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FIGURE IT OUT YOURSELF: FINANCIAL REPORTING, ACCOUNTABILITY AND THE SELF-EMPLOYED by Rebecca Boden (Sheffield University Management School) This is a draft paper, not for circulation or reproduction without permission January 1996

Transcript of FIGURE IT OUT YOURSELF: FINANCIAL … · FIGURE IT OUT YOURSELF: FINANCIAL ... FIGURE IT OUT...

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FIGURE IT OUT YOURSELF:

FINANCIAL REPORTING, ACCOUNTABILITY

AND THE SELF-EMPLOYED

by

Rebecca Boden

(Sheffield University Management School)

This is a draft paper, not for circulation or reproduction without

permission

January 1996

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FIGURE IT OUT YOURSELF: FINANCIAL REPORTING,

ACCOUNTABILITY AND THE SELF-EMPLOYED

I. Introduction

"Thursday 22 January [1818]

Puzzled over my accounts. Could not make the sum total of

the different heads under which I had classed them agree

with the sum total of the year. There was a difference of

8d...In the afternoon did not feel quite well.."

Diaries of Anne Lister (1988)

A plea for the individual

Academic accounting research on financial reporting and accountability tends to

be concerned with either the private corporate or, more recently, the public and

voluntary sectors. In this context financial reporting is seen as a mode of

accountability for, or representation of, public or private organisations and

institutions, as distinct from individuals. Individuals are of course present as

actors in both the corporate and public sector, and in the academic study of them.

For instance, institutions may have to report to individuals, political power can be

seen as being vested in democratic governments by individuals, and of course

individuals act both within the organisations and institutions subject to

accounting and as professional accountants. But in such studies the primary focus

remains at the organisational level.

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A dimension which therefore appears to be largely absent from contemporary

studies of financial reporting and accountability in the UK is the instances and

manner in which individuals have to account for themselves financially. This is

despite the fact that accounting has never operated exclusively in an

organisational context. At a purely personal level the historical record provides

potentially rich pickings here: for instance, the seventeenth century diaries of

Pepys (1970), those of Boswell (1985) in the eighteenth and of Lister (1988) in the

early nineteenth centuries provide a wealth of detail on household accounting and

personal financial accountability. Diarists and other auto/biographers often take

great care to give an account of personal finances along with the other details of

everyday life. Indeed, personal financial reporting and accountability embody all

the familiar elements of auto/biography: the story told is from a personal

standpoint and has a potentially problematic role to play vis-a-vis the reader or

"user".

Contemporary research on social policy has tackled issues such as cash flows and

accountability within households (see for instance: Vogler and Pahl, 1994). Those

people who work for themselves in unincorporated and usually small businesses,

who I shall loosely and collectively refer to as the self-employed, represent a

further area of contemporary interest, and are the focus of this paper1. In the UK

they represent a growing proportion of the workforce, yet have a low visibility in

accounting and other academic research. Successive UK Conservative

Governments have, since 1979, sought to widen of the definition of self-

employment and encouraged a growth in qualifying activities. The policy

motivations here are multifold and include a desire to encourage entrepreneurial

1 This paper draws extensively on work which I have done in collaborationwith Anne Corden of the Social Policy Research Unit at the University ofYork on self-employed applicants for means tested social security benefits(Corden et al, 1993; Boden and Corden, 1994; Boden and Corden, 1996) and ourongoing work on absent self-employed parents and the UK Child SupportAgency.

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activity, to reduce the numbers of people recorded as unemployed and to lighten

employment costs by redefining workers as self-employed and thereby entitled to

lesser employment protection rights and attracting lower employment overheads.

Whatever the policy motivations, the consequence has been a growth in people

defined as self-employed. One of the major implications for the affected individuals

has been the manner in which they have to account for themselves financially,

particularly with regard to state authorities. The purpose of this paper is to

problematise financial reporting by the self-employed, illustrating and explicating

the issues in order to place them firmly on the accounting research agenda.

Viewing such individuals as accountable financial subjects brings fresh

consideration to themes familiar in critical accounting. Thus issues of the power to

construct technical rules and to shape the reporting environment, the balance of

power between reporters and users, the use to which information is put, skills,

resources and costs are all pertinent here.

Why do we need the "self-employed"?

A theme central to this paper is that the labelling of certain individuals as self-

employed is the product of regulatory and administrative imperatives: that is, a

need on the part of state authorities to define certain types of economically active

individuals as a discrete group in order that they can be treated distinctly. One

aspect of this is the need to measure self-employed income in a different way to

that from employment. An individual who is an employee is subject to financial

regulatory control by virtue of their employer’s relationship with the state. Thus

UK employers must provide details of employee’s earnings (defined as that which

the employee receives by virtue of their post) to the Government and are also

responsible, for instance, for making deductions with regard to taxation and

contributory national insurance benefits. Employers may become increasingly

involved in other aspects of the financial regulation of individuals if there is an

increasing use of devices such as attachment of earnings orders for payments (eg

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child maintenance) where there is a large degree of individual non-compliance. A

self-employed individual, who by definition has no employer, cannot be similarly

regulated, necessitating the development of a new mechanisms of surveillance and

control. The need for new and more efficient forms of control has become

particularly marked as self-employment has continued to rise at spectacular rates,

bringing more people (and often with much lower incomes) within its net.

This growth and increasing importance of regulatory control of the self-employed,

particularly with regard to the measurement of their income, can be seen as a

juridifying tendency, with individuals becoming juridical subjects in their own

right and subject to an extension of state rules, laws and powers. It has been

argued that as such regulatory law expands it draws in and upon other disciplines

as law itself reaches its own boundaries of competence and capacity (Teubner,

1987). Thus state control over large numbers of people who it defines as self-

employed requires their income to be measured, and this can only be done by the

adoption of some accounting technology. Miller and Power (1992) argue that

rather than the co-option of accounting into a juridical process, what may be in

evidence is competition between law and inter alia accounting for regulatory space.

