Fair Access is an Accounting Dilemma

Posted on April 8, 2011 by admin

It is almost no longer news that most UK universities are planning to charge the maximum tuition fee of £9,000 for all courses beginning in 2012. It is probably only worth reporting because of the increasing number of former polytechnics joining the list of top-wack institutions. There are now questions about how the government will afford the outlay on student loans implied by all these higher education courses at the higher rate with vague threats emerging that the funding that the colleges receive directly will be cut if the cost of student loans climbs too high.

Of course nobody knew what decisions the universities would make about charges for 2012, although some might have guessed that any university charging at the the standard £6000 rate would be making an admission of inferiority, but one result of so many colleges opting to squeeze as much money out of students as possible will be a great deal of work for the Office for Fair Access (OFFA). It is OFFA’s job to examine and approve the ‘Access Agreements’ that each of these institutions must now prepare in order to justify their fees. OFFA has published its guidance to help college authorities in the task of preparing these agreements. This guidance, though, has to deal with a couple of inconvenient truths.

The first is the fact that the universities that have done best at attracting students from under-represented groups are the very places that have least success in retaining those students to the point where they achieve a worthwhile qualification. So they are not to sit back on their laurels but are required to demonstrate that they are spending some of their higher rate income on improving their outcomes. Obligingly OFFA provides a formula for how much of the additional money coming in from the higher rate fees should be spent on these access objectives. Since most places are charging the full £9,000 all they need to know is that they should be spending £900 of that money supporting their access agreements.

The second inconvenient truth is that it does very little good for universities simply to give money to students from under-represented backgrounds because “our analysis of the impact of bursaries found no measurable evidence that they had influenced applicants’ choice of institution”. The door isn’t quite shut on this one though as “it is not clear how higher graduate contributions will affect behaviour – so it is possible that financial support may become more important in the new landscape”.

The universities, then, should concentrate on outreach initiatives to bring in students from under-represented social groups and on delivering courses that students will complete successfully. Meanwhile the government which has already achieved much to deter students by making courses prohibitively expensive will do the very thing that OFFA knows doesn’t work. It will attempt to bribe students through the National Scholarship Programme NSP) which is “restricted to fee waivers, support in kind and/or a financial scholarship/bursary”. The very inconvenient truth for the higher education institutions is that, apart from spending £900 per course on supporting their access agreements, they will have to account for and match every penny that the government spends on these totally ineffective bursaries.

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Bribery is a failure to account

Posted on April 1, 2011 by admin

A new Bribery Act is due to come into force in the UK on 1 July 2011. The new legislation sets out to simplify and clarify the criminal offence of bribery. Of course, given the very murky nature of the use of bribes in business, particularly international trade, it is unlikely that the Act will create anything like simplicity or clarity. However, there is a helpful requirement that the Secretary of State for Justice, Kenneth Clarke, should produce guidance for UK businesses that are anxious to avoid becoming ensnared in bribery scandals. The published guidance is now available including a rousing foreword from Mr Clarke.

The 45 pages of guidance and presumably the Act itself seem to recognise that no enterprise can be certain that none of its employees, agents or associates is handing out illicit payments behind its back. This kind of corporate failure, where the accused might only be indirectly responsible for bribery, is covered separately by section 7 of the Act. I suppose it is sensible to assume that criminals who deliberately intend to corrupt public officials of othe countries for instance, dealt with in sections 1 and 6 of the Act, need moral direction rather than the commercial guidance provided by the Secretary of State.

There is a possibility that some entrepreneurs setting out across the hazardous seas of international trade will be put off even by advice that runs to as few as 45 pages. Although the whole approach to avoiding bribery is boiled down to just six principles, these six include ‘Risk Assessment’ (Principle 2) and ‘Monitoring and review’ (Principle 6) amongst others which are anything but thrilling. Nevertheless the guidance will repay anyone who takes the time to follow it (and carry out due diligence, for instance, on their agents in foreign countries) and all the more so because the Act allows anyone who is accused under section 7 to produce in their defence evidence that they have followed this guidance.

Yet the guidance does not seem to reflect the biggest scandals that have done most damage to the reputation of the UK. I am referring to the BAe deals in Saudi Arabia (Al Yamamah) and Tanzania. Naturally, when these have come to court in the USA or Britain it has been impossible to demonstrate absolutely the existence of a bribe. Indeed it is easy to imagine that in future a company like BAe would have all its risk assessments and monitoring and review procedures in place to forestall bribery. BAe could not be convicted of bribery. The company pleaded guilty, on the other hand, to false accounting. In truth corruption almost inevitably leaves its fingerprints somewhere in the bookkeeping but the guidance hardly refers to accountancy practices at all with the briefest of mentions, “Financial and commercial controls such as adequate bookkeeping, auditing and approval of expenditure” tucked away on page 22.

