Contact us
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STUDENT LOANS Paying it back early could prove an expensive mistake
ALL THE NEWS YOU NEED and a whole lot more Pages 5 and 6
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IN THE COURTS HOW TO DEAL WITH PROBLEM DEBT Page 14
EUROPEAN COURT DECIDED E-BOOKS SHOULD BE SUBJECT TO 20% VAT; AND ECLIPSE SCHEME ECLIPSED BY HMRC
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INSOLVENCY
Could criminal bankruptcy be back on the statute?
IT’S GOOD TO SHARE How local authorities can save billions by sharing IT and data services Page 8
ETHICAL DILEMMA Doing what’s best for the kids
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Switch to a brighter future! Financial Accountant
Management Accountant
Global Manufacturing, Middlesex
International Automotive, Surrey
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COMMENT NUMBER CRUNCHING
20%
The standard rate of VAT that e-books are now subject to P20
EDITOR’S COMMENTS Keep your ethical head on at all times There is an ethical bent in our latest issue. For starters there’s our regular ethical dilemma, which explains that you can never turn off your ethical ‘radar’ – even when you are volunteering. We also have a feature on the call to re-introduce criminal bankruptcy; John Harlow puts the arguments for and against perfectly. NQ magazine has spent a bit of time in the courts, too. We outline exactly why e-books are subject to VAT at the standard rate and printed books aren’t! Debt is another common theme, with Baker Tilley’s Gary Heynes wondering why the government has made it so difficult to pay back those student loans. The Chartered Accountants’ Benevolent Association also points out that it is there, ready to help ICAEW members who get into debt. Remember, it can take just one incident to change your entire financial circumstances – yes, even accountants have money troubles! Smart use of technology Local authorities (LAs) have undoubtedly taken the brunt of the government’s deficit reduction plans. A report from Policy Exchange (see page 8) explains that they can save £10bn (by 2020) by using technology and data analysis better. The first thing they have to do is phase out costly bespoke IT systems. LAs should also join forces to design and commission apps and online services that can be used by all of them. They all need to collect council tax and one well-designed app would really bring down the costs for hundreds of authorities. You don’t have to keep reinventing the wheel. Finally, with the help of the ICAEW we take a look at what tomorrow’s practice will look like. Accountancy firms must evolve and innovate to survive, says it’s report, and the use of technology will again help create different opportunities to add value. Graham Hambly, Editor (graham@pqaccountant.com)
$34.2 bn
The amount of fees earned worldwide by Deloitte in 2014 P5
£227,000
Fine meted out to KPMG over its failure to force a partner to sell shares in a firm the company audited P6
11,000
Number of firms that can be reclassified as ‘small’ in line with the EU Accounting directive P19
£10 bn
Money that local authorities could save through the smarter use of technology P8 cash being £635 m The sheltered via the now-banned Eclipse tax scheme P21
CAREER ADVICE TOP JOBS NETWORKING WHAT’S NOT TO LIKE? As a newly qualified accountant, ‘like’ us on Facebook and you’ll be joining one of the UK’s leading accountancy and finance recruitment hubs for conversation about career development. Whether you’re looking for career guidance, an insight into the current jobs market, or just want to network with like-minded professionals, you’ll be able to get the latest information in your area. Join the ‘Hays Accountancy and Finance UK’ Facebook community today. Hays Accountancy & Finance UK
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NEWS
Innovating auditor reports Many auditors have made radical changes to the extended auditor’s report that go beyond the Financial Reporting Council’s (FRC) new requirements announced in 2013. The requirements for auditors to describe assessed risks of material misstatement, materiality and the scope of the audit, are beginning to make a process that has been described as a ‘black box’ by investors more transparent. In time, the FRC is hoping this will lead to improved confidence in audit. The innovation came to light in the FRC report: ‘Extended auditor’s reports: A review of experience in the first year’. Significant innovation was found in the following areas: ● Disclosing the materiality benchmark used. ● Disclosing the magnitude of unadjusted differences being
National Grid ends quarterly updates
The National Grid has announced that it will no longer produce quarterly accounts. Last November, the Financial Conduct Authority said listed companies do not need to publish interim management statements. This is part of the FCA’s ‘transparency directive’ and brings the UK into line with EU rules. Companies aren’t stopped from producing quarterly reports, however! National Grid said it will continue to report half-year and full-year figures along with market updates and company developments. National Grid FD Andrew Bonfield is quoted as saying that the company was a “very long-term business”. He also felt that requirements to publish information could provide unnecessary focus on matters of little relevance to a longterm business. NQ Magazine April 2015
reported to the Audit Committee. ● Reporting of detailed audit findings with respect to identified risks. ● Experimentation with detailed broader explanation of the audit scoping process. ● Improved presentation of auditor’s reports through the use of diagrams and graphs. ● Addressing going concern disclosures in auditor’s reports. ● Locating the auditor’s opinion at the beginning of the report rather than at the end. ● Moving generic descriptions of the scope of an audit to a website. The FRC survey also suggests areas where further changes might be made: ● Increasing the entity specific risk reporting. ● Improving the discussion of the auditor’s application of materiality and why a particular benchmark or level was chosen. ● Making a clearer linkage between the discussions of risks and materiality and the description of how these influenced the scope of the audit.