This process may be particularly evident in the area of child support, where court

based juridical systems employing traditional discretion are being replaced with

bureaucratic systems employing a rigid formula grounded in quantitative

measures.

This growth in administrative, and fundamentally regulatory, control over

individuals has gone largely unheeded and unnoticed. It stands in contrast to the

large measure of self-regulation deemed appropriate in financial accountability for

corporate organisations. And even though the marketisation of the public sector

has resulted in the more overt application of new accounting technologies for

financial accountability (Hopwood, 1994; Pendlebury et al, 1992), these

technologies are modelled upon those of the private corporate sector and are at

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least therefore reasonably transparent. This is not the case for the self-employed,

where distinct and diverse financial reporting regimes have been developed with

little apparent regard for existing best commercial practice, harmonisation,

involvement of the self-employed or transparency and openness. The implicit

paradox here is that whilst the self-employed supposedly enjoy a greater degree of

freedom and independence of action by virtue of their status, they are also subject

to an increasing array of regulatory and other administrative controls. These

controls are often presented as being objective and imbued with an authority

derived from their rules-based nature.

An analysis of these issues necessitates a discussion of who the "self-employed" are

and the mechanisms by which they are thus defined: this follows in Section II of

this paper. Section III describes the recent growth in self-employment in the UK

and considers some of the financial accountability issues which that growth

engenders. In Sections IV attention is turned to the nature and applicability of

financial reporting requirements imposed on the self-employed, whilst in Section V

the practicalities of eliciting financial information from such groups is discussed.

This is then followed by some concluding remarks in which I probably raise more

questions than I am currently able to answer.

II. Who are the self-employed?

"28 November, 1660

I find that Mr. Creed hath sent me the 11l 05s.00

that is due to me upon the remaynes of account

for my sea business- which is also so much clear

money to me; and my bill of impresse for 30l is

also cleared. So that I am wholly cleared as to the

Sea in all respects. To the office and was there

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till late at night- and among the officers do hear

that we may have our Salaryes allowed by the

Treasurer"

Diaries of Samuel Pepys (1970)

The self-employed individuals which form the focus of this paper have only one

common characteristic: they are all categorised as self-employed by some

external agency. Individuals may not agree with the categorisation applied to

them, but the bureaucratic and rules-based nature of such agencies means there

can be no scope for self-inclusion or exclusion. All manifestations of the legal or

regulatory categorisation of self-employment cohere around the notion of earning

one’s living in a particular way, and in particular distinguish the self-employed

individual from the employee.

"Self-employed adj.earnings one’s living in one’s own business or through

freelance work, rather than as the employee of another".

(Collins English Dictionary, 1979)

The self-employed are therefore a labelled group, and their definition by how

income is earned prevails over the extensive non-homogeneity of those earning

their living through business, binding together a very disparate group. An

individual can of course be both self-employed and employed simultaneously if

they have two or more sources of income.

The earliest example of this regulatory imperative to institute forms of regulation

and control over, and special provision for, discrete groups on the grounds of the

nature of their economic activity is in the taxation of income. Lord McNaughten

may have blithely stated that "Income tax, if I may be pardoned for saying so, is a

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tax on income..." (London County Council v Attorney General, AC 26 at 35) but he

failed to resolve the vexing question of what exactly income was, and what sorts of

income were taxable incomes. Ultimately income can only be that which has the

character of income, and that character is either socially, economically, politically

or legally defined. In matters of taxation the UK Parliament and the courts have

followed Adam Smith’s (1776) logic that income has to be derived from some

source in the same manner that fruit is derived from a tree, facilitating an

important distinction between income and capital (John Smith & Son v. Moore).

But of course, it may not be deemed desirable to tax all ‘ fruits’: a marriage may be

a source of income for a non-working wife but it would be a radical step to suggest

that such income should be taxed. The problem of defining income was therefore

resolved to some extent in UK legislation by subjecting only the "fruits" (income) of

specified "trees" (sources) to taxation. Hence the UK has a schedular system of

taxation in which the sources were defined as, inter alia, income from

employment (employees) and income from "trades, professions and

vocations" (the self-employed). The schedular system permits incomes from self-

employment to be measured and assessed in an appropriate manner distinct from

income from employment.

During this century in the UK a mixture of statute, case law and practice has

resulted in the incremental refinement and clarification of the definitions of both

"employment" and "trades, professions and vocations" - or self-employment.

Employees are now defined for taxation, and indeed for most other purposes, as

being people who have a contract of employment or who occupy a post or position

(Edon and Mitchell v Ross). There have been a large number of judicial

pronouncements on what constitutes a trade (see for example: Cape Brandy

Syndicate v CIR; Martin v. Lowry), and the general criteria defining a trade for

taxation purposes were summarised by the Royal Commission on the Taxation of

Profits and Income in 1955 (Cmd 9474). These indicators, developed primarily for

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taxation, have been extremely influential in the definitions adopted by other

agencies.

The working guidelines developed by the Inland Revenue are that the provision of

services in which the person doing the work takes substantially all of the risk and

acts under only the general supervision of the contractor is self-employed, whilst

the person who provides service to someone under conditions dictated by the

contractor in return for an agreed reward which involves minimum risk for the

worker is an employee. Detailed criteria, such as the provision of tools and

equipment may also be used. Despite these criteria serious difficulties can arise in

distinguishing self employment from activities undertaken as an employee, and

these have been the subject of much litigation in the areas of health and safety,

national insurance and income tax. Whilst the Inland Revenue relies on

precedents set by the courts (for instance, Davies v Braithwaite 10 TC 198;

Mitchell and Edon v Ross 40 TC 11), section 2(1)(b) of the Social Security Act 1975

defines a person is self-employed if they are gainfully employed other than as an

employed earner.

