By Daniel Hunter

The Institute of Chartered Accountants in England and Wales (ICAEW) has raised a warning flag about proposals from the Department for Business, Innovation and Skills for radical changes to the accounting requirements for micro businesses.

The accountancy body says there is a danger that the UK economy will suffer as the proposed changes may, over time, result in small businesses finding it even harder to access finance.

In its response to the BIS consultation, ICAEW says there are fundamental risks in the proposals that haven’t yet been fully assessed.

“We have a number of concerns about the suggested changes, as they may result in less transparency and less useful financial information. This, in turn, can over time have a negative impact on market confidence and on micro businesses’ ability to access finance, at least at the margins," Dr Nigel Sleigh-Johnson, Head of ICAEW’s Financial Reporting Faculty, commented.

“The ability to accessing appropriate finance is dependent amongst other things on confidence in the performance and prospects of the business. If the usefulness of available financial information falls, some lenders may be less inclined to part with their money. That's not a risk we would encourage BIS to take just now.”

The BIS proposals follow on from a decision by the European Union last year to allow each Member State more flexibility in deciding what reporting requirements there should be for the smallest of businesses. The aim of the changes is to reduce regulatory burdens and save micro businesses money. However, it is questionable whether the changes will result in substantial savings in cost and time for the majority of businesses impacted.

“ICAEW is a keen supporter of efforts to remove disproportionate regulatory requirements and cut small businesses free from red tape. Too much regulation can represent a real barrier to innovation and growth," Sleigh-Johnson added.

“However, in our view it is a myth that accounting is one of the more significant burdens on micro businesses. Much of the accounts preparation process is done automatically, using specialist software. Whilst the impact of the proposals would vary from business to business, any savings in accounts preparation costs are likely to be limited for the majority.”

ICAEW voices particular concerns over the proposed mixing of two different types of accounting, cash and accruals, saying that combining the two may cause confusion and misunderstanding.

There are also several areas the consultation paper from BIS doesn’t cover and which require more work, such as the implications for tax compliance and for the determination of distributable profits.

Join us on
Follow @freshbusiness