- Sally Baker, Head of Corporate Reporting Policy, ICAEW
- Lindsey Wicks, Technical Editor, ICAEW
- John Pearce, Director, Digital and Publishing, ICAEW
Philippa Lamb: Hello, welcome back to the Insights podcast. I’m Philippa Lamb discussing the month’s most important developments in accountancy. As always, there’s a lot to keep track of – how the FRED 82 consultation will change UK accounting principles, what rising corporation tax and changing R&D credits will mean, and how to responsibly use generative artificial intelligence tools like ChatGPT. Here with me, I’m very pleased to have ICAEW’s Head of Corporate Reporting Policy, Sally Baker, Technical Editor, Lindsey Wicks, and Director of Digital and Publishing, John Pearce. Morning everyone, thanks for coming in.
We’ve been hearing a lot in the media lately about generative artificial intelligence tools such as ChatGPT. There is no doubt they’re exciting and potential uses for them are very wide ranging indeed, not least in accountancy, but how reliable is their output? And can accountants responsibly put them to use as more and more reports of inaccuracies and outright invented facts come to light? John, I know you’ve been experimenting with ChatGPT, members are using it. You’ve been talking to them, haven’t you? What are they doing with it?
John Pearce: Well, a lot of experimentation, as you say, and at different levels. At public level, everybody can access it and have a play with it. It’s just a website. But some companies are doing it at an enterprise level, where they’re using the Azure services to integrate it with their own contextual information in a more protected environment, and depending on which way you’re using will depend on what data you can share and the kinds of issues that might result from that.
PL: Talking about outcomes, it was described to me by colleague as an ill-informed, overconfident junior. Does that chime with you?
JP: It can do. It is dependent on the prompt you use and the context you give it, so sometimes people have attempted to engineer strange responses, sometimes it gives strange responses to genuine questions. I do think that if you’re using it sensibly, and you’re crafting intelligent prompts – understanding that it can hallucinate, understanding that it was trained 18 months ago, so it doesn’t have any recent information – it produces pretty good content. But I certainly wouldn’t be publishing content without a professional looking at it after it’s produced it.
PL: As we’ve said, people have been playing with it, they’ve been trying to effectively bully ChatGPT into saying ridiculous things or become outright abusive. Which as I understand it, you can do, but if you’re using it as a serious professional person, and you’re trying to get good outcomes from it, you can still get completely erroneous data back can’t you?
JP: You can. It’s a genuine recognised problem in the language. It’s hallucinations, it does hallucinate. It generates content, it’s trying to please you sometimes. So yes, it can produce content that’s completely made up, that sounds genuine.
PL: It’s titles, invented facts, formulae, all that sort of thing?
JP: Indeed, it will try to please you, so it will invent information.
PL: Which potentially sounds extremely concerning, doesn’t it? So you really, really need to vet everything it gives you before you use it?
JP: Indeed, yes.
PL: There’s an issue around data protection as well, isn’t there?
JP: I think already they’ve started to improve their privacy statements. But Italy, as a country, has decided to block access to it’s because of those concerns from their data protection people. I think you should be sensible with the data and the context you give it.
PL: This is around the idea that anything you give it, in terms of information, it can retain and potentially use or potentially sell?
JP: The policies are different depending on which one you’re using. If you’re using the OpenAI one, or Bard from Google, they do state that they don’t use it, or won’t sell it or pass it on. But people are nervous, and you should be careful in what information you’re sharing with it.
PL: So there’s not enough clarity on that right now, would it be fair to say?
JP: Well, I think the privacy policies are a little bit loose at the moment. But the alternative is the Enterprise route with Microsoft – you can have your own installation, and there, you’re completely controlling, it’s in your own environment. You have the ability to give it much more context and therefore get much better answers, but also the security from Microsoft that it’s contained within your instance. So, if you’re wanting to share information that you don’t want others to learn, I think you need to really go the Enterprise route rather than the open web route.