The reliance on legal and administrative distinctions between employed and self-

employed income in the absence of any more essentialist criteria inevitably means

that the categorisation of some people’s incomes appears anomalous. For instance,

owner/managers of very small incorporated businesses may have a level of control

over the business, particularly with regard to access for resources for themselves,

which renders their personal position more akin to that of a self-employed person

than the employee status with which they are legally accorded (Boden and Corden,

1994; Eardley and Corden, 1994). Difficulties are also encountered in areas where,

in response to pressure from certain business sectors, as a result of historical

tradition, or because of complex, diverse and generally "muddy" contractual

employment arrangements, state agencies permit what can often appear to be

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aberrant classifications. For example, sub-contract building site workers are often

categorised as self-employed for taxation, national insurance and social security

purposes, yet many work fixed hours for a fixed wage reward, supplying no tools or

materials and are therefore indistinguishable in their work practices from most

employees (Boden and Corden, 1994). It is also not uncommon for those working in

financial sectors such as insurance or pensions sales to be "self-employed" whilst

working with only one company and even being provided with office space,

materials and so on. The pressures to permit the ‘employer’ to classify those

undertaking work for the organisation to be known as self-employed is

understandable: self-employment may give greater freedom for the individual in

certain respects, but also denies them access to employment protection legislation,

pensions and other employee benefits. It might therefore be expected that there

will be continuing pressure towards a loose interpretation of self-employment,

particularly if the UK ever adopts minimum wage legislation.

In these circumstances some people have difficulty in determining what the status

of their income is, and, consequently, the rules and procedures to which they are

subject. For example, research on family credit (Boden and Corden, 1994) found

one applicant, a childminder, who maintained that the research project was not

pertinent to her as she was not ’in business’- she simply looked after peoples’

children at home in return for payment. In fact she was defined as self-employed

under the family credit rules.

There can be very real consequences of such confusion: incorrect categorisation (by

either the organisation or the individual) may result in delay or even financial loss

for either the individual or the organisation. For instance, an outworker applying

for family credit (Boden and Corden, 1994) defined herself as an employee despite

the fact that she was self-employed under the regulations. When asked for income

information as a self-employed person she disclosed only her gross turnover, not

realising that as someone who was self-employed she could also claim her business

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expenses. This applicant probably lost benefit as a result. Conversely, the rules

based nature of the definitions may also mean that some people are able to

manipulate the system to their advantage. The same study (Boden and Corden,

1994) found a company director/principal shareholder who was very aware that by

retaining income within the company rather than paying it to herself as salary or

dividend she could depress her assessed personal income thereby maximising her

family credit award whilst accumulating wealth within her company. Similarly

the tax system abounds with cases where individuals have realised that by

shifting their status between employment and self-employment they can gain a

significant advantage (see for example Davies v. Braithwaite).

It is incumbent on organisations which require people to be financially accountable

to devise sensible and easily comprehensible means of consistently identifying

those who are to be treated as having self-employed income. The demarcation

should be as unambiguous as possible, and expressed in ways which individuals

can understand. Special regard needs to be paid to the needs of people for whom

english is not their first language or who, because of cultural diversity, have

differing conceptions of self-employment. Categorisations currently in use do have

the advantage of a reasonable degree of consistency between organisations. But

there are more subtle and complex issues here. Definitions can lead to grey areas

which may confuse some individuals and which others may exploit to personal

advantage, raising issues of equity in financial accountability between them and

those who have less effective choice. And the definition of some individuals as self-

employed by the State may either impose burdens on them (for instance, through

more onerous reporting requirements or inferior employment rights) or confer

advantages (such as more liberal tax rules).

III. The self-employed in the UK

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"Wednesday 24 November [1762]

I called on Dodsley and found that although he

had refused to take the hazard of publishing my

Cub, that it had sold well, and that there was

thirteen shillings of profit, which I made him pay

me down. Never did I set so high a value on a

sum. I was much in spirits."

Boswell’s London Journal 1762-63 (1985)

Growth in UK self-employment

During the 1980s there was a massive expansion in the numbers of people

recorded as being self-employed in the UK. Between 1979 and 1990 their number

increased by almost 75% to 3.44m, or 13% of the workforce (Daly, 1991; Eardley

and Corden, 1994) The trends have been less marked and more variable since

1990. The product in part of Government attempts to encourage the development

of an ’enterprise culture’, there is also evidence to suggest that much of this growth

represents an attempt to escape unemployment, or to facilitate workforce

restructuring by employers anxious to reduce labour costs. The result is that

many of those involved can be characterised as ’quasi self-employed’: lacking both

the autonomy of real entrepreneurs and the security afforded to employees by the

legal system (Eardley and Corden, 1994). Much of this new self-employment

generates income only in the lower deciles (Meager et al, 1994) and has been

described by Wheelock and Baines (1994) as ’self-exploitation’.

There are four principal reasons why the range and nature of financial reporting

by the self-employed might have expanded considerably in recent years. First, the

greater numbers of people with income from self-employment has, in itself, led to

an increase in the numbers of people reporting income to ubiquitous regulatory

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bodies such as taxation authorities. Second, given the predominance of the new

self-employed at the lower end of the income scale, greater interaction with public

and private organisations which provide means-tested benefits and other

assistance to those on low incomes might be anticipated. The Benefits Agency has

noted that the scale of it’s self-employed workload has increased significantly,

causing it to give serious renewed consideration to the rules and procedures

operated for this group (Boden and Corden, 1994). Third, the stimulation of an

"enterprise culture" has taken place within the context of various forms of state

and private/voluntary sector assistance with business start-up and development.

