Host

Philippa Lamb 

Guests

• Sally Baker, Head of Corporate Reporting Strategy, ICAEW 
• Ed Saltmarsh, Technical Manager, VAT and Customs, ICAEW 

Producer 

Natalie Chisholm  

Philippa Lamb: Hello and welcome to the newly renamed Accountancy Insights podcast. I’m Philippa Lamb and this is your monthly roundup of accountancy news. Today significant changes to accounting standards and principles are front and centre. We’ll be hearing from Sally Baker, Head of Corporate Reporting Strategy at ICAEW on that, and Ed Saltmarsh, Technical Manager – VAT and Customs is here to talk us through a new government consultation on VAT and private hire vehicles. Hello, both – good to see you again. Now, Sally, there is a lot going on when it comes to corporate reporting right now, before we get into the fine detail, do you want to give us the headlines? 

Sally Baker: There are three main headlines, I’d say. So for companies preparing accounts under UK GAAP, there have been amendments made to FRS 102 and the other FRSs following the periodic review. For companies reporting under IFRS accounting standards, the International Accounting Standards Board has issued a couple of new accounting standards, IFRS 18 and IFRS 19. And then just prior to calling the general election, the government provided an update on the timeline for introducing UK sustainability reporting standards.  

PL: OK, shall we make a start with the amendments to UK GAAP? I think there are two main changes, aren’t there, grabbing the headlines? 

SB: Yes, two main changes – those are changes to revenue recognition and lease accounting.  

PL: Shall we make a start with revenue recognition? 

SB: At the moment FRS 102 distinguishes between revenue from a sale of goods, the rendering of services and construction contracts. Going forwards, when the amendments come into force, there will be a single comprehensive, five-step model for revenue recognition. 

PL: Run us through the five steps.  

SB: So first of all, it’s identify the distinct goods or services promised to the customer within a contract, then allocate the total consideration that the entity is entitled to against those distinct elements. And then companies will recognise the revenue from each element as or when those promises are fulfilled. And that five-step model, it’s worth noting, is being introduced into both FRS 102 and FRS 105 – FRS 105 being the accounting standard for micro entities. There have been some simplifications made for FRS 105 reporters, though. 

PL: And the second big change you mentioned is lease accounting?  

SB: With leases, first of all it’s worth noting that this is only changing in FRS 102 and not in FRS 105. So for lessees, the current distinction between operating leases and finance leases is being removed. With some exceptions, all leases will now be recognised on the balance sheet in a similar way to what’s currently done for finance leases. So that means that lessees will recognise an asset; that reflects their right to use the item throughout the term of the lease. And they also recognise the corresponding liability, reflecting their obligation to make the lease payments throughout the length of the lease. And after that initial recognition, the right-of-use asset is then subject to depreciation and the lease liability will have interest charged and then will reduce as the payments are made.  

PL: There are exceptions here aren’t there?  

SB: There are exceptions, yes – two exceptions: short-term leases, which is those leases with a term of 12 months or less; and then also leases where the underlying asset is of low value. 

PL: Right, before we go any further, what exactly does low value mean, in this context? 

SB: In FRS 102 they haven’t attached any monetary value to what constitutes low value. But there are examples in the standard of things that are not low value. And the standard also says that an item can only be of low value if the entity is not highly dependent on it. One thing to point out is that for those listeners who are familiar with IFRS 16, the international equivalent of these rules, there is a monetary value of $5,000. The Financial Reporting Council has not incorporated that monetary value into FRS 102. So their intention is to essentially set a higher threshold for low-value assets, which means that UK GAAP reporters will ultimately put less leases on balance sheet compared to their IFRS counterparts. 

PL: What about other changes beyond the headlines you’ve just given? 

SB: It’s definitely worth noting this, because all of the headlines are around the revenue and the leases changes, but there are a lot of other changes in FRS 102 as well. Pretty much every section in FRS 102 has been changed in some way. So it is important that preparers of accounts carefully study the amendments in full, so that they identify exactly how they’re impacted.  

PL: And when does all of this come into effect.  

