Host

Philippa Lamb

Guests

• Iain Wright, Chief Policy and Communications Officer, ICAEW
•  Caroline Miskin, Senior Technical Manager, Digital Taxation, ICAEW
• Sally Baker, Head of Corporate Reporting Strategy, ICAEW

Transcript

Philippa Lamb: Hello, welcome to Accountancy Insights. I’m Philippa Lamb with your regular monthly news roundup. This time, I’ll be discussing how tariffs may affect the government’s fragile growth plans with Iain Wright, Chief Policy and Communications Officer. We’ll also cover Making Tax Digital’s 10th birthday with Caroline Miskin, Senior Technical Manager for Digital Taxation, and recent IFRS changes with Sally Baker, Head of Corporate Reporting Strategy.

We’re recording this episode a week after the Spring Statement and a day after news of President Trump’s trade tariffs. Earlier, I caught up with Iain Wright and asked him what he thinks they will mean for the UK.

Iain Wright: It’s not good news. Anything that injects additional costs and complexity into the global trading system will ultimately have an impact on people’s livelihoods, on jobs and on living standards. So, let’s not sugarcoat this, this is not welcome news. That said, the UK seemed to escape relatively lightly. The minimum tariff imposed by President Trump yesterday was 10% and that’s what the UK had, in contrast to, say, the EU, which had 20%. Vietnam had something in the region of 46%, I understand, something like that. So, it was incredibly bad across the global trading system. The UK faired relatively lightly.

PL: Thinking about growth, we had growth forecasts from the OBR [Office for Budget Responsibility] just last week, but they are presumably rethinking them even as we speak.

IW: I would have thought so. It seems such a long time ago, the Spring Statement, and the big headline then was – because of challenging domestic and international scenarios – growth forecast was going to be halved from 2% to 1%. Some of that was the volatile geopolitical system. Some of that was down to a need for increased defence spending, all of that. Part of it was self-inflicted, of course, as well. The OBR did acknowledge that trading conditions had deteriorated since the October Budget, and some of the measures that were put into the October Budget were the cause of that. So, let’s not lose sight of that, very much a self-inflicted wound. But it has changed, it has changed dramatically. We are talking wafer-thin growth figures for the rest of the parliament.

The OBR had modelled some of the things relating to trade scenarios, tariffs and what that might mean for UK GDP growth. They were working on the assumption of 20% and as we said, UK goods will be subject to 10% tariffs. But even so, the OBR said it would have an impact of round about 0.2% of GDP. It would permanently reduce the size of the UK economy by about a percentage point. These are negative things, and although it might be slightly lighter than that, given that we don’t have tariffs of 20%, it is going to take a hit. It takes a hit on economic growth. It takes a hit on future trajectory of economic growth in our country. And crucially, given that you just mentioned the Spring Statement, it takes a hit on public finances. The Chancellor is walking such a tiny tightrope, and any reduced receipts from economic activity – VAT, corporation tax, income tax, all of that – or any increased expenditure because of higher debt interest repayments, blows her calculations out of the water. And then that means what? Well, there are two options. You either reduce expenditure still further, and it’s difficult to see where you’d cut the state in that regard – NHS? Defence? Well, certainly not. Or you raise taxes. And I think that is the challenge facing the Chancellor in the next few months as we come up to the Budget in the autumn, it looks almost inevitable she will have to raise taxes.

PL: So even though she’s fenced herself in with a set of self-imposed fiscal rules, that’s just not looking feasible now, for her to maintain this?

IW: She can’t make the sums add up, and something has to give, and she’s talked about cutting welfare spending. But look at the big, big headwinds in terms of we have to, as a country, spend more on defence, that is expensive. Tariffs, that trading position, will make sure that the global economy deteriorates. That has an impact both on living standards, on our growth, the nature of our economy, but also on public expenditure – higher debt, interest payments, lower tax receipts coming in. Public finances have worsened in the last 12 hours.

PL: Thinking about what the tariffs will mean on the ground, do we have any sense yet of which specific sectors will be able to ride them out best or indeed, be hardest hit?

IW: I think I mentioned in the last podcast, we talked about tariffs, and I said we are relatively in balance with the US when it comes to trading in goods. We tend to sell them pharmaceuticals, because we have a great pharmaceutical and life-science industry in our country, it’s fantastic. We tend to sell them high-value cars. So, we sell them the Bentleys, the Jaguars and the Land Rovers. They will take a hit.