● See http://tinyurl.com/od2d2bl
Deloitte #1 Deloitte has retained its position as the world's largest accounting firm, beating PwC into second place by $248m. Deloitte reported $34.2bn in fees in 2014. The survey by the ‘International Accounting Bulletin’ (IAB) found the Big 4 control 66% of the global accounting market share, with combined fee income of $120.2bn. IAB also discovered the gap between the Big 4 and the nearest competitor, BDO, has widened by over $7bn in the past decade. Finally, the figures show accounting firms experienced a 6% uplift in earnings during 2014. The top 52 global networks and associates earned a combination of $181.7bn. Meanwhile, Deloitte has announced that Cathy Engelbert has been chosen as its new chief executive, a ‘first’ among the Big 4 firms in the US. Engelbert replaces Frank Friedman, the interim CEO. She has an accounting degree from Lehigh Univesity and joined Deloitte in 1986. Engelbert is both chair and chief executive of Deloitte & Touche for the next four years.
Cap on insolvency fees The government has said it will impose a cap on fees charged by administrators of collapsed companies in England and Wales. The move follows protests from creditors over the excessive amounts being charged. Under the rules laid before parliament, administrators (and other practitioners) who oversee insolvencies will have to provide upfront estimated costs. They will also have to provide details on the work they propose to carry out and exactly how long they expect it all to take. The government wants to end a system where insolvency administrators are charging on average £375 5
NEWS
KPMG fined by accountancy watchdog KPMG has been fined hundreds of thousands of pounds by the Financial Reporting Council (FRC) following two disciplinary hearings. In one case, involving James Marsh, the watchdog imposed a reprimand on the firm and fined it £227,000. A tribunal found that KPMG had failed to require Marsh, a former employee of Cable & Wireless, to sell his 651,559 shares in the company when he became a partner. Cable and Wireless was an audit client at the time. The tribunal felt that there was a lack of sufficient or appropriate procedures to prevent or identify the failure on the part of Marsh to sell the shares. Marsh was also reprimanded and ordered to pay a fine of £39,000. KPMG agreed to pay the majority of the FRC’s costs. In a separate case, KMPG Audit plc and Greg Watts came before the FRC following admitted breaches of the ethical standards for auditors. KPMG was fined £162,500 and a reprimand was imposed. Watts was found guilty of a breach of fundamental principles of confidentiality by failing to take all reasonable steps to preserve client confidentiality. Again, KPMG agreed to pay the bulk of the hearing costs. The FRC’s Paul George said: “I welcome the sanctions imposed by the tribunal in these matters, which serve to emphasise the central importance of the ethical standards for auditors to the audit process. As the tribunal observes, they are at the very heart of trust in the audit process on which public confidence in capital markets and the conduct of public entities depends.” George went on to say he also welcomed the constructive approach adopted by KPMG LLP, KPMG Audit plc, Marsh and Watts in acknowledging the seriousness of these matters and in cooperating with the FRC. Ultimately, this led to the fines being reduced by over £200,000.
New use for Facebook Receivers can now officially notify a debtor on their Facebook page that they must appear in court. A ground-breaking decision from Tunbridge Wells County Court means social media can be used to notify bankrupts of the terms of orders made in relation to their bankruptcy where they themselves have failed to engage with the proceedings. The ruling relates to the bankruptcy of a Ferrari dealer who failed to co-operate with the Official Receiver and trustee Quantuma. After ignoring numerous letters and other communications it was discovered the debtor was continuing to trade and was active on Facebook. After the dealer then failed to appear at a meeting, District Judge Christopher Lethem gave permission to post a notice on the debtor’s Facebook page to appear in court. Quantuma’s Simon Bonney said: “This is understood to be the first decision of the Bankruptcy Court of its type and shows that the court is increasingly prepared to adopt a modern and practical approach to assist trustees in bankruptcy in dealing with difficult debtors.”