SB: Virtually all of the changes come into effect from 1 January – accounting periods beginning on or after 1 January 2026; early adoption is permitted, however. There are some disclosure requirements about supplier finance arrangements, and they come into force from 1 January 2025. 

PL: Now there’s been a lot there – listeners can find all details on this on the Corporate Reporting Faculty’s periodic review hub; there’s an FAQ document there, isn’t there, with all the all the changes covered?  

SB: Yes, exactly, and the short form for that hub is icaew.com/UKGAAPreview.  

PL: We’ll put that in the show notes. Let’s move on to the new IFRS accounting standards now – shall we start with 18? 

SB: So IFRS 18 is a new standard on presentation and disclosure in financial statements. When this comes into effect, it replaces the existing IAS 1 on presentation of financial statements. IFRS 18 essentially carries across all of IAS 1’s requirements. But it does introduce three new requirements. So, two new defined subtotals in the statement of profit or loss, being operating profit and profit or loss before financing and income tax. Also some new disclosures, which will be subject to audit, about management-defined performance measures – some of our listeners might be more familiar with the term ‘alternative performance measures’ – and also some enhanced guidance around the grouping of information in financial statements.  

PL: Why is this being introduced? 

SB: IFRS 18 is all about giving investors more transparent and comparable information, particularly around the financial performance of an entity, and hence the changes to the statement of profit or loss. And ultimately, it’s aiming to support better investment decisions.  

PL: And when are we going to see this? 

SB: Like all IFRS accounting standards IFRS 18 will need to be endorsed before it can be used in the UK; at the earliest that’s going to be Q4 2025, and it could possibly slip into early 2026. Assuming the endorsement process happens within that timeframe, we’d expect the standard to be in effect for accounting periods beginning on or after 1 January 2027 – again, with the option for it to be adopted early. 

PL: And that takes us neatly to IFRS 19.  

SB: So this is the second of the new IFRS accounting standards. IFRS 19 was issued by the IASB in early May, and this standard is going to permit eligible subsidiaries – which means those without public accountability – to apply recognition, measurement and presentation requirements of IFRS accounting standards, but with reduced disclosure requirements. And that could be really beneficial for some international groups. It’s worth noting that in the UK, however, we already have a similar standard in the form of FRS 101, which allows eligible UK subs to prepare IFRS accounts with reduced disclosures. And IFRS 101 is very popular. So from a UK perspective, there’s going to need to be some thought as to how FRS 101 and IFRS 19 might sit alongside each other before IFRS 19 is endorsed for use. Internationally, though, and subject to any local endorsement regimes, IFRS 19 is also effective from 1 January 2027. Again, early adoption is permitted. 

PL: It’s fair to say it’s been a busy couple of months, hasn’t it? 

SB: It’s really been busy – lots to keep us on our toes.  

PL: And there’s movement on non-financial reporting, and specifically sustainability reporting, too? 

SB: So just before announcing the general election, just a couple of days, the government shared an updated timeline on the implementation of sustainability reporting standards in the UK. So last summer, when the International Sustainability Standards Board, the ISSB, published their inaugural standards, the government indicated an endorsement decision would happen within 12 months. And it became evident that that timetable was slipping. So this announcement has given us a welcome update. And the government said that they were aiming to complete the endorsement process and have the final UK version of the ISSB standards available for use by the end of Q1 2025.  

PL: OK, but as we know, this announcement was made just a few days before the general election was called, wasn’t it? So presumably what actually happens now is all going to depend on whichever government we have post-election and their priorities?  

SB: Yes. 

PL: OK, thanks very much. We have covered a lot there and there’s more to come, as Sally says, so if you’d like to stay updated on developments, your best plan is to join ICAEW’s corporate Reporting Faculty and receive their monthly bulletins. Membership is open to all but there are charges if you’re not an ICAEW member; visit icaew.com/joincrf to find out more; you’ll find that link in the show notes or just head to the resources page on the website where you’ll find the online magazine, By All Accounts, and much more. 

On to VAT now and private hire vehicles with Ed Saltmarsh. Ed, why don’t you start by reminding everyone of the difference between a taxi and private hire vehicle? 