PL: And they’re subject to a separate tariff, aren’t they, in addition?

IW: Exactly. So again, the OBR last week in its forecast suggested that – and bearing in mind, they were assuming a tariff of 20% – they thought that goods would fall by 80% in terms of value. That’s a big, sizable chunk. And this is what President Trump wants, the administration wants. It’s either get rid of all barriers on both sides – and what he means by barriers is things like a sales tax, VAT, that’s not going to happen – or manufacture in the US. Move your production away from your domestic country into the US. And although companies may be thinking about that – you may have a pharmaceutical company, you may have a car manufacturer thinking, “Can we do more manufacturing capability in the United States?” – that doesn’t just happen overnight. It’s not like saying, I’m in my supermarket, I can’t get the shampoo of my choice because it’s not there, I’m just going to buy another shampoo. Moving manufacturing capability takes years, so we take the short-term hit, but I don’t think the American economy, if ever, will get a long-term gain from this.

PL: But in reality, thinking about automotive – 10% basic tariff, 25% additional tariff, there’s talk of 25,000 jobs being at risk here because of that. Do you see that happening?

IW: I haven’t done the figures in terms of looking at that, but it doesn’t surprise me, and the reason why I say that is because we’ve talked about this before. The imposition of tariffs is never a positive thing for the global economy. You want to have as much free and frictionless trade as possible, because capital and economic activity moves to where it’s most efficient, and then ultimately the end consumer gains as a result of lower prices, you’re better off in that regard. But prices go up. We’ll see inflation higher for longer, which means we’ll see interest rates higher for longer, which means economic activity will be curtailed. I think most pressing for things like manufacturing on where to relocate things, the normal and natural response for business leaders the morning after President Trump’s announcement would be, let’s hold off any investment decisions. Let’s see how this plays out. And so, you get lower investment. Lower investment ultimately means lower growth levels. So, we are all worse off.

PL: Thinking about services, obviously, that’s our strong suit. We export a lot of services to the US. Generally, are professional services better able to ride out this sort of hit than manufacturing? The margins are bigger.

IW: We are a powerhouse when it comes to professional and business services. We are indeed second only to the US in the world for the calibre of our different sub-sectors. That includes accountancy, it includes our legal sector, it includes things like architecture. A government minister does the government chairing of it, but I’m the Business Chair of the Professional and Business Services Council, and we had a meeting with the government minister, a full council meeting yesterday. We were talking about this, and at the moment, the Trump administration’s announcements are focused on goods. Let’s hope the US administration does not look at services, because that’s where our strengths really are, and we want to not really downplay the great strengths, the comparative advantages that we’ve got there.

Having said all that, we are in an era of massive change. World orders on things like global trading systems, on defence capabilities of the Western powers, are moving so quickly in real time, it’s astonishing. I haven’t seen anything like this in my lifetime, and I lived through the Cold War 30-odd years ago. But the way that things are moving so quickly, we are moving into a new world order. What you need in an era of complexity is a professional to help you navigate. And I think that’s where the inherent strength of accountants, and indeed the wider professional and business services, come into their own. In all of this uncertainty, in all of this complexity, can I have a chartered accountant to advise me please?

PL: As you say, the events are moving very fast. It’s a real challenge for government. How are they going to manage this situation between now and the Autumn Statement? Communication is going to be key, isn’t it?

IW: One of the things that we saw in Labour’s first Budget, or rather more accurately in the run-up to the Budget, was a vacuum. Business, and indeed, the media and commentators, hate a vacuum. What happens in a vacuum? There’s speculation, and speculation could unnerve markets. People get jittery. And so, if you have a long time where you don’t hear anything, that means that businesses become even less confident. We saw it in the Budget. There was a long time between the election of the new government and its first Budget, and in that time, there was speculation. Is VAT going up? What is she going to do with corporation tax? And what do businesses do? Well, the economic rational response to all that is, I’ll sit and wait, I’ll hold, I won’t make that investment decision. I won’t take on that new recruit. I won’t invest in that new service line. And so that drags back growth, it delays it, possibly even permanently. And you don’t want to have a stream of consciousness with government ministers telling people what they think in real time, that doesn’t work. What you do need is clear and concise communication to wipe out that vacuum and the speculation that arises.