The only way that a company can be quite sure that its money isn’t being used to pay bribes is to account properly for every penny.

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The Business of the Budget

Posted on March 25, 2011 by admin

Many commentators have pointed out that George Osborne’s first ‘proper’ budget statement this week was unlikely to change very much. The Chancellor had set out the government’s policies in his June 2010 budget immediately after coming to power and subsequently in the October comprehensive spending review (CSR). Although there are signs that the radical cuts in public sector expenditure, and therefore employment, may have created a damaging overall collapse in confidence in the economy, it would be far too soon to abandon the Coalition strategy of deficit reduction so, along with the Treasury, we must all grit our teeth whilst watching and hoping for economic success.

Even the most popular measure in the budget, the reduction in fuel duty, was not unexpected. However, the way this piece of public largesse has been financed did come out of the blue. Instead of taxing the vehicle users at the pumps the government will switch the burden to the oil producers, or those in the North Sea at any rate. Caught unawares the media have not done justice to this measure. Even the Chief Secretary to the Treasury, Danny Alexander, was at a loss to explain to the BBC why this would not have the same effect as taxing petrol and diesel. Yet the Budget Statement demonstrates exactly how this works: “When oil prices are high, as now, fuel duty will increase by inflation only. UK oil and gas production is more profitable at such times, so it is fair that companies should contribute more.” Similarly, “In future years, if the oil price falls below a set trigger price on a sustained basis, the Government will reduce the Supplementary Charge”. The arbitrary trigger price, incidentally, is $75 per barrel so if and when the cost of oil comes back down to that level then, “Fuel duty will increase by RPI plus 1 penny per litre in each such year.” The increased tax on UK producers, which effectively only taxes production in one location, will hardly affect the global price of crude so there will be very little to pass on to consumers. The oil and gas industry in the UK should not be very badly affected either because when the companies have chosen to develop a field in the North Sea they will have done so assuming a price for the output more like George Osborne’s $75 per barrel and they will know that developing reserves in future will only attract higher taxes if the global price is also high.

So this particular cash grab in the budget seems to work out very well for everyone except shareholders in energy companies expecting super-profits from UK oil and gas production. It is a shame, though, that the windfall will be squandered pandering to vehicle owners who are reluctant to economise on fuel.

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OECD looks at the books

Posted on March 17, 2011 by admin

Company accountants don’t always look forward to having the books audited but the Chancellor might look upon the the OECD Economic Survey as a most helpful publication.

That wouldn’t be susrprising, of course, because the survey is carried out very much hand in hand with the Treasury. Also, the wise economists at the OECD are less free with financial forecasts than they were before the credit crunch when, for instance, they released a rather optimistic prognosis for the Irish economy which promptly collapsed. So there is no need to say whether or not George Osborne’s cuts are choking off the chances of growth in the UK and the OECD can settle for the formula that the fiscal adjustment is ‘necessary’.

The predictions, then, are timid. Apparently “a subdued recovery is expected over the next two years” and “unemployment is expected to fall gradually”. The coalition government even receives a few pats on the back. There are glowing reviews for the introduction of the Office for Budget Responsibility (OBR) whereby the “the government has addressed one element behind previous fiscal indiscipline” and for the new level of tuition fees. Indeed, “the government could pursue reforms to further lower the public share of funding, e.g. through lower grants to universities.”

The survey is worthwhile, if at all, for the advice it gives to our politicians. Too many of these helpful words are directed the very fine detail of British public life. So, for instance, the OECD recommends that “the government should experiment with proscribing the use of residence criteria in admission to local government maintained schools in some local authorities and evaluate the effects carefully” and that “decisions on opening new schools should rely on the quality of the business plan and should not be left to local authorities but to another appropriate body.”

When it is not presuming too much insight into the educational system in this country, though, the report does make some useful suggestions that might boost the government’s confidence to take decisions which may receive bad press but which are nevertheless long overdue. The survey points out that political expediency has produced VAT arrangements that discount or exempt far more forms of consumption than other countries. If we were to sweep away these unnecessary concessions then we could use the additional revenue for more targeted interventions to address the acute social inequalies that the OECD recognises. Not content with shooting the sitting duck of British VAT concessions the report’s authors also hit upon our idiosyncratic system of housing taxation. They suggest that property taxes should be linked to market values in the hope that this would work better than the current council tax arrangements and would function as a break on escalating house prices.

