Cash Accounting for small businesses - Engagement letter
Plans were announced in the 2013 budget to introduce a cash accounting regime for small unincorporated businesses. Practitioners planning to offer this service to their clients will need to consider revising the letter of engagement. Many of the current paragraphs in the engagement letters will continue to apply, but practitioners might want to consider making the following changes:
Sole trader accounts preparation letter
Paragraph eight of the letter refers to preparing the accounts and then adds “financial statements” in brackets. It would clarify the position if that reference was removed and replaced instead with “receipts and payments account” in the brackets. Additionally the two references in paragraph 8.1 to “financial statements” should be replaced with “accounts”.
Paragraph nine sets out specific responsibilities, and it would probably be advisable to add the following:
• A record of business mileage undertaken in the year
• A record of hours per month worked at home if you wish to claim for business use of your home
• Details of any loan interest paid
Finally, paragraph 13 states: “where we identify that the accounts do not conform to accepted accounting principles…” At this point it would be good to add “nor to the specific rules relating to the cash accounting regime”.
Partnership accounts preparation letter
Practitioners might want to consider changing paragraphs eight and nine of the partnership letter in the same way as detailed above for the sole trader letter. The other change, which is in paragraph 13 of the sole trader letter, should be made in paragraph 12 of the partnership letter.
Schedule of services-personal tax
In paragraph two of this letter, it should be stated that the accounts are prepared “in accordance with generally accepted accounting practice and the rules associated with the cash accounting regime.”
Paragraph six sets out examples of ad hoc and advisory work, and an extra point should be added here, along the lines of; “making recommendations to you about the use of cash accounting and other suitable methods of accounting”. This paragraph should be added to ALL personal tax engagement letters, even where cash accounting has not been adopted, as it sets out that the consideration of its suitability will involve a separate additional instruction from the client, and it is not the accountant’s responsibility.
After paragraph 17 a new paragraph should be added: “You are responsible for monitoring your monthly turnover to establish whether it exceeds the relevant thresholds for the cash basis. If you do not understand what you need to do, please ask us. If you exceed the threshold, and wish us to assist you in notifying HMRC, we will be pleased to assist you in the process. You should notify us of your instructions to assist in this process promptly. We will not be responsible if you fail to notify us in time and incur a penalty.”