PL: Not least because, as we know, President Trump is unpredictable. This tariff regime, it’s where we’re at right now. Who knows whether it’ll be where we’re at in a month’s time or six months’ time? It’s hard to know how members can mitigate the effects of these announcements, isn’t it? Any advice?

IW: I think I said in an earlier comment, it is an era of complexity. I don’t think we’ve seen this level of complexity on various fronts for a long, long time. There are two things I would mention. First is the inherent strength and advantages of chartered accountants. Yes, we have very little detail at the moment, but in terms of helping people navigate through uncertainty, chartered accountants are superb. So, for those people who maybe are not chartered accountants, go and speak to your trusted business adviser. That’s really, really important. But of course, ICAEW, as a professional body, wants to provide guidance, insights. So, I would ask members, in this era of real uncertainty, where things change from hour to hour, from week to week – we’ve just talked about the Spring Statement that feels like ancient history, that happened seven days ago, it’s ridiculous – things are moving so fast, keep looking at the ICAEW website. Participate in events, webinars, podcasts. We are keen to make sure, in this time of uncertainty, we provide some degree of guidance and insight to help people carry out their business careers.

PL: And in terms of what we’ll actually hear from government next, it’s going to be the industrial strategy, isn’t it? Is that June?

IW: And that’s in line with when the spending review will be announced as well. The spending review, I have been told very clearly, is tough. There’s a lot of hard negotiating going on. But ultimately that will be key in setting out the government’s public finances path for the next few years. Where will government spend, and crucially, where will government use taxpayers’ money to invest for the long-term future of this country? That’s going to be key as well. But the industrial strategy setting those really key growth sectors – advanced manufacturing, creative industries, the professional and business services – on that path to sustained prosperity in the next decade, in that era of huge uncertainty, that’s really important. Our comparative advantages as an economy, what we’re good at – and I would include accountancy, law, all of that as part of professional and business services – we’ve got to make sure they’ve got the conditions to invest and thrive in the future.

PL: On to Making Tax Digital with Caroline Miskin. So, this year it marks MTD’s 10th birthday.

Caroline Miskin: It does, on 18 March 2015 the then Chancellor George Osborne promised to abolish the tax return altogether – not quite where we have ended up or will end up. Since then, we have had MTD for VAT, which was introduced in 2022, and now we’re looking ahead to MTD income tax, which will start being phased in from April 2026.

PL: So, what do we need to know about that?

CM: It applies to individuals with income from self-employment and/or property over certain turnover thresholds. Partnerships and limited companies are out of scope for now. MTD income tax has been phased in based on turnover from self-employment and property, so above £50,000 from April 2026, £30,000 from April 2027 and £20,000 from April 2028. That final date was confirmed recently at the Spring Statement. It will bring in a very different type of taxpayer, probably including most landlords with only one rental property, and the cost for that group of taxpayers is going to be even more significant than the other cohorts.

PL: And do we have an estimated number of taxpayers for each of those cohorts?

CM: Yes, it will be about three million altogether by the time all three groups are in.

PL: So, what will taxpayers in MTD need to do about this?

CM: They will need to do three things. They’ll need to keep digital records in commercial accounting software or on a spreadsheet. Secondly, they’ll need to make quarterly submissions to HMRC for each of their MTD income streams. And then after the end of the year, they will need to file their year-end tax return with a normal filing date for self assessment returns.

PL: And a key point that, as you say, was announced in the Spring Statement was that commercial software has to be used for those final tax returns now.

CM: Yes, it does. The plan was that commercial software would need to be used for quarterly updates from self-employment and property. HMRC were planning to provide a service that would have allowed taxpayers and agents to submit the rest of the year-end tax return using HMRC software.

PL: But not any more.

CM: That will not be available. If you are in MTD income tax, you will have to use commercial software for all the submissions quarterly and year end. ICAEW is concerned about the increased cost to taxpayers and the difficulty of choosing a suitable software product. Although 19 products are listed as being ready, there is still a lot of work to be done by the software developers, and all the products are going to offer very different functionality and have very different scope.

PL: So, there’s a lot of potential for confusion here.

CM: Yes, there is.

PL: Any other worries?