However, with Ed Miliband proposing this week yet another reduced VAT rate, this time on petrol and diesel, and with the nation convinced that prosperity is the result of ever increasing property prices, it seems that, when it comes to making useful suggestions, the OECD is wasting its breath.

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Accounting for tax simplification

Posted on March 8, 2011 by admin

When he became Chancellor George Osborne moved very quickly to establish the Office of Tax Simplification (OTS). In time for this month’s budget the OTS has now reported back. The team responsible should be applauded for achieving anything in so short a time. However, that achievement, of course, was made possible by severely limiting the scope of their work.

The review concentrates on tax reliefs rather than the taxes themselves. Apparently they have counted 1042 individual reliefs and this latest report deals with 155 of those in detail making recommendations on each one. There is, though, a very large elephant in the room:- “Merging income tax and NIC”. It almost seems to go without saying that this would be the right thing for any government to do but the OTS swerves away as it is “a long term project of structural reform”.

Even more daunting, perhaps, would be a reform of VAT. Fortunately for the OTS, even though the range of VAT reliefs is the most extensive and complicated of all taxes, VAT is governed by EU directives which are merely interpreted and put into effect in national law. Not only that but the OTS can defer to the “EU announcement, on 1 December 2010, that there is to be an evaluation of the current VAT system.”

The European Commission consultation document, grandly titled, “GREEN PAPER – On the future of VAT – Towards a simpler, more robust and efficient VAT system“, unlike the OTS has not reached the point of making any definite recommendations. It does, though, make a case for the ”relative efficiency of consumption taxes, consumption being a broader and more stable base than profits and incomes” and warns that “given the impact of ageing societies … taxation systems will have to be adapted”. The green paper identifies two main areas for reform; intra-EU transactions and the scope of VAT.

The current rules for intra-EU transactions whereby transactions are treated differently depending on whether they are domestic or intra- EU have notoriously created the conditions for fraud which has already cost the UK Treasury staggering sums of money. The green paper cannot claim to have a solution to this problem but it does set out some alternatives that might address it.

The scope of VAT, apparently, is too narrow and a broader-based tax with a single rate would be more efficient but “the use of reduced rates as a policy instrument is often advocated notably for health, cultural and environmental reasons”. So there we have it, as long as taxes are regarded as a political tool for social engineering purposes we will have to suffer the ever increasing pile of unnecessary additional taxes (like VAT), unjustifiable reliefs (like newspapers) and exemptions that completely distort the market (like public transport).

Still, the OTS has made a start. Amongst other reliefs that needn’t be retained it has proposed abolishing the excise exemption for ‘black beer’ which was once considered to have medicinal properties despite being considerably stronger than most other beers. No doubt the very few remaining black beer drinkers will be disappointed, if not surprised, but at least the Treasury can say that it is making progress.

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ECJ takes no account of risk

Posted on March 2, 2011 by admin

Across the European Union there are many people who think that the European Court of Justice (ECJ) is making binding decisions that go directly against the views of the majority of the people. The old adage that ‘the law is an ass’ seems especially appropriate now that the court, in insisting on equality between the sexes above all else, has wilfully decided not to understand the nature of insurance.

At the heart of this case is EU Directive 2004/113/EC which prohibits all discrimination based on sex in the access to and supply of goods and services. Of course, on the face of it this is a catch-all directive that includes insurance services but the text of paragraph 19 of the directive says, “Certain categories of risks may vary between the sexes” and continues, “Member States may decide to permit exemptions from the rule of unisex premiums and benefits, as long as they can ensure that underlying actuarial and statistical data on which the calculations are based, are reliable, regularly up-dated and available to the public.” The directive requires the Member States to keep this exemption under review but essentially allows insurers to continue business as usual. The court, however, has unilaterally overruled the Directive “in the light of higher-ranking legal rules and, in particular, in the light of the principle of equality for men and women enshrined in EU law.” It must be highly gratifying for the lawyers to eradicate these little anomalies that allow people in the real world to stray from the path of righteousness.

So, from 21 December 2012, insurers will not be allowed to make any distinction on the basis of sex and must not take into account that young women are much less likely to drive dangerously than young men or that men at retirement age will probably die sooner than their female colleagues and should therefore have their pension annuity measured out over fewer years.

Will the ECJ go even further towards destroying the fundamental actuarial principles of insurance? Are there ‘higher-ranking legal rules’ that guarantee equal treatment regardless of age, for instance, or disability? Apparently not. Although men and women must have equal access to goods and services as enshrined in Directive 2004/113/EC other potential victims of discrimination that might be “based on religion or belief, disability, age or sexual orientation”, for instance, only enjoy the protection of EU Directive 2000/78/EC which sets up equal treatment in the workplace.