These schemes all require some sort of financial reporting from the self-employed.

And finally, there is also the growth in the number of benefits, reliefs and

agencies, such as the Child Support Agency, which necessitate income reporting

from all of those within their remit, including the self-employed2.

Accounting and the individual

The self-employed person may therefore be exposed to requests and demands from

a wide variety of state, voluntary or private sector quarters for information of a

financial nature. Some of these interactions may be mandatory, such as taxation

or assessments for child support payments, whilst others will be elective, such as

applications for means-tested social security benefits or business development

loans and grants. Table One gives an indication of some of the instances in which

an individual in the UK may elect or be required to provide financial information.

Even though some interactions are de jure elective, the de facto situation may be

that failure to comply with requests may result in financial loss or disadvantage,

leaving the individual with little effective choice.

2 In 1996 the DSS is to pilot a new low pay benefit (yet to be named),which will be given to all qualifying people in employment or self-employment regardless of family circumstances

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APPROX POSITION OF TABLE ONE

The information supplied by individuals, either compulsorily or through some

elective process, is much more likely to form the basis of a specific calculative

interaction with an authority rather than enhancing some less specific

"accountability" by contributing to information flows. Financial reporting for

individuals is essentially for administrative or other regulatory purposes and will

almost invariably have a direct, specific and traceable impact on their personal

financial position.

In the interests of accuracy and consistency in calculation, and of equity of

treatment, the dominant mode is for individual official bodies to make regulations

regarding the reporting of self-employed income. The influential role of

governmental organisations in determining the nature and processes of reporting

and assessment of self-employed income has important implications for the

balance of power vis-a-vis reporters and users. Interaction between individuals

and private sector organisations, such as banks, may not be statutorily controlled,

but the individual may also be at a relative disadvantage when, for instance,

seeking funds. Above all, an important distinction must be made between the

demands placed upon individuals and those placed on corporations. The latter tend

to be dominated by more general and less specific requirements to enhance

information flows, and to do so in a way largely determined through self-

regulation or the intervention of a self-regulated accounting profession. What is

evident for the self-employed is that they are much more likely to be subject to

highly specific regulatory control and that the information which they provide will

be used in highly calculative interactions which will have a direct and obvious

impact on their personal financial position.

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Self-employed people work in a huge variety of businesses, with extremely varied

circumstances and skill levels in dealing with financial matters. This non-

homogeneity presents something of a financial reporting challenge: to find

efficient, efficacious and fair ways for such people to report their income to a wide

variety of users with very different needs. Not only must the technical rules

associated with income measurement be fair and meet the policy needs of the

organisation to which they are reporting, but the system itself must be workable.

To this general challenge the UK situation adds a further difficulty: there exists no

central, harmonised approach towards the definition, measurement or operational

systems for assessing self-employed income. Individuals are therefore presented

with a whole panoply of sometimes markedly different rules and procedures

operated by the different organisations to which they may be financially

accountable. In particular, whilst accountants may be involved with the

preparation of accounts, or in negotiating with agencies on their clients’ behalf, the

income measurement rules adopted by the various organisations may have little in

common with generally accepted commercial accounting principles.

Whilst other countries may have similar needs to regulate the self-employed and

to elicit financial information from them, some of them undertake this task in very

different ways. For instance, the Australian Tax Office calculates taxable self-

employed income from a basic questionnaire on the tax return. A certificate of

total taxable income is then produced and individuals find this figure used for a

very wide range of calculative regulatory interactions such as for the Child

Support Agency or student grants.

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IV. Making rules for the self-employed

"Wednesday [5 July 1939]

Most dear little being,

I miss you. I’ve received all your little letters

safely, and you’re very sweet to have been such a

good correspondent. But it really grieves me to

feel you so glum, there far away, and to be glum

myself here. I’ve just received a blow: I went to

see the tax people, and they’re demanding 2,400

francs from me. I’ll check whether it’s really

true, and appeal if need be. How much have you

paid, for instance?......I love you, dear little

being, I love you quite passionately and kiss and

hug you

Your charming Beaver"

Simone De Beauvoir’s Letters to Sartre (1991)

A role for accounting and accountants?

A major point of distinction between financial accountability of individuals and of

public/private sector organisations relates to the role of professional accountants

and traditional commercial accounting. Whilst generally agreed commercial

accounting practices, and their practitioners, obviously dominate the construction

of accountability rules and environments in the private sector, and have had a

significant impact in the public sector (Hopwood, 1994; Pendlebury et al, 1992),

their influence is much less marked on matters involving reporting by individuals.

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Because the reporting requirements on the self-employed arise in the main from

regulatory or administrative need, and because the self-employed are a disparate

group with little individual or collective power, they tend to be imposed by the

authorities. This can be contrasted with the large degree of self-regulation evident

in the corporate sector. Whilst consultation may take place with trade associations

and other similar groups, in the final analysis the detailed rule making powers

which create reporting and accountability systems for the self-employed lie

exclusively within the realm of regulatory law. In such circumstances it can be of

little surprise that the systems created are designed to meet the policy aims and

objectives of regulators and administrators. Moreover, because the accountability

demands are disparate and differently motivated, the range of reporting

requirements comes to mirror this diversity, increasing the costs and reducing the

transparency of the system for the self-employed.

Traditional commercial accounting and its practitioners have had an influence on

accountability for individuals, but most noticeably where the regulatory regime

also applies to corporate entities3. Thus, when the courts were left with the task

earlier this century of elaborating on the term "profits" used, but not defined, in

the income tax legislation, they adopted a robust and commonsensical approach

grounded in commercial accounting principles:

"The next point is the question of profits. Now

what is profit? It is, as I understand, the

difference between the price received on a sale

and the cost price of what is sold".

3 For instance, individuals and corporations were subject to the sameincome tax legislation until the passage of the first Corporation Tax Act in1965.