CM: ICAEW’s position is that we’ve consistently supported the digitalisation of accounting records and HMRC online services, but we have opposed the quarterly update element of the requirements because we believe that it raises the administration burden and raises costs for really very little benefit. What we have advocated is retaining the annual reporting cycle for income tax but with record-keeping requirements. But we’ve had that debate, and it’s now closed. The other concern is that HMRC is facing a very significant delivery challenge. It’s got to build and test the system. It’s got to migrate all the records to its new platform, which is a very significant task. It’s got to develop guidance, and it’s got to communicate the change to taxpayers and agents and ensure that its own staff are ready and able to provide the appropriate customer support, which we know has been a challenge for HMRC in a lot of other areas.

PL: How confident are we that HMRC is going to be able to deliver on all this?

CM: HMRC has got a very detailed delivery plan, and it assures us that it is on course to deliver it but does admit that it is a very tight delivery schedule.

PL: Now there are new penalty rules, aren’t there, applying to those in MTD income tax?

CM: Yes, this was the other point, which was highlighted by the Spring Statement. Anybody who signs up to MTD income tax will be subject to the new penalty rules. Those are the ones that we’re now fairly familiar with because they’ve applied to VAT for some time. During the testing period, and for anybody who is voluntarily complying with MTD income tax, there will not be any late submission penalties, for example, for late quarterly updates. However, the one to watch is the late payment penalties, because if you’re in the new regime, you are paying what are more onerous late payment penalties, and that was what changed at the Spring Statement. The rates of those penalties were increased very significantly, and you can – if you don’t manage it well – be paying up to 18.5%, effectively.

PL: So that’s a really significant change. What are you feeling that firms need to do ahead of April 2026 then?

CM: Firms need to re-engineer how they operate, and those are going to be very significant changes to their workloads, which they need to plan for. The first step is to identify the clients who will be in scope, and then allow significant time that will be needed for the conversations they’re going to need to have with each and every client, and to then put into place the plan for that client. Putting one client into the testing in 2025/26 I think is important, simply because it will give firms much better insight into how the system works and enable them to plan, including how they are going to charge fees for the new services.

PL: It feels like quite a tight window.

CM: It is.

PL: Lastly, as we said, it’s complicated. Where can listeners go for more information?

CM: We continue to develop ICAEW’s MTD hub, which has got explainers, videos, tax guides, webinars and links to all sorts of other resources. We will continue refreshing that hub and keep an eye on daily Insights for further news.

PL: There’s a webinar as well, isn’t there?

CM: Yes, the next significant event is a webinar with HMRC on 2 June 2025. It’s going to be a long webinar, two hours with a break, because that is when we want to really take the time to go through the broader detail.

PL: Sally Baker joins me now to discuss changes to UK GAAP, and Sally, the FRC – the organisation that sets UK accounting standards, obviously – they’ve issued changes, and they’re going to impact over three million businesses in the UK.

Sally Baker: FRS 102, which is the principal accounting standard in the UK, and FRS 105, which is the standard which relates to micro-entities, both of those accounting standards have been amended. These changes are effective for accounting periods beginning on or after 1 January 2026 and they’re really the most significant amendments that we’ve seen to UK GAAP in the last decade. We’ve got major changes to leases and revenue but there are lots of other significant changes, too.

PL: Let’s take this in chunks. Let’s start with FRS 102, what’s changed on revenue recognition?

SB: Previously, the rules around revenue recognition depended on whether the sale to the customer was a good or a service, and that distinction has gone. So now, going forwards, an entity will apply a five-step model, and that five-step model revolves around identifying the separate performance obligations within the contract. That model will then be applied to all contracts with customers, and by having a single model that will lead to more consistent and comparable accounting. The previous requirements also were quite limited in places. They were really only suitable for very straightforward transactions. The requirements are now much more comprehensive, which will help with application. It does mean that there’s a lot more information for preparers to absorb and understand, but hopefully that should help in the long run.

PL: Any tips for listeners who are going to be dealing with these new rules?

SB: I would certainly think about gathering and analysing all your existing sales contracts and reviewing them in light of the new accounting requirements. Also consider whether you might need to make any changes to your future contracts. There might be opportunities to standardise the wording format of future contracts, for example. Also worth knowing, when it comes to transitioning to the new requirements there are a couple of options, so it’s worth getting ahead and considering which you intend to do.

PL: Let’s move on to leasing under FRS 102.