PL: In terms of essay writing – and even examination students have welcomed ChatGPT with open arms – thinking about the ACA examinations, how is the qualification going to maintain its rigour in the face of this? Because as I understand it, it’s not trackable if you use ChatGPT right now.
JP: Within the examination environment that we host, we have proctoring, it’s another way to access the internet, which we restrict. But in terms of its performance in passing the exams, the first release 3.5 back in November failed our exams when we tested it. The one – GPT4 – that was released in March passed it.
PL: And passed it well.
JP: It passed it well, yes. GPT’s owners did the test on the bar exam. The first iteration was in the bottom 10% and the second iteration was in the top 10%, so you can see the exponential improvement over those versions.
PL: Yeah. Because there’s a new version. Is it November the next version is expected?
JP: They haven’t confirmed when the next iteration will be, but yeah, it will have a little bit of a pause now.
PL: But in terms of examinations, the response to how they might need to change or be reorganised, that sounds as if it needs to be pretty rapid.
JP: Indeed, yeah, obviously we’re already looking at it, because it’s going to change the way our members work once it’s integrated into Enterprise products. Microsoft have already launched Copilot. And therefore some of the tasks that humans used to do are going to be more and more done by these products with human oversight. So, the mix of what we need to examine and what’s in the qualification will also need to change.
PL: As you said, there’s lots of potential positive outcomes here. Thinking about what it might mean for client service, it has a very tempting potential, doesn’t it, to reduce time spent on at least routine tasks? Would that be fair to say?
JP: That’s the idea. The programmers have obviously been used to this for a bit longer, it’s been live in in GitHub for about six months. And there Microsoft say productivity increases about 70% but job satisfaction increases by 80% because the things that it is doing are the things that people find a bit more like drudgery.
PL: Really? The mundane work, the grunt work?
JP: That’s the idea.
PL: OK. I know that the legal profession has been a rapid adopter. It’s been used quite widely, hasn’t it?
JP: But the legal profession is also identified as one of the areas that is most exposed to AI, so I think they need to adapt and use it, otherwise it’ll take their jobs.
PL: Goldman Sachs, I think they’ve recently produced some work on that about the potential – I call it job threat – but the potential outcomes that this might have for certain professions, and legal is high up, office admin, but also business and financial.
JP: Yes, 300 million jobs potentially affected was the headline there. And obviously, mostly in the Western world, and mostly in office type of environments. But we’ve been here before with other computer initiatives, and generally our members adapt very well to technology and are keen to adapt and become more productive. And new jobs will obviously arise.
PL: So what do you see as the most appropriate uses for accountants, as things stand now?
JP: I think any kind of report writing or content generation customer service within the firm. It’s very good at customer service, especially if you can integrate it with your CRM. I would say that you really have to look at it in an enterprise level, if you’re going to be sharing data that’s privileged – so not the open access ones – I would recommend giving it a try just on the open web for normal conversation. But the customer service, marketing, and then financial once it’s in the product – because it’s coming in with Excel – all the big software providers will be integrating in their services in a controlled manner so your data is protected.
PL: And at the front-end client research, presumably?
JP: Indeed, yes.
PL: So, your thoughts for people listening to this who perhaps haven’t ventured into it before. How would you suggest they open relations with ChatGPT?
JP: Go and have a play. It’s already available via Bing, or Bard for Google. It’s very easy to access, so just start having a conversation with it and see what output you get. But a little bit of caution on what it produces, check the accuracy, especially if you’re going to be sharing it further.
PL: Lots of critical thinking. Thanks very much, John. Now, Lindsey, should we move on to the effects of rising corporation tax and changing R&D credits? Should we kick off with corporation tax?
Lindsey Wicks: Yes, let’s do that.
PL: What what’s changing and when?