Tax avoidance clampdown
Under new rules issued by the Treasury, high-risk tax avoidance scheme promoters must now publicise the fact that they are being monitored by HMRC so that potential customers are aware of the risks of using them. Laws introduced last summer allow HMRC to issue promoters of ‘high risk’ tax avoidance schemes with conduct notices requiring them to change their behaviour. The new rules mean if a promoter does not comply with the terms of a conduct notice they can be issued with a tougher ‘monitoring notice’, which among other things will mean the promoter will be publicly named by HMRC. They will also have to tell their clients that they are being monitored and if they fail to comply could be fined up to £1m.
ACCA awarded ISO 22301 Valid for three years, the certification means that ACCA can adhere to BSI standards as follows: ● Identify and manage current and future threats to its business. ● Take a proactive approach to minimising the impact of incidents. ● Manage an incident effectively to ensure that critical 6
activities can be restored within their recovery times during an incident. It also has to communicate with all interested parties keeping them informed. Downtime during the incidents must also be minimised. ● Demonstrate resilience to customers, supplier and for tender requests. ● Ensure all plans are regularly exercised so that recovery teams are competent and information is up-to-date. NQ Magazine April 2015
Time to get smart
TECHNOLOGY
Local authorities can use technology to save themselves a stash of cash, says a new report
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NQ Magazine April 2015
TECHNOLOGY
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Since 2008, councils have shouldered the largest spending cuts of any part of the public sector – despite providing 80% of local public services – and face a funding shortfall of £12.4 billion by 2020. Some are doing admirably well under this extreme financial pressure, developing innovative schemes using data to ensure that they scale back spending but continue to provide vital public services. For example, Leeds, Yorkshire and Humber are developing a shared platform for digital services needed by all three councils. Similarly, a collaboration of public sector organisations in and around Hampshire and the Isle of Wight is developing ways of sharing data and helping neighbouring councils to share content and data through the Hampshire Hub. Eddie Copeland, author of the report, said: “While there are examples of innovative councils that have used technology and data to deliver better, more efficient public Using data to predict and prevent fraud: Each year services, many local authorities have failed to reform. councils lose in excess of £1.3 billion through Council “Using technology and data in a smart way could save Tax fraud, benefit fraud and housing tenancy fraud (such local authorities £10 billion by the end of the next parliament as illegal subletting). By collecting and analysing data – money which could be better targeted at helping some of from numerous different sources, it is possible to predict the most vulnerable in our communities.” where future violations are most likely to occur and direct Local Government Minister Kris Hopkins said: “Can-do investigative teams to respond to them first. councils are already delivering multibillion-pound savings through embracing the digital age and the efficiencies this Sharing data between neighbouring councils: Sharing new dawn offers to them. But as this report shows they can data would reveal where it might be beneficial for two or go much further and town halls should now be tapping into more neighbouring local authorities (LA) to merge one or more services. For example, if one council spends £5m each these new opportunities to make the necessary savings to protect frontline services and keep council tax down for year on combating a particular issue, such as investigating food safety violations, fly-tipping or pest control, it may be hardworking families. more cost-effective to hire the services of a neighbouring “Local government accounts for a quarter of all public council that has a far greater incidence of that same issue. sector spending and should therefore play its part in reducing the inherited deficit. This could include doing more joint working, getting more for less through smart Phasing out costly bespoke IT systems: Rather than procurement, tackling local fraud and council tax arrears, or each LA independently designing or commissioning its own apps and online services (such as paying for council tax or utilising their reserves and surplus property.” NQ reporting noisy neighbours) an ‘app store’ should be created where individuals, businesses or other organisations can bid to provide them. The services created could then be used by dozens – or even hundreds – of LAs, creating economies of ● Download or read the report at: http://tinyurl.com scale that bring down prices for all.
