You are very welcome to this, the second instalment, of Query Of The Week. Each week our technical team respond to a massive number of client queries. The purpose of Query Of The Week is to share with you the most common questions that keep coming up time and time again.
In this Query Of The Week, Des O’Neill looks examines some unforeseen implications of Practice Incorporation.
Accountancy Practice Incorporation – The Opportunities and The Pitfalls
If this Query Of The Week was of interest to you, you will also be interested in our Accountancy Practice Incorporation – The Opportunities and The Pitfalls online CPD course.
Full details for this online CPD course can be found here.
| CPD Allocation | 1 Hour |
| Fee | €20 (or 1 CPD Club point) |
| Presenter | John Murphy – OmniPro |
| Category | Financial Reporting |
Query Of The Week – Video Transcript
(Please note that this is a direct unedited transcript of the spoken word as recorded on the video)
This week’s query arose when we were working with an accountancy firm who we helped to incorporate back in 2017. They came to us with a question in relation to investment business authorization.
This new problem has arisen, that due to the change in regulations arising from the transposition of the EU insurance directive, that accountancy firms who previously held investment business authorizations through their accountancy body under the investment intermediaries act of 1995 for the provision of investment business, now need to see if they fall within the remit of these new IDD regulations and register with the central bank.
The deadline for registration was back the 30th of June. The problem here is if the entity is regulated by the central bank, then it falls into the category of being a schedule five entity under company law. That means this accountancy practice that was just incorporated, were expecting to be able to avail of the audit exemption, but if they’re a schedule five entity, they won’t be able to avail of the audit exemption.
They were working on the basis they were preparing their accounts and prepared their last set of accounts as a section 1A FRS 102 entity, and than ey actually had an option of being an FRS 105 entity, but now if they’re a schedule five company, they must produce full FRS 102 financial statements, and the third implication is they cannot file abridged accounts and must file full financial statements with the CRO.
There are three implications for an accountancy firm, becoming directly authorized by the central bank. The first one is they can’t avail of the audit exemption. The second one, they must produce full FRS 102 accounts. And the third issue, they must file full financial statements.
What can we do here to solve this problem? And what options are open to this firm? What are their options if they don’t want a huge amount of information in the public domain?
Some accountants don’t care, great. Some accountants do. This particular accountant, we looked at, well, what are the options open to them. The first thing that we could look at for them is converting them into an unlimited company. At 31st of December 17 year end, if they wanted to convert to an unlimited company, they can’t do it retrospectively anymore, so they would have to do it prospectively by the 30th of September in 2018 to convert.
But here’s the thing. They’re only applying for investment business now. The central bank had its deadline the 30th of June, so if they were to sign off their 31st December 17 accounts, they weren’t authorized by the central bank during the year 31st December 17, so that means they can sign off, or file unedited financial statements the 31st December 17 on the basis of not being a schedule five entity during the period, and then when it comes to the 31st December 18, if they want to, they can file unlimited accounts.
This accountant brought up a really good point, he said: “I thought when we were incorporating the converting into an unlimited company, that by being a limited company, it gave it more of a bonafide commercial basis for the transaction.”
Under section 135 of the tax consolidation act, you’re always looking for bonafide commercial reasons. Our interpretation there is we incorporated at that point in time. Now something has changed in legislation, and anonymity and privacy is a bonafide commercial reason, so that’s why they look at converting into an unlimited company.
The second option is, if they were to hive off the investment business into a separate company from the accountancy firm. If you just look at this on screen for a minute. So we start here, we’ve got our accountancy firm. So here’s our accountancy firm. And in this instance, the quantum of investment business was actually quite small, it was a service they were providing to their clients. It wasn’t necessarily a huge money maker.
So we have investment business here, and we have everything else that’s in the accountancy firm here. One thing that they could look at doing is, they could look at hiving off and hiving out the investment business here into a second company and taking it out of this entity. To hive off into a separate company, there would be capital gains tax relief available, there could be statue relief available, and if there weren’t distributable reserves, it might require a SAP 204, but if there are distributable reserves and common shareholders, no SAP is required. What we would do in that situation is, well, now we will have our schedule five entity over here, and that would need to file full financial statements, but our accountancy firm would be back as a stand-alone company in its own right.
One thing you have to watch in terms of the central bank applications, the central bank wanted the original authorized holder of the investment business authorization to apply to them. I’m not sure what the difficulties and complications might be if we now go to apply for a new investment business authorization and a new firm.
So that’s where we came up with option three, but option three is that you would actually hive off out the accountancy firm. Now, there would be a lot more work in that, there’s more paperwork, you’d look at SAPs, and if there were no distributable reserves, using a SAP 204, but option three, in terms of hiving out the accountancy firm.
It is a question, really, of how sensitive are you if you are investment business authorized, how sensitive are you to having this information in the public domain?
So that’s our query of the week. If you have an interest in incorporating your accountancy practice and looking at things like an evaluation of goodwill, other incorporated firm issues like this one, join John and myself here on Friday the 6th of July at 12 o’clock for our webinar on accountancy practice incorporation, the opportunities and the pitfalls. Until I see you again, let’s get it done.