LW: Well, on 1 April we went back to having two rates of corporation tax in the UK. The biggest companies, those with profits over £250,000, will pay tax at the main rate of 25%. Back at the Budget, the chancellor said that only 10% of companies will pay at the 25% rate. The smallest, those with profits of less than £50,000, they’ll pay tax at the small companies rate, which is still 19%. And then those companies with profits in the band from £50,000 to £250,000 will pay 25% with marginal relief, and what that really means is that their effective corporation tax rate in that £50,000 to £250,000 band is 26.5%.
PL: Now, this sounds straightforward, but I know you think it’s more complex than it looks.
LW: Yeah, there’s two reasons for this. The first is now that we’ve got two rates of corporation tax and the associated company rules come back into play. And what that means is that where there are associated companies, we have to divide those £50,000 to £250,000 profit limits. So, if there are two associated companies, those limits are halved. And then the other complication is the transitional rules. There’s not that many companies that have a 31 March year end. So, if you’ve got a different year end, a different accounting period, you’ve actually got to divide your accounting period into two for the date that straddles 1 April.
PL: OK, so how is this going to affect members working in tax?
LW: The first thing is familiarisation or re-familiarisation with the associated company rules. We’ve had a single corporation tax rate since 1 April 2015. So, it’s a long time since we’ve had to pick up those rules. There may be some restructuring work to do. People might decide that their group structure or their holding structure isn’t right now in the light of those associated company rules coming back into play. And the other thing to be aware of is the transitional calculations. Yes, we’ve got corporation tax software that will do the work, but you need to understand how the rules should be working to be able to do a sense check on what the software’s spurting out at the bottom.
PL: R&D tax relief, what’s changing there?
LW: There are a lot of changes on a lot of different dates. So from 1 April of 2023, we had a lot of rate changes. The additional deduction for SMEs was cut from 130% to 86%. The payable credit for SMEs was reduced from 14.5% to 10%. However, at the Budget, it was announced that R&D-intensive SMEs would have a reprieve, they’ll still get a credit rate of 14.5%. The research and development expenditure credit, also known as RDEC, that rate actually increases, and that’s going up from 13% to 20%. All of these rate changes mean that companies that don’t have a 31 March year end will need to apportion their expenditure because it applies as of all expenditure that is incurred on or after 1 April. So, they’ve got to be able to split their expenditure. The next set of changes also apply to accounting periods beginning on or after 1 April 2023, so it’s a slightly different dynamic here. And this brings in more eligible R&D expenditure, so the categories are expanding to include payments for datasets and cloud computing services. And then the R&D guidelines are changing, and this is to extend R&D to include pure maths. Another change for accounting periods beginning on or after 1 April 2023 Is that companies will need to formally notify HMRC of their intention to claim R&D tax relief. The next change will apply from 1 August 2023. Companies filing claims on or after this date will need to file an additional information form either before or at the same time as their corporation tax return. And then one other change that we had been expecting this year, which was the restriction on overseas R&D expenditure, that’s actually been delayed until 1 April 2024, and the reason for that delay is because the government wants a bit more time to think about how that will interact with its proposals for a single R&D scheme.
PL: But as you say, there’s a lot isn’t there? What should listeners be most alive to right now?
LW: Well, all of these changes are on top of the corporation tax rate changes, so it’s going to be harder to specify the benefit of the relief this year, particularly as we’ve got all these transitional rules in play. They need to be clear on what’s happening when. There may be a rush to file corporation tax returns containing R&D claims before that 1 August deadline, so I think it’s going to be a busy summer for a lot of people doing those claims. And the other thing is, yes, we think these things are happening in 2024, but a lot of people are pushing back, including ICAEW, on whether that’s too soon for having a single R&D scheme as well.
PL: So that might potentially change?
LW: That might change, yes.
PL: OK. Capital allowances, do you want to talk us through the replacement of the super deduction? What’s changing?