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(Sir George Jessel M.R., Court of Appeal 1881, Erichson

v. Last)

"Profits and gains must be ascertained on

ordinary principles of commercial trading"

(Lord Halsbury L.C., House of Lords 1892, in Gresham

Life Assurance Society v. Styles)

In 1951 the Government’s Committee on the Taxation of Trading Profits (Cmd

8189) reported that:

"...we think it can now be taken as settled that the

profits or losses of a business for tax purposes are to be

computed in accordance with established commercial

accountancy principles as they apply to the particular

business in question, subject nevertheless to a number

of qualifications."

(Cmd 8189, para 133)

In the face of corporate pressure, and perhaps a naive view from the courts, it is

perhaps not surprising that commercial accounting became the basis for the

calculation of profits for income tax purposes. Whilst accounting and taxation

profits have never been synonymous, accounting profit remains the starting point

for the calculation of taxable income and the symbiotic relationship between the

two still is still a matter of active debate. The expertise of accountants in defining

commercial accounting principles has also been acknowledged by the courts

(Heather v PE Consulting).

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This early (and arguably misplaced) faith in and reliance on the veracity,

objectivity and suitability of commercial accounting measures has not been

sustained across all regulatory or administrative organisations. Most notably, in

those regulatory areas where individuals rather than corporations predominate,

and where the accounting profession has only a low visibility, there has been a

tendency for authorities to develop independent approaches. For instance, in 1988

family credit replaced family income supplement as the principle social security

benefit for low-income working families. This development brought with it changes

in the way in which self-employed income was to be measured. Previously a

necessity, accruals based accounts were no longer admissible and information on

cash income was to be provided via a questionnaire prepared by the applicant

instead. None of the professional accountancy institutes appear on the circulation

list for the consultative document mooting these changes, and they were therefore

unable to comment on the proposals. The non-participation of accountants in the

consultation process was to prove problematic: the resulting furore over the non-

acceptability of traditional accounts led to a hurried revision of the regulations,

making both cash-flow questionnaires and standard accounts admissible (Boden

and Corden, 1994). Despite this late change of heart, the policy shift presaged a

major readjustments of the technical rules on which income was assessed. Chiefly,

traditional accounting notions of trading income were abandoned for some time, to

be supplanted by a more onerous rule that all flows into the business (cash or kind,

loans and capital) were trading income. Although accruals accounts were accepted

as a format, the information they contained was therefore subject to different

interpretations not grounded in commercial accounting practice: the mould had

been broken.

The influence of conventional commercial accounting has been varied and patchy.

Many of the rulings developed and pursued by the Chief Adjudication Service for

use by the Department of Social Security, and condoned by decisions of the Social

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Security Commissioners, have departed radically from traditional accounting

conventions (Boden and Corden, 1994). But there is also evidence of the indirect

effects of commercial accounting in the area of social security: a number of cases

recently decided by the Social Security Commissioner have relied heavily on

decided tax cases (unpublished case R (FC)1 91; Kostanczuk v. Chief Adjudication

Officer). These cases in turn, because of the nature of the precedents relating to

the definition of profits, rely heavily upon traditional accounting principles.

Empirical observation based on my family credit work suggests that this shift back

towards accountancy may be as a result of an increasing number of appeal

tribunal cases being brought by self-employed people, many of whom cannot

understand the divergence of regulations from accounting practice and/or use

professional accountants as agents. Tribunal chairs and other legal professionals,

when faced with accountants, show evidence of deferring to traditional accounting

rules. At the same time, the more enduring and developed methods of doing

things under the tax regime (where commercial accountancy has much influence)

might well be driving other regulatory regimes.

In general, examination of the technical rules and standards of public sector bodies

eliciting self-employed income information suggests that commercial accounting

principles and the accounting profession is far from dominant in the shaping of

practice. It can be posited that the relatively small amount of influence enjoyed by

commercial accountants and accounting in this area is due to two principal factors.

First, institutionally, this may be an area where accountants and their

professional expertise have, for whatever reason, had little power and influence.

And second, it may be that user needs are, quite simply, best met by other means.

The large accounting institutions appear to have only limited involvement with

self-employed issues, although there is a seed corn of genuine interest (Boden and

Corden, 1994). There may be a number of reasons for this: the growth in self-

employment and therefore of the importance of the issue is a relatively recent

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phenomena; the professional institutions may traditionally have been seen by

themselves and by others as connected exclusively with either corporate or public

sector accounting; and, perhaps somewhat naively, those outside the accounting

profession may have had a feeling that if ’accounts’ in the traditional sense are not

part of the income measurement process then there is no role for ’the accountant’

or indeed ’accounting’. In addition, the institutions may justifiably be more

concerned with issues which directly affect the interests of their members: most of

whom will be in practices which do not deal with very low-income self-employed

people. The Institute of Chartered Accountants, Scotland does have an active

involvement in this area, and this may be because ICAS is dominated to a greater

extent by sole or very small practitioners who may have a significant self-

employed client base. For instance, a group of Scottish small practitioners from a

remote rural community became extremely vocal and well organised within ICAS

on the matter of the assessment of self-employed incomes for family credit

purposes (Boden and Corden, 1994). There is also evidence of change- research on

the Child Support Agency indicates that when the self-employed constituency is no

longer exclusively very low income (as it is with DSS benefits) then there is a

greater level of accounting professional involvement and a higher degree of

interest from the ICAEW.

A world without accountants?