ocal authorities could save up to £10 billion by 2020 through smarter and more collaborative use of technology and data. A report released by leading think-tank Policy Exchange highlights how every year councils lose more than £1 billion by failing to identify where fraud has taken place. The paper also sheds light on how a lack of data sharing and collaboration between many local authorities, as well as the use of bespoke IT systems, keeps the cost of providing public services unsustainably high. ‘Small Pieces Loosely Joined’ sets out three ways in which local authorities could not only save billions of pounds, but also provide better, more coordinated public services:
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BUSINESS PLANNING
image: www.vectoropenstock.com
Accountants need to adapt and evolve to survive in today’s marketplace, says the ICAEW’s Nikki Campbell-Gumb
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BUSINESS PLANNING
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ver 1.5m businesses in the UK are advised by ICAEW chartered accountants, but as circumstances change, so must we. Tomorrow’s Practice, an ICAEW initiative, found that regulatory changes, technological advances and economic pressures present opportunities for the accountancy profession, but only if we adapt and innovate to exploit them. We have already seen technology change the face of the profession – the commoditisation of basic accounts preparation and bookkeeping has led to greater efficiency, leaving practices free to focus on client needs, develop new services or lower their costs. However, while it opens doors, the shift to digital also presents a threat to the profession. During our interactions with practices we found that many had concerns about keeping ahead of the game. Many changes require sizeable investment and a high degree of technological expertise. Customers are able to manage certain aspects of the bookkeeping process themselves, so it’s important that accounting firms look for ways to add additional value to their proposition. We are a regulated profession, shaped from our earliest days by law and public policy. Changes in pensions tax, public sector audit and legal services have all opened new markets. We have the ability to fill the gaps left by changes, and firms can carve out specialist niches, differentiating themselves from others in the profession. Our recent Small Business Matters research found that 48% of businesses view their accountant as their most trusted business adviser. Only 6% and 3% thought the same of their bank and solicitor respectively. This means
NQ Magazine April 2015
accountants are excellently placed to take the lead in advising businesses. The most popular services SMEs buy from accountants are accounts preparation, tax services and bookkeeping, and many see accountants as just offering this narrow range of compliance services rather than proactive business support. Clients too often do not realise that chartered accountants have more to offer. So what can be done to shift this view and truly take advantage of the opportunities out there? Tomorrow’s Practice identified three key areas practices should think about: skills, new service lines and new ways of delivering services. Above all, when planning ahead accountants need to make sure their proposition meets clients’ changing wants and needs. Technological changes and shifting perspectives on business culture mean that clients would like to see more flexible, less formal practices. Each client likes to communicate with their accountant in a different way, some prefer face-to-face meetings, others prefer phone or video conferences – they might even like to communicate by social media. Practices should try to be amenable to this, as well as increasing their availability to work with clients outside office hours. We’ve continually heard that clients want people who understand their business and can effectively provide a ‘one-stop shop’ of services. Traditional services such as bookkeeping and audit
are important, but by developing skills in the workforce practices can offer additional value to their clients, making themselves indispensable. Audit training provides accountants with skills that can be adapted to assurance work, but good communication and client-facing skills are also important and will become increasingly so, as will data analytics. Clients don’t necessarily want technicians, they want people who they can talk to and who understand their business. It may not be possible for practices to provide the fully rounded business support desired by clients, so the importance of referral networks and alliances, and the use of project-based freelancers, will become increasingly prevalent. Chartered accountants can now operate in a much wider range of industries than ever before. With the UK’s ageing population and recent pension reforms, opportunities for accountants are arising in the personal financial planning and wealth management space. In a similar vein, the deregulation of the legal services market means practices can now offer previously restricted services such as probate. Change can be intimidating, but the number of opportunities out there means that practices can choose a pathway that works for them. Accountancy firms, like all businesses, need to adapt and evolve in order to NQ survive, or they risk being left behind.
● Nikki Campbell-Gumb is ICAEW’s Head of Member Strategy and Reporting 11
ETHICAL DILEMMA
Bad education? Outline of the case
Key fundamental principles
You are an accountant appointed as a voluntary member of a school governing body. You also serve on the finance and buildings committee of the school, which is responsible for awarding building contracts. The membership of the committee includes a number of local businessmen. One is a builder – a long-standing governor who is well respected by the community and the board of governors (‘the governors’). At your first meeting, the committee considers a report from the head teacher about the condition of the school hall. The report sets out a scheme of remedial building works, with estimated costs. After discussion of the scheme, and recognising the need to move quickly if the work is to be carried out during the summer vacation, the builder on the committee offers to do the work at a competitive price. The other members of the committee are minded to accept the offer. The finance and buildings committee reports to the governors. In this case, the governors are not considering the use of a formal tender process, or making any reference to the existing governance arrangements in respect of tenders. You are concerned that the committee (and consequently the governors) will be unable to demonstrate reasonable decisionmaking and stewardship of public money. Although it may be in the best interests of the school to accept the builder’s offer, you are concerned that established procedures are not being followed, and that the decision made is somewhat subjective. The governors and the committee may be vulnerable to criticism.
Integrity: Can you demonstrate integrity by highlighting the lack of due process, while not impeding the progress of the building works? Objectivity: Is it possible for the governors to demonstrate objectivity without implementing a tender process? Can you remain objective in the face of pressure from the committee to accept the builder’s offer? Professional behaviour: The need for you to demonstrate professional behaviour in a voluntary appointment is just as important as it is in paid employment.