If the European Union, quite logically, eventually concludes that all forms of discrimination, whether on the grounds of sex or, say, of age, require equally to be prohibited by EU law then most forms of insurance will become pointless as it will not be possible for the premiums accurately to reflect the risk. Until then it will be mostly young women drivers and men on retirement who will wonder why they should pay for the more expensive outcomes of the opposite sex.

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Good statistics or bad accounting?

Posted on February 22, 2011 by admin

The Office for National Statistics has published the figures for the Public Sector Finances for January and there is something of a surprise after the gloom of the GDP figures for the last quarter of 2010: the public sector borrowing requirement (PSBR) was negative. In other words, receipts from taxes were greater than the total public sector expenditure for the month. So the deficit actually went down!

This result is not so extraordinary, of course, because January is a peak month for tax receipts from income tax and corporation tax. Nevertheless, the surplus of £3.7bn was a huge improvement on the same month in the previous year when the UK still had to borrow £1.3bn. So how can these two economic indicators be both so pessimistic and so hopeful at the same time? The simple answer would be that one set of statistics, or possibly both, is wrong. That isn’t at all unlikely given the historic inaccuracy in preparing the figures.

However, it could be that both the PSBR and the GDP numbers are correct. If so, then the gloomy shadow of the decline in GDP at the end of last year should cast a longer shadow than the positive glow of the public finances.

The better-than-expected tax receipts, after all, came about because individuals earned money and companies made profits in the period ending in the early part of 2010 or even sooner. The GDP figures, on the other hand, do not suffer from the same time lag.

The worrying thing is that the chancellor, just as he is planning his budget in a month’s time, may be inclined to take the credit for a PSBR for the year to March 2011 that is significantly lower than the projections suggested when he entered office. He might take this as encouragement to pursue his policy of deep cuts even more vigorously when it was actually his predecessor’s efforts to promote growth that had generated the additional income and the more recent headlines of cuts in all departments had only succeeded in nipping that growth in the bud.

Every accountant, including the chancellor, should remember that there are two sides to the profit and loss equation. Concentrating solely on either increasing revenue or on cutting expenditure is usually very bad business.

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Square accounts in a round tax hole

Posted on February 15, 2011 by admin

Published accounts, or financial statements to use a more professional title, tend to look somewhat similar. This is especially true of the central document at the heart of all accounts, the balance sheet. This similarity is by no means accidental. A succession of Companies Acts have steadily refined the mandatory way to compose the annual accounts so that, as far as possible, every company will put the same accounting item in the same place. Of course, different companies may have widely differing accounting methods for arriving at the final figure for that particular item but at least it has its own designated place in the financial statements.

At the same time as the latest Companies Act passed into law, in 2006, Lord Carter of Coles published a report recommending that all corporation tax returns should be filed in eXtensible Business Reporting Language (XBRL) format. Since 2006 the use of XBRL has gone further with inline tagging (iXBRL) that enables HMRC to ‘read’ accounts electronically exactly as intended by the company filing its annual reports and iXBRL will be the obligatory format for corporation tax returns from April 2011. Those returns must also include the company’s accounts in iXBRL format.

Five years is not very long to implement technology changes as the report acknowledges. Although when te report says, “We felt that the picture .. was one of an overstretched IT provision and we believe this unlikely to change over the next 5 years. The funding available for online services is also limited.” it is actually talking about HMRC rather than the beleagured corporate accountant. Yet, for all Lord Carter’s concern, HMRC now finds itself ready to insist that all returns are made in iXBRL whilst the tax accountants have written to the Treasury asking the Exchequer Secretary, David Gauke MP, for more time. He has responded to the effect that there will never be a good time because “there will always be implementation challenges” to put the change into effect so we might as well start now, even if nobody is ready. 

This seems rather one-sided and it is. The Treasury and HMRC know exactly where they think that every item in the accounts should be pigeon-holed. The trouble is that their list of thousands of tags, which in many ways correspond with the boxes on an old-fashioned tax return, are effectively a whole new and very precise accounting language for a profession that might refer to, for instance, the sales ledger as the debtors ledger or the customer ledger or accounts receivable. Unless the accountant can be sure when transactions are posted to the accounts that the account used matches the correct tag for iXBRL purposes there is bound to be a laborious job of translating the results of the company’s bookkeeping into the language of HMRC returns. No wonder the software houses only have an ‘interim solution’ available.