Given that commercial accountings are produced with certain end-users in mind, it

is perhaps not surprising that organisations eliciting information for their own

specific purposes from the self-employed will, to the extent that they have the

power to do so, prioritise their own primary policy objectives. Thus the Inland

Revenue seeks to conduct an essentially historical exercise to establish the income

earned during a past period in order to tax it. The measure used is the income

enjoyed or enjoyable. For other organisations the policy objective is much more

forward looking. For instance, family credit supplements a family’s immediate

cash income by means of an award which lasts for the ensuing six months and

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which is not re-examinable. Therefore some indication of likely future cash income

is required and the historical income figure is used as an, albeit imperfect,

predictor.

In terms of rule-making power there may be a happy medium to be struck here.

Completely autonomous actions by individual authorities in defining rules for

financial accountability by the self-employed may offer the prospect of efficient and

effective regulation, but there will inevitably be a cost in terms of reporter

confusion which will also have repercussions for the regulators in terms of costs,

appeals and public justification. Alternatively, a large degree of harmony between

regulators in their approach may interfere with policy objectives: the Child

Support Agency in Australia is currently experiencing problems with income

measurement manipulation because, they contend, the self-employed are ordering

their tax affairs in such a way that, whilst there are no net tax consequences,

there is a real reduction in reported income figures used for other assessment

purposes. The Australian Tax Office has a huge amount of definitive power over

the figures which have to be used by other agencies. This situation is proving so

problematic that the Australian CSA is contemplating major changes to the

system, involving breaking away from the Autralian Tax Office measures4.

In the absence of any accepted unitary or harmonised approach to the assessment

of self-employed earnings in the UK, different organisations have developed

different technical rules to meet their specific needs. Some organisations, notably

the DSS, which act as the umbrella for a number of interactions with the self-

employed, impose a measure of consistency within their own organisational remit.

Thus the Benefits, Contributions and Child Support Agencies all calculate self-

employed income in almost identical ways. Such intra-organisational

4 I am grateful to officials at the Australian Child Support Agency fortheir assistance in explaining these issues.

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harmonisation makes sense in that it demonstrates consistency and may increase

reporter acceptance.

The technical rules used by various organisations dealing with the self-employed

are a product of legislation, in-house practice, and precedents established by

tribunals and courts. Some law-making is more visible than others: taxation rules

are made overtly and the subject of very public Parliamentary debate whilst many

social security rules are made through less visible statutory instrument

procedures. The courts and the appeal tribunal system have played an influential

part in resolving disputes, often relying on commercial accounting practice where

there is little other guidance. Technical rules have proved not to be exempt from

public debate and dispute: for instance the treatment of the self-employed by the

CSA has been the subject of recent press coverage.

From this regulatory soup of rule-making for the self-employed emerge three areas

to which regulators and administrators need to pay particular attention. These

are: the definition of what is to measured; the establishment of a suitable basis

period; and the actual computational rules to be applied.

i) Definition of income

Nearly all regulatory demands for financial accountability from the self-employed

require some measure of revenue income or profit. The definition of income is as

complex as it is diverse, but has traditionally rested upon notions of a distinction

between income and capital (see for instance, Smith, 1776). In theory this

distinction enables users of accounts to discern the value added to capital utilised

by a business entity. Allied to this, the matching principle facilitates the

measurement of profit in a specified period. As a business measure such

approaches therefore have much to commend them. But they are constructed with

specific objectives in mind. When looking at other regulatory purposes it is

important to consider whether trading profit is a suitable approximation for

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income, and whether accruals accounting is an appropriate means of income

recognition. Thus there are two central issues: what is to be defined as income, and

the manner in which it should be recognised.

In the absence of any essentialist criteria, the definition of income is dependent

upon the policy objectives of the regulatory system concerned. Two contrasting

examples serve to illustrate how two different agencies have approached the

problem of income definition. The tax system, with its schedular basis and concern

with taxing the ‘ fruits’ from ‘ trees’ such as trades was obliged by the courts to

accept a definition of income firmly rooted in commercial accounting. Whilst such

an approach has a certain logical consistency, it has proved far from

unproblematic. By the 1960s tax payers were beginning to appreciate that in a

sophisticated financial world there was an uncertain boundary between income

and capital, and that by representing some accretion of wealth as being of a capital

one could escape not only income tax but tax altogether. This problem was

overcome not by the state redefining income to include such sums, but by

introducing capital gains tax.

The Department of Social Security’s family credit rules adopted until very recently

a wholly different definition of income. The family credit regulations state that

self-employed earnings are the gross receipts of the business less allowable

expenses. The Adjudication Officers’ Guide (the definitive rulebook for putting

social security systems into operation un the UK) defined receipts of the business

literally as any item in cash or kind coming into the business. Thus not only was

turnover included, but also any capital receipts, any loans taken out, any capital

introduced by the self-employed person and so on. Indeed, any sum which was

recorded as incoming into the business, whatever its nature, was included as

income. This interpretation stands in stark contrast to rulings by the courts in tax

matters (see for instance Higgs v. Olivier). The interpretation applied by the

Department of Social Security did not extend to expenditure: capital expenditure

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is disallowed except in certain very specific circumstances and includes many

items where the receipt of a similar sum would count as income. A subsequent

ruling by the Social Security Commissioner has amended this interpretation to one

where the gross receipts of the business are those earned by the business, but also

include the proceeds of the sale of business assets.

The original interpretation of the definition of income by the Department of Social

Security followed advice given by the Government’s Chief Adjudication Service

and was justified by the argument that it was no part of the remit of the social

security system to subsidise the development of businesses, and that to treat any

cash or kind coming into the business as not available for the applicant to live on

would provide a subsidy.

On the issue of income recognition, again the same two agencies serve as

interesting contrasting examples. Historically, the Inland Revenue has been

concerned to tax the profits earned in the basis period of taxation. The definition

of profit has been developed largely using commercial accounting principles and

this included notions of matching and accruals. To the tax authorities the

acceptance of accruals based accounts is therefore not problematic. The Inland

Revenue has the power to accept cash based accounts but are generally reluctant

to do so because of the opportunities they provide for income deferral.

