Are you ready for the tax implications of the accounting rules changes?

UK companies that have prepared their accounts under UK Accounting Standards are required to prepare them under new rules for accounting periods commencing on or after 1 April 2015. These changes will affect the accounts of all companies with various items being valued on a new basis. This will have an impact on the look of the accounts, how and when these items are taxed and on cashflows.

There are a number of areas that will change, but one that could catch many businesses out is the treatment of financial instruments. Financial instruments sound a bit complicated but it includes all debts and liabilities of the company. It also includes any derivative contracts that the business is party to, which could cover circumstances where the company has entered into an agreement to buy or sell currency or materials in the future in order to fix the price.

Under the old Accounting Standards these financial instruments would generally be carried at cost or possibly would not be on the balance sheet at all. However under the new Accounting Standards these items will generally be required to be held at fair market value on the balance sheet. This will create greater volatility in the accounts as fair market value moves, but also these movements will be taxable on the company. In addition there is likely to be a change in value of the asset or liability or including it on the balance sheet for the first time and again this will be subject to corporation tax. The adjustment in value due to the new accounting standards is either taxable in the first accounting period or it is spread over 10 years depending on the circumstances.

An area that will require particular attention is where loans have taken place at non-market rates, for instance on an interest free basis. This will often happen where a shareholder lends money to the company and does not charge interest. Here the company is required to fair value the loan assuming that a market rate of interest is being charged. The company must then fair value the loan at each year end until it is repaid. The change and the finance charge will be tax allowable as they arise in the accounts. This does mean that there is potential for an upfront tax cost on the company although this will reverse as the finance charge arises in the accounts. However, as the rate of corporation tax is coming down in 2017 and 2020 this could result in a real tax cost for the company.

Where loans are between group companies the accounting rules under the new Accounting Standards will apply, however the taxation rules will over ride these changes and the company will continue to effectively be taxed under the old Accounting Standards.

The new Accounting Standards are set to can have a significant impact on the accounts and cashflows, so are you ready for them?