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Considerations Identify relevant facts: Consider the school’s policies and procedures regarding tenders. Do the governors have a code of conduct? Study the head teacher’s report to establish the urgency of the building work, and determine the summer vacation period during which the work should be performed. Identify affected parties: Key affected parties are you, the other members of the committee (including the builder) and the governors. Other possible affected parties are other local builders, who might wish to tender for such work, and the general public, as the work is to be financed by public funds. Who should be involved in the resolution: You should involve the chairman of the finance and buildings committee and ultimately the chairman of the board of governors. You might be able to gain support from other members of the committee, and it would be diplomatic to involve the builder on the committee.
Possible course of action You should make your concerns known, and explain to the other members of the committee why you feel acceptance of the offer from the builder on the committee could be inappropriate in the absence of a formal tender process. You should make it clear that you NQ Magazine April 2015
ETHICAL DILEMMA
As a school governor you are unhappy about building work not going to tender. So what should you do? from the committee if you gain the support of other individual members, including, if possible, the builder and the committee chairman. You should explain that the committee needs to demonstrate a proper decision-making process that would support any contract awarded. This would protect the governors from the potential reputational risk that the school is not seen to award contracts properly. If your views are not heeded by the committee you should raise the matter at the next meeting of the governors. You would first need to refer the matter to the chairman of the board of governors. It may be advisable to discuss the matter with other governors in advance of the meeting. After taking these steps, if the prescribed tender process is not adopted, you should consider disassociating yourself from the board of governors. The value of resigning as governor should be weighed against the value of remaining in order to influence events. You should document, in detail, the steps that you take in resolving your dilemma, in case your ethical judgement is challenged in the NQ future.
are acting in the best interests of both the school and the local community. If you have to raise your concerns forcefully, you should try to provide constructive advice, rather than be seen as simply impeding the building works. Try to demonstrate how the process of tendering for and performing the work may still be completed during NQ Magazine April 2015
the summer vacation. If this is not possible, explain that the benefits of delaying the work will include protecting the school’s reputation. If, in your opinion, the building work is significant, you should try to insist that the award of the contract be subject to a proper tendering process. You will encounter less resistance
â—? This article is taken from a
series of Ethical Dilemmas Case Studies, published by the CCAB. See http://www.ccab.org.uk/ reports.php 13
CABA SPOTLIGHT
Accountants aren’t immune from debt Is your debt beginning to get you down? This problem is far more common among accountants than you might think – but help is at hand, says Paul Day
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CABA SPOTLIGHT
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hen thinking about self-improvement we often set goals around appearance, or wanting to get ahead, or getting a promotion at work. However, one issue that is much harder to address is being in debt – surely those who handle money professionally should not end up in financial difficulty? However, we know this can be the case and that both full and newly qualified chartered accountants do suffer from debt problems. As an NQ accountant you may have numerous forms of debt, such as student loans to pay off or credit card debt. Alternatively, you may have no debt at all. Having debt is not unusual, with data from November 2014 revealing that the average person in the UK owes £28,968. Be it through store cards, overdrafts, the ‘bank of mum and dad’ or unemployment, many of us have accrued debts that can sometimes get out of control or begin to feel unmanageable. While it may surprise some people, despite handling money in a professional capacity accountants do also fall in to debt. Unfortunately, people in financial difficulty often feel that admitting any debt problems will reflect negatively on them. This is often worse when it can reflect badly on their professional reputation. We often see this stigma preventing members from seeking help until things escalate out of control. From the calls we receive we know that debt among accountants is caused by a variety of reasons, ranging from accrued personal debts or debts related to running a small business, through to long-term illness or the pressures of being a carer. In the main it isn’t an individual spending beyond their means, but an event, or series of events, taking their personal finances out of their control. Remember, it can take just one incident (such as a redundancy or interest rate hike) to change your entire financial circumstances, and this isn’t something to be ashamed of. If you’re worrying about mounting bills or reaching your credit limits the tips below are a good way to begin to address the problem head on:
NQ Magazine April 2015
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Don’t delay – by addressing the problem early, you’ll begin to face your debts sooner, preventing them from escalating and giving you peace of mind.
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Budget – it’s not only students who need to count the pennies. Spending a little time working out what is coming in and the necessities that are going out is a worthwhile investment to balance the books. Look closely and cut back on non-essential outgoings to help free up extra funds to pay off your debts.
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Prioritise – different debts have different costs. Always look to prioritise the debt with the highest percentage interest rate, so if you have a 0% credit card or free balance transfers look to utilise these benefits and consolidate your debts. Then pay down the debts accruing interest (like bank loans, overdrafts or store credit). This is not a long-term strategy, but in the short term it can help to free up extra cash to address those debts burning holes in your pockets.