SB: Nearly all leases will be recognised on the balance sheet. So, in other words, that means that they’ll be recognising a liability, which reflects the obligation to make future lease payments, and they’ll also recognise a corresponding asset, which reflects the right to use the asset during the term of the lease.

PL: There are some exemptions, aren’t there?

SB: Yep, there are a couple of exemptions: short-term leases and low-value assets. And for those exemptions, the lease payments will be expensed to profits.

PL: Any particular tips around that?

SB: Quite a few here. Again, gathering all of your lease contracts is a first step. Analysing them to determine whether the contract actually contains a lease in accordance with the new requirements will be the first step. During the accounting there are a number of judgements that have to be made. It might be, for example, around the lease term, if the lease term has options to extend. Also, choices around the discount rate that preparers will use to measure the liability as well. So again, thinking about those judgements and choices in advance will be helpful. You might also need to consider some system changes to make sure that you’re recording all of the data that you need. Also, the change in accounting might impact on debt covenants, and you might need to communicate the impact of those changes to lenders.

PL: Now, you mentioned there are lots of other changes in FRS 102.

SB: The changes to revenue and leasing are the two that have grabbed all of the headlines, but there’s a lot of other changes in FRS 102 as well, some which might be quite significant to those entities that were affected. First of all, there’s a change that’s actually affected from 2025 and that’s some additional disclosures relating to supplier finance arrangements, also known as reverse factoring arrangements. Then from 2026 there are changes around fair-value measurement, more guidance on business combinations, clarifications around share-based payments and uncertain tax treatments, and there’s quite a few other changes as well. So, it’s really important that preparers look at all the sections in FRS 102 to understand how they might be affected.

PL: OK, so much for FRS 102. Should we move on to 105? Do the same changes apply to micro-entities here?

SB: Not quite. There haven’t been any changes to lease accounting under FRS 105. The changes to revenue recognition have been made, though, but there are some simplifications. So, to illustrate, there are only 56 paragraphs covering revenue recognition in FRS 105 compared to the 139 in FRS 102, so more complex areas like contract modifications, customer options, they’re excluded. The transitional arrangements are also slightly different. So, under FRS 105 you’ll only be required to apply the new recognition model prospectively, and won’t have to apply it retrospectively.

PL: On top of these, the changes to company size thresholds, they come into force this month, don’t they?

SB: Yes, the monetary company size thresholds changed on 6 April 2025. We have a full explainer on the ICAEW website, but essentially, the turnover and total asset thresholds increased by about 50% across all the size categories.

PL: So, does that mean that a lot of companies that were small may now drop a size down to micro?

SB: Exactly. It’s estimated that there’ll be about 117,000 more companies that will become eligible to use FRS 105 should they wish to. And given that means that they won’t have to change their lease accounting, we might see more companies choosing to adopt FRS 105. It’s worth noting, though, that out of the 2.8 million or so UK companies that are currently eligible to use FRS 105, only just over about 50% currently do, so it will be important to think through the implications if you are considering switching from FRS 102 to 105. So, for example, it may not be worth it if you’re only a little bit below the thresholds and you anticipate growing so that you end up back in the small category in the not-too-distant future. Also worth bearing in mind is that some banks and lenders may ask for supplementary information if you prepare accounts under FRS 105, and that’s because FRS 105 accounts contain very little information in themselves.

PL: As you say, Sally, there’s a lot of detail to absorb here. Where can listeners find out more about this after they’ve listened to the podcast?

SB: We have a periodic review of UK GAAP hub on the ICAEW website, and that brings together all of our resources on the topic: articles, webinars, fact sheets, etc. And also worth bearing in mind is that we’re hosting our corporate reporting conference on 9 June at Chartered Accountants’ Hall, and that’s going to be firmly focused on the amendments to UK GAAP. So, as well as a keynote from the Financial Reporting Council on the amendments, we’ll also have experts in practice taking you through all of the practical implementation considerations.

PL: That’s really helpful, thanks very much indeed, Sally. We’ll link to everything that Sally mentioned in the show notes. That is it for today, we’ll be back in early May. Meantime, listen out for the next episode of Behind the Numbers. If you haven’t heard it yet, every month we take a deep dive into one big issue, and that’s of interest not just to accountants, but the wider business and finance community. It’s all part of Accountancy Insights on your podcast app. So, subscribe and you’ll catch every episode. Thanks for being with us today.