LW: We had the super deduction up until 31 March. It had been thought that that would go but at the Budget we got a bit of a reprieve. So instead, we’ve got what is known as full expensing. But really, it’s 100% first year allowance for companies, and that’ll apply from 1 April 2023 until 31 March 2026. The expenditure there must be on plant machinery that’s new and unused, it can’t be on cars, it can’t be on things that have been given to the company as a gift or things that have been bought to lease to somebody else. At the same time, we’re retaining the 50% first year allowance for special rate expenditure. That was there alongside the super deduction before so that’s staying, and what happens there is you get a 50% first year allowance and then the balance of 50% gets 6% writing down allowance in a future accounting period. And special rate expenditure includes integral features, thermal insulation added to buildings, solar panels and long-life assets. And those are assets with a useful life of over 25 years. Like the super deduction, special disposal rules apply. So, if you sell an asset, then you get a balancing charge of 100% of the disposal value if it was a full expense asset. If it’s a special rate asset, so it’s had 50% allowance, then you have to bring 50% of the disposal value in as a balancing charge, and the other 50% is deducted from the special rate pool.
PL: Again, a lot to chew on there. Key messages for listeners?
LW: If an asset doesn’t qualify for full expensing, the £1m annual investment allowance might be an alternative. But remember, that’s not available for cars. There are 100% first year allowances for electric cars and zero-emission cars, but not other types of cars. The annual investment allowance is also available for special rate expenditure, so that might be a better option.
PL: And timing of expenditure, that’s key?
LW: Yeah, it is, it might determine the value of the relief, particularly for accounting periods straddling 1 April. But one bit of good news is that the super deduction was quite restrictive, in that you couldn’t ever claim it on something where there’d been a contract entered into before those rules were announced. There doesn’t appear to be a similar kind of restriction for the full expensing, so it does seem to be a little bit better in terms of timing.
PL: So overall, what’s your estimation of the effect of these changes all together?
LW: It’s going to be a really complicated time. There’s a lot of dynamics at play that might affect the overall tax position for companies, on top of a lot of other uncertainty that they’re playing with at the moment – inflation, wage inflation, supply chain issues. There’s a lot happening for companies at the moment.
PL: ICAEW has good resources on this. Where can listeners find them?
LW: Well, one of the places will be ICAEW’s TAXline hub. We’ve also got lots of Insights articles picking up on the most recent changes following the Budget. So yes, there’s a variety of places that ICAEW listeners can go to.
PL: Thanks, Lindsay, there was a marathon there, a huge amount of information. Thanks very much for summarising it all for us. Sally, shall we move on to FRED 82. This is the consultation on financial reporting exposure draft 82, and it closes at the end of April, doesn’t it?
Sally Baker: The FRED 82 is the document that proposes amendments to UK accounting standards, and it’s setting out those amendments for public consultation. It also goes by the name of the periodic review of UK GAAP. So as the name suggests, the standard setter, the Financial Reporting Council, they conduct a periodic review of their accounting standards at least every five years. This is the second of their periodic reviews, it started in March 2021 with an initial request for views, and FRED 82 is the document that puts the proposals out there for public consultation.
PL: And what’s it been looking at?
SB: It’s been looking at all of the sections within FRS 102, the main accounting standard that’s applied by companies in the UK, but also FRS 105 and the other accounting standards within the suite of accounting standards. There’s really three areas that the FRC consider when they are doing these periodic reviews: Changes to International Accounting Standards – the FRC do aim for global alignment within their accounting standards, and they do look to apply an IFRS-based solution where possible, so they’ve been looking at changes in recent International Accounting Standards; developments that have happened since the last periodic review – so that might include Brexit, for example; and any other improvements that they feel are required to existing requirements.
PL: And the key proposals?