For the Department of Social Security the imperative is somewhat different. The

notion of accounting profit has little relevance to an organisation attempting to

assess how much cash an applicant for a benefit has to live on and therefore how

much cash supplementation is appropriate to give them an acceptable cash

income. Benefits are committed to provide immediate cash assistance to applicants

and therefore the appropriate measure of income would appear to be available

cash from the business. In fact under the family credit rules, following the

brouhaha over the decision to no longer accept accounts in 1988, both the accruals

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basis and the cash basis are acceptable, and indeed applicants may switch

between the systems in a way that could amount to benefits planning. This

approach has also been adopted for Disability Working Allowance and indeed by

the Child Support Agency in its regulations. Some Housing Benefit officers have a

further measure: when accruals accounting or cash accounting income is lower

than the proprietor’s drawings from the business some take the latter as the

measure of cash income (Corden et al, 1993).

Regulatory agencies therefore need to pay careful attention to the definition of

income and of the choice of measurement criteria (accruals accounting or cash).

The systems devised must be appropriate for the policy aims of the authority.

Openness as to policy aims, together with widespread consultation, should ensure

that individuals do not suffer as a result of the selection of such criteria and that

they are appropriate to what regulators are attempting to achieve. Part of the

difficulty with, say, the original family credit interpretation of income was that

the system was not the product of widespread consultation or even any significant

degree of openness. Moreover, there were initially no significant lobby groups able

to take up such matters.

ii) Basis periods

Because all accountings are periodic in nature organisations measuring self-

employed income need to select appropriate basis periods. The basis period

adopted will be a compromise between the needs of the organisation (it may need

an ex post measure or an indication of current/future earnings and administrative

ease or practicality. Historical measures of income within defined time-frames are

the most simple option, consisting as they do of past and largely verifiable events.

Historical measures are best suited to ex post regulatory regimes where the

primary concern is what has passed, such as with income tax or value added tax.

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But where the income measure is used as an indication of current or likely future

income flows the use of historical measures is much more problematic because

they may have very poor predictive value. A wide range of means-tested social

security benefits aim to supplement claimants’ cash income. They do this by

awarding benefit for a fixed period (usually six months) in advance. This produces

a requirement for accurate information on likely future earnings over the ensuing

benefit period. Only in some housing benefit areas do officials do an ex post

reassessment of benefit comparing actual historical earnings with the original

benefit awarded and make any appropriate adjustment.

Most self-employed earnings, especially cash earnings (as distinct from accruals

profit), will fluctuate, often quite widely, over time. Moreover, the pattern of

earnings will vary from trade to trade. Thus a farmer will have quite specific and

predictable variations in cash flows, whilst a taxi driver may suffer a wholly

unexpected downturn of earnings due to, say, a vehicle failure. It is not

unreasonable to expect the self-employed to budget over a longer period than, for

instance, weekly or monthly salaried staff. But the question arises as to what is a

reasonable period. Small farmers interviewed in the family credit work (Boden and

Corden, 1994) experienced severe difficulties here. Their income cycle is annual,

with marked fluctuations between summer and winter. But they could be assessed

on their cash earnings during the six months when they are their highest. This

will depress the level of family credit paid for the ensuing six, lean, winter months.

In some cases there will be no historical information at all- for instance when

someone has newly started in self-employment. Because benefits such as family

credit are designed to act as an incentive to get people back to work it would be

counter-productive to make applicants wait until they had historical information

on earnings before their received any benefit. In such circumstances an estimate

is made by the applicant of likely future earnings. Housing benefit officers will

often do a subsequent check of reality versus estimated and make appropriate

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adjustments, but no such adjustments are made in respect of benefits paid by the

Benefits Agency of the Department of Social Security.

Problems may also arise for those who have suffered changes in personal

circumstances which impinge upon business performance. For instance, an absent

parent may be assessed by the Child Support Agency on the basis of income during

the period when the domestic relationship was still intact, and when the former

partner was contributing towards the business by, say, giving labour. Similarly,

people who have experienced relationship breakdown may have less energy and

enthusiasm for their work which in turn will affect their earnings capacity.

In essence, the selection of an appropriate basis period for the calculation of

earnings will always be somewhat arbitrary, and will suit some occupational

groups more than others. And this is not a problem specific to the self-employed:

an employee too may have earnings which fluctuate because of overtime work or

bonuses.

iii) Computational rules

Consequent to decisions as to what will count as income, and measured over what

basis period, are concerns with computational rules. The major issues here concern

what is deemed allowable as expenses against income. What is allowed as an

expense is, again, the product of the policy motivations of the authority concerned.

Some may be motivated by a desire to curb certain sorts of business behaviour (for

instance, the ban on deductions in respect of entertaining for tax purposes) or to

encourage others (the granting of allowances for capital costs in lieu of prohibited

depreciation deductions).

The approach taken by different agencies may vary considerably on similar points,

emphasising the partial and constructed nature of the law and accounting. For

instance, until recently the DSS refused to apportion single expenses (such as the

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rental of phone equipment) between business and private usage, disallowing them

in their entirety, on the grounds that the rules state that expenses must be ’wholly

and exclusively’ for business purposes. This is despite a long established Inland

Revenue practice, found to well grounded in tax law, of allowing the

apportionment of expenses with dual purposes (Boden and Corden, 1994; Cmd

8189, para 155-60).

Problematic here is the fact that a lack of harmony in the rules may tend to create

confusion and dissent, with a corresponding low acceptance of the rules by self-

employed individuals. This will raise both users’ and reporters’ transaction costs.

The greater the divergence in rules the less scope there will be for harmonisation

between agencies.

