For and Against.

Audit threshold and IR35 trap[QQ] Accountancy Age (1 February page 2) revealed that thousands of contractors were at risk of fines and interest charges from the Inland Revenue as a result of IR35.

The wrath of the Revenue was about to descend on hard working professionals because they didn’t understand what they were meant to do. The reason they did not understand was because they did not have a qualified accountant to keep them on the straight and narrow.

And why didn’t they have an accountant? Because the audit threshold has been lifted to such an extent that virtually every one-man company – and an increasing number of more than one-man companies – don’t need an audit by law. And if they don’t need an audit they don’t go knocking on the door of an accountant and therefore don’t receive essential financial and tax advice ensuring their obligations are fulfilled.

In some ways the news that many small businesses and one-man bands have cut their ties with accountants should not come as any surprise.

The introduction of IR35

coincides with the rise in the audit threshold. And which government department constantly blocked moves to let smaller companies off the hook of audit? Step forward the Inland Revenue.

An audit certificate gave the Revenue some assurance the small business wasn’t completely on the fiddle. Is it too far fetched to suggest that when it realised it was about to lose the fight over the small-business audit, that it found through IR35 an alternative means of shoring up the revenues from the small business sector?

One of the boasts of this government was that it wanted to practice ‘joined up’ thinking. The tale over IR35 and the rise in audit threshold suggests that, in this instance at least, government has failed to think through the consequences of its actions. Some in the profession are suggesting the government may reverse its policy on audit once it realises the consequences.

The idea of politicians and civil servants performing such a public U-turn seems highly unlikely.

But maybe before ministers and officials at the Department of Trade & Industry go ahead with their plans to raise the threshold to over #4m, perhaps they should pop round to their colleagues in Treasury and Revenue to discuss what the likely consequences of such a move could be.

– Peter Williams is a freelance writer and a director of Kato Publishing

… TAKE THE EXEMPTION LEVEL HIGHER

For the vast majority of small companies, statutory audit is not a valued service provided by an independent qualified accountant. Instead services seen as beneficial are tax advice, business advice and dealing with Companies House requirements.

The continuing involvement of the accountant with all aspects of an exempt company’s accounts is viewed as adding quality and reliability to financial statements.

Given the statement from managers that demand for competent advice remains, it’s difficult to see why the tie with the accountant may be severed as audit thresholds are raised.

From my colleagues’ experience there is no evidence of desertion, and certainly not by contractors affected by IR35.

For most affected companies raising the audit exemption beyond #1m towards the European threshold of over #4m cannot come too soon. At this level the Small Practitioners Association’s 1999 survey suggested that 92% would obtain exemption.

The survey found average savings in annual accountancy charges of #350 and, for this sector of business which DTI statistics show as 250,000 strong, a national annual saving of #87m, allowing accountants and managers to make better use of time previously absorbed by regulatory procedures.

Banks or other third parties may still require exempt companies to have accounts audited, as will various professional bodies, associations and clubs. Some of this latter group might benefit from reduced charges by considering a rule change to ‘an annual examination of financial statements by an independent qualified accountant’ which would reflect what they actually expect.

A real but not insurmountable concern is that graduates may be reluctant to train in practices with little audit work, and it may be intake sources need reconsideration. Those like me who did five-year articles can envisage recruitment of A-level students via an AAT course before taking institute examinations.

With higher exemption inevitable, the ICAEW voted not to support a half way, ‘light touch’ regulated independent professional review suggested by the DTI and, with this single bold leadership statement, gave a clear message to the business community that we are ready for and support the upper level proposed.

– Peter Mitchell is a small practitioner, chairman of the Small Practitioners Association and a member of the ICAEW council.