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Don’t be afraid to seek our help – from time to time we could all use a little help. Whether you need advice or financial assistance, don’t be afraid to tell us how bad it is, as CABA is here to help without judgement. Remember, debt puts great strain on your wellbeing (both physical and mental) and you will feel better for getting much-needed support. For ACA students who do get in touch we can offer a range of services, including helping you negotiate with creditors, offering financial assistance and steering you with practical advice to tackle your debt. We work with you to resolve the situation and get the best possible outcome. If you have been through a period of overspending, need to pay back a creditor or for other reasons are agonising about your finances, we urge you to come to us and let us help you. Being proactive is the first step to tackling the problem. For more information visit www.caba.org.uk NQ
● Paul Day, Debt Support Officer at CABA, a charity for ICAEW members
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INSOLVENCY
Could crim bankruptcy on the s John Harlow explains the concept of criminal bankruptcy and why there are calls for it to be re-introduced
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was intrigued to read recently that R3, the trade body for the insolvency profession, was pushing for the reintroduction of ‘criminal bankruptcy’, a concept that vanished back in the 1980s. When I first started in the insolvency profession in 1985, criminal bankruptcy was still extant on the statute books, although I never actually came across a case directly. The term bankruptcy, although widely used as a generic term for insolvency, actually only refers to the insolvency of an individual, not a limited company or a partnership. Criminal bankruptcy was something of a hybrid, whose purpose was to make available to victims of a crime, on the conviction of an individual, the recovery of assets to make good that loss to a specified minimum amount. The minimum amount for which a criminal bankruptcy could be made was £15,000, considerably more than the £750 for which a normal trade creditor could petition for a debtor’s bankruptcy. This was enshrined in the Powers of Criminal Courts Act 1973 (PCCA). Two Insolvency Acts consolidating the insolvency regime across both personal and corporate insolvencies were enacted in 1985 and 1986; the latter Act (as amended) is still the one governing the profession today. Although criminal bankruptcy was included in the 1986 Act, the PCCA was repealed in 1988, effectively making it impossible to make a Criminal Bankruptcy Order. What the Insolvency Act 1986 did do, however, was introduce a raft of so-called Bankruptcy offences, with which a trustee could pursue the debtor. These include failure to deliver-up property to the trustee; concealment of debt; failure to account for or explain loss of property; 16
concealment of records; making false statements and absconding with property. So committing any of these offences either before or after the making of a Bankruptcy Order could result in criminal proceedings being brought by the trustee. The Bankruptcy Offences contained in a schedule to the Insolvency Act 1986 are all triable either way (that is they can be tried in the Magistrates Court or the Crown Court) and must be instituted by the Secretary of State or with the consent of the Director of Public Prosecutions. The penalties vary, but may lead to a fine or imprisonment (or both) on conviction. The severity of the punishment will depend on which court the sentence is pronounced in. So if the current bankruptcy regime enables criminal sanctions to be brought against offending bankrupts, why would it be necessary to re-instate criminal bankruptcy? I wonder if this call by R3 is in part a reaction to the impending loss by practitioners of the ability to bring actions against offending bankrupts through Conditional Fee Agreements and After the Event Insurance policies, following the withdrawal of the insolvency exemption to the Legal Aid, Sentencing and Punishment of Offenders Act 2012 (LASPO 2012). R3 has (rightly in my opinion) lobbied hard against the withdrawal of this exemption, which will mean that Insolvency Practitioners will find it extremely hard to bring actions against errant debtors where there are no available funds in the estate, especially where there is no protection against adverse costs. The exemption is, however, set to be withdrawn with effect from April this year, notwithstanding opposition from the insolvency profession. NQ Magazine April 2015
minal y be back statute? R3 argues that the introduction of Criminal Bankruptcy Orders would be more effective than the current system of confiscation or criminal orders and, perhaps more importantly, all of the individual’s assets could be realised to repay victims rather than just the proceeds of the crime. It is also argued that overseas assets would be easier to retrieve, due to insolvency practitioners’ powers being internationally recognised. In addition, it is argued that insolvency procedures are generally quicker than actions carried out under the Proceeds of Crime Act, representing savings in both time and money. Investigations to trace and recover assets are carried out under civil law, which demands a lower burden of proof than criminal law. Given the problems which can be encountered by a Trustee in Bankruptcy in bringing proceedings against a malefactor, or indeed that encountered by a liquidator when he tries to bring an action against an errant director, then I agree that there may be a strong case for the re-introduction of Criminal Bankruptcy Orders. There has been a suggestion that, where a company is wound-up by the court in the public interest, a Criminal Bankruptcy Order should follow automatically for the directors of that company. However, I do wonder quite how it is envisaged that these will be funded. In the past, a petition had to be brought by the ‘Official Petitioner’, who would usually be the Director of Public Prosecutions. R3 is of the opinion that the re-introduction would enable fraudulent activity to be tackled in a more cost-effective way, especially in the light of cuts to the Government’s anti-fraud agencies. The question remains, however, at whose cost? In a normal bankruptcy scenario, even if the position of NQ Magazine April 2015
INSOLVENCY
Trustee is passed to an independent Practitioner, the Official Receiver (OR), a civil servant working for the Insolvency Service, will retain an investigatory role. This, of course, is paid for by the taxpayer, and I wonder therefore if the role of trustee in a criminal bankruptcy would remain with the OR. If so, surely the funding problems will remain. If these cases were to be passed out to the independent sector, then the same difficulties presented by the withdrawal of the LASPO 2012 exemption may render it an ineffective tool. Don’t get me wrong here: anything that is introduced to make an insolvency practitioner’s life easier and which enables us to recover assets more easily for the benefit of both creditors and the victims of crime is to be welcomed wholeheartedly. I will continue to follow the current discussions on this topic with interest.