Apparently the tax inspectors will be sympathetic for a couple of years where they think that an error in an iXBRL return is a genuine mistake. After that, though, the tax accountant, who seldom has a say in the way that the bookkeeping is done, must ensure that the iXBRL version of the accounts comes out right. It seems that HMRC, in order to streamline the task of its accounts analysts, is effectively introducing the equivalent of the French ‘Plan Comptable Général’ and accountants would be unwise to think that their existing training is sufficient to enable them to deal with it.

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The end of the Premier League’s pricing game

Posted on February 9, 2011 by admin

If you blinked you will have missed the news that the EU Advocate General, Juliane Kokott, has given her formal advice  to the European Court of Justice (ECJ) in the case of Karen Murphy. It is not certain, of course, that the court will follow her advice but it is highly likely, especially as she has come down in favour of freedom of movement of services around the member states of the EU. Such a ruling could change the business of football as much as the Bosman decision of 1995.

So, if we assume that the court accepts the Advocate General’s advice, what difference does it make? Karen Murphy is the landlady of a pub in Portsmouth. She didn’t want to pay the exorbitant fees that Sky charges pubs to broadcast Premier League matches so she acquired the equivalent equipment and decoder card to show the games as broadcast on satellite by a firm called Nova from Greece. The Premier League (FAPL) and Sky know full well that Premier League matches are much hotter property in Britain than they are in Greece so the fee passed on to their Greek customers is a fraction of the UK equivalent price on Sky. Quite reasonably the FAPL argues that it owns this intellectual property and has the right to decide what customers pay to access it. Ms Murphy, on the other hand, claims that EU citizens cannot be prevented from freely purchasing services anywhere in the EU.

This, briefly, is the clash of principles behind Juliane Kokott’s advice although she has actually found herself answering eight different, but related, questions put to the court. In doing so her advice threatens to shatter the way that the FAPL/Sky does business. She entirely dismisses the suggestion that acquiring a satellite decoder and card in one country and bringing it to use in another country makes the equipment an ‘illicit device’ in terms of copyright law so the English publican cannot be held criminally liable for doing so. That would be true, apparently, even if the user of the decoder had used an address of convenience in another country to obtain the equipment. What’s more, there seems to be no reason for applying the law any differently between commercial consumers, such as pubs, and domestic ones although the Advocate General did graciously endorse the practice of applying a different and more expensive licence to pubs.

The final item, though, is the biggest bombshell: licence agreements that require broadcasters to prevent the use of decoder cards outside the licensed territory “are liable to prevent, restrict or distort competition”.

Sky, the Premier League, and possibly many others, may have to devise a ‘one price fits all’ approach to business in the EU.

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Accounting for Sunshine

Posted on February 4, 2011 by admin

The UK government Department for Energy and Climate Change (DECC) is responsible for encouraging us to use less fossil fuel and to switch to renewables wherever possible. There are a number of sources of energy generally available including wind turbines and heat pumps. Two of the sources however, photo-voltaic (PV) arrays and solar thermal water heating, rely directly on sunshine. The idea that consumers should create their own renewable electricity is called ‘microgeneration’.

DECC realises, of course, that the only form of encouragement that will persuade us to invest in technology to turn our homes into miniature power stations is a financial inducement. So it has introduced the Feed-In Tariff (FIT) based closely on similar schemes across Europe. The idea is that it wouldn’t be attractive, even at the current cost of fuel, for most of us to spend several thousand pounds to save a few units of electricity so the government will pay us for every unit that we generate. The hope is that this will kick start a national movement for microgeneration driven by consumers. This form of subsidy seems very much against the cost-squeezing spirit of the coalition government but, even so, it is going ahead for the time being.

Overall the subsidy is designed to take into account the cost of installing a microgenerative scheme as compared with the amount of electricity that it will produce. So PV solar panels receive the greatest subsidy according to the tariff whilst hydro schemes earn the least. This arrangement extends the logic that is behind the whole initiative which is to persuade consumers to buy into something which is otherwise not very rewarding.

There are two good reasons why PV panels are so cost ineffective that they need overwhelming largesse from the state to persuade rational people in Britain to buy them. The first is that they don’t work very well. According to the experts typical domestic PV solar panels only convert 15% of the sunlight into electricity. Not surprisingly scientists and manufacturers are working to improve these figures. It is hoped that the Feed-In Tariff subsidy will help to stimulate this industry but it is difficult to imagine that it will ever lead to the UK becoming a world leader in PV production. The second reason is that Britain has relatively little sunshine. No amount of hopeful intervention from the government will ever improve this.

Why, then, does the department want to turn the world upside down like this? Why are we spending public money to persuade taxpayers to do something so impractical? The politicians must answer for themselves. Meanwhile the funds that are available will be mopped up by the very least cost-effective option for reducing CO2 emissions.

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