SB: I think there’s really two headline areas in terms of the key proposals around revenue and leases. In terms of revenue, they’re planning to introduce a five-step model for revenue recognition. That will bring FRS 102 into alignment with the international standard of IFRS 15. There are simplifications compared to IFRS 15 to make it more cost effective for the types of entity that apply IFRS to and also to try and promote some efficiency within groups. The five-step recognition model will move to a single framework that can be applied to all transactions and all industries, as opposed to the current guidance within FRS 102, which is OK for very simple transactions, but anything slightly more complicated that we see in today’s world, it doesn’t work so well.
PL: So, thinking about preparers, what’s it going to mean for them?
SB: I think in terms of preparers on revenue, it’s a little bit of a different mindset. It will take a little bit of getting used to, but there is lots more additional guidance within the proposals than there used to be. We’d encourage the preparers to embrace that additional guidance. It should really make their life easier to have a single framework with more guidance that will be easier for businesses with anything more than the most straightforward transactions to be looking at.
Key proposals in terms of leases – with the leases at the moment, we have a distinction between finance leases and operating leases. Finance leases are on balance sheet, whereas operating leases are off balance sheet, and FRED 82 is proposing to bring in virtually all leases onto the balance sheet, effectively treating them like a finance lease. Again, some simplifications compared to the full IFRS 16, there will be some exemptions for low-value assets as well. But by and large, most leases will be bought on balance sheet.
PL: And ICAEW’s initial thoughts in those areas?
SB: In terms of revenue, we are supportive of the introduction of the five-step model into FRS 102. The proposals do suggest bringing it into FRS 105 as well, and we do think that that might be a little bit disproportionate. But on the whole, we are very supportive. There are some further tweaks required. Some of the language has been changed slightly compared to IFRS 15, with a view of making it slightly simpler to apply, but we’re worried about the unintended consequences of that. So, we would encourage the FRC to perhaps reconsider their decisions there. In terms of leases, again, generally supportive of bringing leases on balance sheet. Companies deal with finance leases already, so preparers should be fairly familiar. And again, the simplifications that they’ve introduced or they’re proposing to introduce, particularly around the interest rate, which has been a problematic area in practical implementation for IFRS 16, the proposed simplifications there will definitely help preparers. We do, however, feel that the section in terms of drafting is very long. Essentially they’ve more or less brought all of IFRS 16 into FRS 102, so we would like to see that shortened.
PL: Now this consultation closes on 30 April. What happens then?
SB: From 30 April FRC will be looking at all of the feedback that they have received, and then they will issue the final amendments, so they will issue updated FRSs. The proposed effective date for these changes is accounting periods beginning on or after 1 January 2025. Now, the FRC have stated that they will give companies at least 12 months to prepare for these changes, so that would suggest that we’d see the final amendments by the end of this year. Time will tell based on the feedback that they receive whether that timetable is stuck to.
PL: So, there is time to get involved in this. How can listeners contribute to the consultation?
SB: There’s a couple of ways that listeners can contribute. In terms of ICAEW we have a digital magazine By All Accounts that is currently published, and that’s available at icaew.com/byallaccounts – that provides a range of articles informing readers about the changes, and they can also provide input directly to ICAEW by emailing us at email@example.com. Alternatively, listeners can respond directly to the FRC themselves. They have a hub at frc.org.uk/fred82 with details of how to respond directly.
PL: Thanks, Sally, that’s great. And obviously there will be links to everything you’ve just referred to in the show notes, so don’t worry if listeners hearing that didn’t get a chance to write it down. John, Sally, Lindsay, thanks very much indeed for joining us today. As we said, you can find more information about the issues we’ve discussed in this episode. Visit the TAXline and the By All Accounts hubs on the ICAEW website, you’ll find links to those in the show notes. You can sign up to the newsletters there, too, so that you receive updates direct your inbox. In the next In Focus podcast later this month we’ll be discussing methods to encourage SME investment and the particular role that the regulatory burden plays. We’ll have more news and accountancy updates for you in May. Meantime, if you found this useful, please do let us know by rating, reviewing and sharing this episode, and subscribing to ICAEW Insights on your podcast app. Thanks for being with us.