Judith Freedman

Financial and Tax Accounting: Transparency and 'Truth'

In the USA there have been calls for greater conformity between the rules producing tax accounts and those used for financial reporting purposes. A number of benefits are claimed for this so-called ‘book-tax conformity’, including reduced compliance costs and better opportunities for monitoring. In Europe, the debate around use of the financial accounts for tax purposes has arisen from a different conceptual starting point as well as differences in surrounding circumstances. Linkage between tax and financial accounts is common in Europe, although it takes varying forms. This does not result in complete book-tax conformity, however, and recent developments in accounting may be increasing divergence rather than reducing it. Despite the strong arguments in favour of conformity, there are also good reasons for some divergences, meaning that the most likely outcome in any system, whatever the starting point, is partial convergence. The problem with a hybrid outcome of this kind is that, at the point of divergence, there can be conceptual confusion and difficulties in integrating and managing two conceptually very different rule systems. Clarity of the relationship between the rules and improved accounting disclosure requirements might be more important than convergence, and might be achieved with less distortion to either tax or financial accounting. The current UK position is used to illustrate these points.

“One Size Fits All”—Small Business and Competitive Legal Forms

This article examines the proposals of the Company Law Review Steering Group (CLRSG) and the subsequent Government White Paper in relation to small, closely-held businesses and evaluates them in the light of the nature and needs of this heterogeneous sector. It suggests that some types of deregulation attempting to cater for particular types of firm can actually introduce complexity (‘complex deregulation’). The article argues that, given the variety of businesses in this sector, and the dynamic nature of small businesses, a ‘one size fits all’ approach which starts small but can be adapted as a business grows (and also if it shrinks) is preferable to an attempt at precise tailoring of legal forms for different types of small business. In conclusion, it is maintained that the proposed reforms for small businesses are helpful and the fact that they are not radical is not necessarily a serious defect. The main criticism levelled at the Company Law Review (CLR) exercise is that the opportunity was not taken to examine thoroughly the role of limited liability for small firms and to consider the entire range of legal forms available to the small business and the relationship of these forms to each other. If we confine the examination to UK company law, however, we see that it is already flexible and sets up few barriers to entry for small firms operating in the UK. The proposals made by the CLR, as adapted by the White Paper, will maintain the attractiveness of the UK as a base for small businesses without, for the most part, removing creditor and minority protection as more radical changes might do.