Postscript As an addendum, it has just been announced that the withdrawal of the insolvency exemption to LASPO 2012 has been further delayed by the Government following the lobbying by R3 and others. This means that for the foreseeable future insolvency practitioners will be able to continue with the current funding regime. The Government will consider the appropriate way forward later in the year. The campaign is not over yet, we still need to convince the Government that our exemption should be made permanent and we will continue to do so when the new government is elected in May. NQ
● John Harlow, managing director, Harlow Insolvency 17
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THE EUROPEAN DIMENSION
Following the directive The UK government has outlined what it
needs to do to fall into line with the new
EU Accounting directive. Here’s a summary The UK government recently published its final recommendations on how new EU Accounting Directive will be implemented here. It has provided a list of things it intends to change:
profit and loss account and the balance sheet provided that the information given is at least equivalent to the information otherwise required by the standard formats.
● Adopt the maximum thresholds available to determine the size of small companies. This will enable 11,000 medium-sized companies to be re-categorised and access the less burdensome small companies regime. Mandatory increases in the thresholds for medium-sized and large companies will also be applied.
● In exceptional circumstances, where the useful life of goodwill cannot be reliably estimated it can be written off over no more than 10 years.
● Reduce the number of mandatory notes required of small companies to 13 notes, where these are appropriate. Most small companies have to provide a minimum of 17 notes.
● Remove the requirement for micro-entity companies to prepare a Director’s Report.
● Permit small companies to prepare an abbreviated balance sheet and abbreviated profit and loss account if approved by all of the company’s shareholders. The government believes this strikes a balance between enabling simplification and protecting minority shareholder interests. ● Give companies in the same group as a public company, which is not listed, access to the small or medium-sized companies regimes. ● Providing companies with the opportunities to use alternative layouts when preparing their
● Information on subsidiaries included with the consolidated financial statements can only be provided as a note to those statements.
● Permit the use of the ‘equity method’ in individual company financial statements. The government said it will not amend the definition of net turnover to include other sources of income. It believes there was insufficient evidence or appetite to justify introducing such a radical change into the UK financial reporting framework. Legislation in the form of ‘The Companies and Groups (Accounts and Reports) Regulation 2015’ will be introduced in 2015. Companies will be required to apply the new financial reporting framework for financial years commencing on or after 1 January 2016. Companies can adopt the framework earlier. NQ
IN THE COURTS
Reading between the lines
The European Court has determined that e-books are subject to VAT at the standard rate
T
he European Court has ruled that e-books are subject to VAT at the standard rate, as distinct from printed books, which are subject to the VAT reduced rate provisions. The Court said that, on the basis e-books are downloaded from a website, they are considered as ‘electronically supplied services’; not ‘books on a physical means of support’. As such, they are explicitly excluded from the VAT reduced rate provisions. The long-running debate on the discrepancy of VAT rates between printed books and e-books went before the European Court following the European Commission’s infraction proceedings (prompted by complaints from the UK and Germany) against Luxembourg and France for applying VAT at a reduced rate to e-books. Ian Carpenter, Head of VAT Services at Baker Tilly, said: “While the European Court’s judgment comes as little surprise, I doubt if this will be the end of the matter as the Digital Agenda for Europe has previously recognised the disparity of the application of VAT to printed books and e-books. “One of the guiding principles of EU VAT law is that similar goods and services should be subject to the same VAT rate. The Commission itself recognises that where a VAT reduced rate (or even a zero or super-reduced rate) is allowed for printed books, it should also be applicable to e-books.” He added: “The current application by some member states (notably France and Luxembourg, but more recently Italy and Malta) of reduced VAT rates to e-books has historically resulted in significant distortions of competition to the detriment of suppliers in the other member states
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NQ Magazine April 2015
IN THE COURTS
applying VAT at the standard rate in compliance with EU law. For almost 10 years, large digital service providers (Amazon Kindle, Skype, Netflix and Microsoft, etc.) have located their European headquarters in Luxembourg, enabling them to charge consumers the reduced VAT rate of 3%. “While this distortion of competition has largely been addressed by the new VAT rules applicable since 1 January 2015 whereby e-booksellers have had to charge VAT at the rate set by the country where the buyer resides, rather than the rate where the servers are located, the new rules have failed to address the fundamental principle of fiscal neutrality. Namely the discrepancy in VAT treatment between printed books and the same book in electronic form.” Carpenter added: “The VAT legislation that ‘zero rates’ printed books in the UK (and affords VAT reduced rates in other member states), substantially pre-dates the invention of e-books. It is noticeable that increasingly, some books are ‘born digital’ i.e. without a printed equivalent; but to the consumer, a book is a book whatever its format; they both deliver the same content to the end-user and, from the point of view of that consumer, content is more important than the medium through which it is supplied.