Ed Saltmarsh: This is a really important distinction because everything I’m going to talk about today only applies to private hire vehicles. So there are two main differences. The first is that private hire vehicles have to be booked in advance, whereas taxis you can hail on the street or pick one up from a taxi rank. And the other main difference is that taxi fares are more regulated, so you can only be charged a certain amount per mile or per minute, whereas with private high vehicles it just depends on supply and demand and the agreement made between the driver and the rider. 

PL: As you say, this is only about private hire vehicles. What is changing? 

ES: So the market is changing to a model where private hire vehicle operators are acting as principal rather than agent. And I’ll come on to what that means in a bit more detail.  

PL: This is based on two court cases, isn’t it?  

ES: Yes. So in 2021, the Supreme Court decided that Uber drivers are workers and not self-employed. But as part of that case, the judge noted that, in London, the private hire vehicle operator can only act as principal, not as agent. So Uber took a separate case, because they didn’t want to be the only ones having to apply this model. And in a case in 2023, it was decided that outside of London, any private hire vehicle operator licensed in England – apart from Plymouth – and Wales is required to enter into a contract with a passenger as principal. 

PL: Now, you mentioned Plymouth, and we talked about this before we were recording this podcast – Plymouth being an exception. Why is Plymouth an exception? 

ES: So this is a bit of an odd one. In most of England and Wales, the licensing and regulation of private vehicles is governed by the Local Government Miscellaneous Provisions Act 1976. However, in Plymouth, it is governed by the Plymouth City Council Act of 1975.  

PL: So they were just quicker in that they made their own rules? 

ES: It certainly looks that way. No one seems completely sure what happened. But it appears that private hire vehicles kind of came about from a bit of a loophole in taxi regulation. And it looks like Plymouth regulated it first, and then they followed up with a nationwide act. But because Plymouth already had their regulation, it doesn’t apply there. 

PL: Got it. So not Plymouth. So what is the difference between an operator acting as a principal and an operator acting as an agent?  

ES: OK, so this is quite technical and I’m going to try and explain it with some worked examples. It’s important because, fundamentally, it affects how much of the fare is subject to VAT. So using Uber as an example – other private hire vehicle operators will be in the same position, such as app-based things like Bolt as well – so if Uber is principal, they are supplying the transport to the passenger directly. So the driver, say, charges Uber £9 for their services; Uber wants to make £1 profit so they charge the passenger £10, and they have to account for VAT on that whole £10. So the passenger ends up paying £12. If Uber acts as agent, the driver is actually making the supply of services directly to the passenger. So although the passenger pays Uber, the VAT amount is only due on Uber’s supply of services, which is the supply of actually linking the driver and the passenger to each other. 

PL: The £1? 

ES: The £1 that they want to keep.  

PL: So it’s a really significant difference.  

ES: Yes, so in that case, they only have to account for 20p of VAT, not £2. So the fare might be £10.20p, £12 pound, obviously, that’s very simplified.  

PL: But that’s the nuts and bolts of it, the crux of it. So these two court cases, if you just dig into exactly what that’s going to mean for VAT treatment? 

ES: The market is moving towards private hire vehicle operators acting as principal. So, in theory, fares for private hire vehicles will be going up as more operators move over to this model, because more VAT is due because it’s due on the full fare.  

PL: I think I’ve got my head around that. But what does that mean for drivers? 

ES: So most drivers are not VAT registered, because they would have to have turnover of over £90,000 a year to do so. And in most cases they don’t have that, which is why private hire vehicle operators have historically used that agency model because then the driver’s fare isn’t subject to VAT. 

PL: What is the Treasury thinking about all this? 

ES: So the Treasury has concerns about the increase in fares. They’ve actually estimated that across the whole market, fares will increase by 2.5% which, for the average user of private hire vehicles, equates to £5.60p a year.  

PL: So it’s hardly significant? 

ES: It doesn’t seem significant. The government I think, is particularly concerned about the 7% of passengers who use private hire vehicles at least once a week, because they believe that this will include mostly vulnerable customers who don’t have access to other transport. And they have concerns that for them, the fares will increase quite significantly and they will lose access to a crucial service.  

