At the end of the day, over the life of a business, the profit is broadly the difference between what cash the business has earned over its life and the payments it has made over that same period. Cash in and cash out over the 1, 2, 5, 10, 20 year existence of that business.
All that accountants do is cut up that cake into neat slices, generally one year in length. We spend years training how to cut up this cake when it is basically money in less money out. HMRC get very upset if the profit is reported in the wrong period. Millions of pounds are spent on the wages and salaries of civil servants who check the results of our work, which at the end of the day might seem wholly unnecessary.
That is one view of the world and, as it would mean making me redundant, I think it is fundamentally flawed. I and all the other accountants and our staff need to earn a living after all and what else are we going to do.
So, we all probably have to accept that the accounts of your business are going to be drawn up on the current basis and thankfully, most of you will need an accountant. Accountants are masters of a black art that mystifies and bemuses so many people. We prepare the accounts and then tell you how much tax you have to pay, which in many cases does not seem to make any sense when you look at the profit (or loss) in your accounts.
We prepare the accounts, and we understand what they mean, and we may or may not get that meaning across to you. But we then go behind a veil and prepare the tax computations. You see, the accounts only tell you what accounting profit (or loss) you have made in the period.
But there are things in your accounts that are necessary to determine the profits for the period but are not allowable to tax, and there are things which are allowable to tax, which would be inappropriate to deduct when determining profitability.
The best example of this is when you buy equipment. At the moment you will probably get 100% tax relief, that is you can deduct the cost from your profit. These are your capital allowances and deducting them gives you the taxable profit. But we don’t do that in the accounts. We write off the cost of that equipment against the profits over the expected useful life of that piece of equipment. So, in the year of purchase, you will appear to be paying a lot less tax than you would expect from the accounts profit because we have deducted the full cost of the equipment in that year. In later years you will seem to be paying more tax than you would expect from the profit shown in the accounts because we are deducting the depreciation but that is not allowable for tax.
This is the simple explanation. The rules on capital allowances are ridiculously complex. No wonder people view us as masters of a black art. Then there are the assets you might buy that do not qualify for any allowances or deductions. Most buildings are a good example, although some do qualify in whole or in part for some capital allowances.
All this happens largely out of sight. You get the accounts and the tax bill and you just have to trust that we know what we are doing. You do not see all the time we spend juggling allowances and reliefs trying to get your tax to the least that we can. You do not see the complexity of the programmes we run. You get a set of accounts and a tax return and all you need to do is approve them. It is in the shadowy world away from the gaze of anyone that we actually earn our keep. And it’s also in this technical fog that corners can be cut, or claims missed and no one is any the wiser. If we take shortcuts, our invoice might be less, but your tax may be higher, You would be happy with the first and probably just accept the tax that was due. That’s not how we operate.
A few years ago, we ran a tax challenge. The challenge to anyone who was not already a client, and therefore paying the least amount of tax anyway, was that if we could not reduce your tax by at least £100, we would give you £100 in cash. We never paid out anything. Cash is largely a thing of the past these days but if you want to see what we can do to reduce your tax bill, why not get in touch. The first meeting is always free and you never know what we might find.
So, back to my wizardry and potions, back to the dark world of the black art of accounting. If you want to see what spells we can conjure up for you, give us a call.
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Alan E Long
The Long Partnership