“European legislators traditionally favour specific definitions to enable them to apply a uniform approach to VAT, but the progress in technology needs to be addressed and appropriate amendments made to European VAT legislation. “I would hope that the European Commission’s Digital Agenda for Europe takes this forward, sooner rather than later; to ensure that all e-publications are subject to the same (reduced) VAT treatment, whether they appear online or offline. The longerterm implications of this may be that printed books, currently enjoying a zero rate in the UK, may have to apply VAT at a reduced rate, currently 5%.” NQ NQ Magazine April 2015
HMRC wins Eclipse court case
T
he Court of Appeal has ruled in favour of HMRC against Eclipse Film Partners (no 35), which will protect around £635m in tax. Eclipse claimed to trade in film rights but was in reality simply a tax avoidance scheme. There were 31 Eclipse partnerships that ran for between 11 to 20 years from 2005/6. Eclipse 35 is the first of the partnerships to be taken to litigation. The scheme sought to create substantial interest relief claims for investors. People borrowed significant sums of money, at interest, to invest in Eclipse. As the capital was supposed to be used by the partnership for trade, the individuals could then make interest relief claims against their other income.
The scheme operated by acquiring the rights to certain Disney films and then sub-leased them back to a different Disney entity for a guaranteed income stream. In reality, the borrowed money simply earned interest, which was then filtered through the partnerships to investors to cover the interest on their loans. This was dressed up as a trading transaction in order to enable the partners to claim tax relief. The Court of Appeal upheld earlier tribunal decisions that Eclipse 35 was not trading. As a result investors were not eligible for interest relief, and profits from the partnerships remain taxable.
NQ
21
STUDENT LOANS
Payback time? Gary Heynes explains why early repayment of your student loan can lead to an administrative nightmare
Y
ou would think that paying off your student loan would be a good thing – but it seems HMRC has other ideas. Many might say that it should be welcomed when someone repays their student loan early. In practice, it can turn out to be an administrative nightmare.
Individuals who have an incomecontingent student loan (starting before 1 September 2012) were required to repay 9% of their income exceeding £16,910 in the 2013/14 tax year. For employed individuals, this was done by way of deduction from their salary through the PAYE system. If, however, the individual was required to complete a self-assessment tax return then they were required to calculate and include a student loan liability on the form. It is possible to repay a student loan more quickly by making extra payments (a bit like overpaying a mortgage). If you are employed then the Student Loans Company (SLC) can issue a stop notice to your employer to cease deductions.
However, where a taxpayer settles the liability via self-assessment, it is not possible to restrict the liability on the tax return to the actual amount outstanding. So if during a tax year an individual within self-assessment has already repaid their student loan in full by making extra payments, it is still necessary to calculate a liability based on the individual’s income for the year. For 2013/14, HMRC says that if a taxpayer filed their return by 31 October 2014 then HMRC will make the necessary adjustment to avoid overpaying, but what about someone who filed after that date? Ordinarily, the individual will settle the student loans liability calculated on the form and will wait to be told whether they have overpaid. If a taxpayer fails to calculate a liability, HMRC will ‘repair’ the return and advise that a payment is now overdue. While this liability can be set aside until HMRC are advised of the actual amount due by the SLC, typically this requires both HMRC and the taxpayer to contact the SLC in order for position to be finalised. While we are all for simplicity, an individual should not be penalised for settling their loan early. A better way would be to allow an individual to override the calculation and state the actual amount outstanding, where it is less. This one additional box could save a significant amount of HMRC and NQ taxpayer time.
● Gary Heynes, National Head of Private Client, Baker Tilly 22
NQ Magazine April 2015
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