PL: Yes, I see, and they don’t necessarily have access to alternative services. So they think they’ll drive that demand down or force that demand down? 

ES: Yes, so they actually think that 2.5% increase in fares will lead to a 2.5% decrease in demand for the services, which then obviously has impacts on the drivers who won’t have as much work. So they have launched a consultation to consider potential alternatives to this new model where VAT is charged from the entire fare. 

PL: And that consultation closes on 8 August? 

ES: Yes, that’s right. So they’ve given us quite a bit of time to respond to this, which is really useful because, as we’ve discovered, it is quite technical. So it’s really appreciated that we have that time to actually go back to them with a proper response on this. 

PL: And the implications could be more significant than you might realise at first glance.  

ES: Yes, absolutely. And it affects a lot of people.  

PL: So what are the options, as you see it, open to the Treasury? 

ES: So they’ve considered changing transport legislation, which would then mean that the operator doesn’t have to act as principal, and it would go back to the operator as agent. So the VAT wouldn’t be due on the full fare. That comes with its own problems, partly because transport legislation isn’t uniform across the whole country, so they want to avoid that because of its unnecessary complexity as we’ve seen with Plymouth. But also, they are worried that that effectively removes private hire vehicles as an option – you wouldn’t have the difference between taxis and private hire vehicles. So they’re worried about removing that choice for consumers. So the other option on changing legislation is actually changing the VAT legislation, which does apply across the UK so may be more straightforward to do. But it would lead to the VAT rules not following reality, which they try to avoid – they call it a legal fiction, where in VAT rules, you pretend that something isn’t happening. So they want to avoid that because of its unnecessary complexity. And they are worried that actually that would cost the government up to £750m as well. 

PL: Now, you mentioned impact on consumers – there’s a possibility there for more targeted interventions?  

ES: Staying on VAT, they have also considered lowering the rate for private hire vehicles either to a reduced rate of 5%, or to the zero rate. Again, that’s going to cost them lots of money – either £1bn or £1.5bn – which I think, whichever government we have after the election, if they’re looking at tax cuts they’re probably not looking here. They’ve also considered a margin scheme, where the operator would only account for VAT on the difference between what the driver charges them and what they charge the rider, which would effectively leave them in the same position as acting as agent. But these margin schemes can be quite complex and HMRC is currently challenging Bolt’s treatment of using a margin scheme. So it seems strange for them to suggest this as an option.  

PL: So no obvious answers here as yet. What’s ICAEW thinking? 

ES: We really welcome this consultation, because it is an important area of VAT. It has come about as a result of court cases and we have seen in the past that sometimes HMRC change their position without consultation – or sometimes they can choose just to ignore the cases. So actually, the fact they’re thinking about this in detail is really welcomed. We want a tax system which is simple, certain, easy to calculate. So it seems strange to change VAT to fit reality. And I don’t think a margin scheme would be greatly appreciated by operators, particularly the smaller ones, who may not be able to administer that effectively. So for us, that leaves the targeted interventions, and the government is even considering much more targeted things that don’t relate to VAT at all – so things like extending the disabled person’s bus pass. And that just seems much more simple and probably more effective. So at the moment, we’re thinking that might be the way to go.  

PL: Good job on explaining this because it is complex. If listeners want to get involved in this, how can they do that? 

ES: So firstly, I’d recommend my article in TAXline, which explains this in more detail with diagrams, which always makes VAT easier to understand. But if people want to submit comments for the consultation response, I’d really value that. And I’d ask people to contact me by 26 June, and then I can consider their comments for the ICAEW response. 

PL: How should they get in touch with you? 

ES: They should email me at ed.saltmarsh@icaew.com  

PL: That’s great. Thank you very much. That’s it for this month. Head to the shownotes for more information on both those stories and join us later in the month for June’s episode of Behind the Numbers which you will remember used to be called Insights in Focus. Meantime, please rate, review and share this episode and subscribe to the whole series on whichever podcast app you like best – you’ll find it everywhere. If newsletters appeal as well, you can also get daily, weekly or monthly newsletters from ICAEW Insights. They have all the latest accountancy news, if you would like to sign up for them too.  

Thank you for being with us.