IV. Administrative arrangements

"In spring 1959, when Alice was eighty-two....she

was paid $35 for reviewing Sylvia Beach’s book,

Shakespeare and Company. ‘That will mend the

springs and recover the armchair- the horsehair

has worn out.’ She wanted to buy a new chair but

thought the price staggering. She did a four-

minute BBC broadcast on Pierre Balmain’s

collections which paid for a pair of ‘winter

sandals’.....Money was a nagging problem."

From the biography of Gertrude Stein

and Alice Toklas (Souhami,

1993,p374-5)

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One of the major factors which will affect self-employed people is the reporting

environments within which they have to operate. This is rendered even more

problematic in the UK context because of the sheer number and diversity of

agencies with which self-employed individuals may have to engage. This section

considers that environment in its elemental parts.

i) Requesting Information

Requests for financial information from the self-employed necessitates careful

consideration. Unlike the presentation of corporate accounts, there is no universal

agreed format. The formulation of requests for information must therefore take

into account the needs of both users and reporters. The regulatory users must get

the required type and detail of information; they must be mindful of the limits of

their ability to interpret the information provided (including issues of costs and

staff expertise/training); and should be sensitively aware of the need to be fair and

maintain natural justice with regard to the self-employed. Because of public-sector

performance indicators the system must also be constructed in such a way as to

enable tasks to be completed whilst demonstrating efficiency (Boden and Corden,

1996). The self-employed reporters will be concerned to ensure that the eliciting of

information does not unduly intrude into their privacy, does not impose onerous

and unwarranted costs (financial and otherwise), is within their means to provide

and demonstrates equity with others.

Generally speaking, information may be requested either in the form of

conventional accounts, usually drawn up by an accountancy practitioner, or via the

completion of an official form. The forms typically require cash basis information.

Some organisations will permit the presentation of information in either format.

Reliance on traditional accruals accounts can be problematic. Not all self-employed

people may employ an accountant (for cost or other reasons) and relatively few

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appear to have the expertise to produce accruals accounts themselves. Moreover,

the information provided may not suit all user needs and would then require

subsequent adaptation. Such adaptation may result in additional work for both

reporter and user, subsequent clarifications and escalates the potential for error.

Difficulties also arise in Britain with the multiplicity of official forms seeking

financial information. For instance, those with a turnover of less than £15,000

may complete an extremely abbreviated grid on their tax return which simply asks

for gross receipts, expenses and net profit. If the same person applies for family

credit they will be presented with a relatively complicated form demanding much

greater detail and spread over several pages. Local authorities each produce their

own forms for benefits such as housing benefit or community charge benefit, and to

some extent these can be tailored to the socio-demographic profile of an area,

although the `fit' with the self-employed community is unlikely ever to be 100%

(Corden et al, 1993). Form design is of crucial significance given the heterogeneity

of the self-employed community if some individuals are not to be

confused/perturbed or simply deterred by a form which apparently has little

relevance to their own self-employment.

ii) Comprehension of rules and systems

In the interests of equity and efficiency it makes sense for organisations to ensure

that self-employed people understand the rules and procedures to which they are

being subjected. The consequences of failing to so may be the disadvantaging of

individuals, higher transaction costs as misunderstandings are ironed out, and the

possibility of unequal treatment between individuals. The more diverse the

various reporting requirements the higher the costs of gaining such familiarity for

the individual.

The Inland Revenue has a long history of providing information on the operation

of tax rules and procedures, and now, under the Citizens' Charter, has a customer

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orientated approach. The Revenue also has had to work with professional

accountants acting for their clients for a long time. The situation of many other

organisations can be quite different. The DSS for instance does not have a long

history of having to explain complex rules to individuals or of dealing with

professional accountants. The growth in the numbers of self-employed people has

resulted in a process of readjustment as the DSS takes in hand such tasks as

giving written guides to the rules in an accessible format and explaining

judgements etc to professional accountants (Boden and Corden, 1994). Clients of

the Child Support Agency have experienced a number of problems in

comprehending the complex formula by which liabilities are assessed.

For the individual, imbalances of power may arise if the rules are not adequately

explicated. For the organisations problems may arise with staff training if the

rules and systems are not adequately explained and staff do not have the requisite

skills.

iii) Diversity and discretion

Any organisation dealing with the self-employed will have to deal with a broad

range of individuals presenting extremely diverse personal and business profiles.

If systems are not to grind to a halt, or generate objections on the grounds that

strict adherence to rules produces manifestly unjust or absurd solutions then it

may be necessary for individual officers within the organisations to have some

discretion as to how they deal with cases. Traditionally the Inland Revenue has a

great deal of discretion in dealing with taxpayers in order to reach pragmatic

compromises. Because the Board of Inland Revenue is charged under S1 of the

Taxes Management Act 1970 with the care and management of taxation the level

of discretion is generous. In contrast, the relative rigidity of the CSA formula has

generated much public opposition, and legislation to permit some element of

departure from the formula was introduced by the Child Support Act 1995.

Because of an adherence to principles of absolute equity between applicants the

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Benefits Agency has no real room for discretion. Whilst discretion entrains

problems of equity and of the perils of policy formulation by default, rigidity and

rules-based approaches can lead to inflexibility and costly bureaucracy.

iv) Veracity and audit

Audit by external agents is an important part of the verification process for

organisations, whether public or private. Individuals have no statutory audit

requirements placed upon them, although they may, from time to time, be audited

by a state organisation as part of an investigation connected with deceit or fraud.

Only in relatively unusual circumstances will a self-employed person have a full

audit certificate on their accounts.

Financial information from individuals will usually therefore have to be taken on

trust unless the end-use agency elects to investigate- a procedure which can be

expensive for both parties. In addition, investigation or the threat of it could deter

individuals from seeking help and assistance from some agencies, contrary to

policy objectives of ensuring, for instance, the maximum take up of a social

security benefit. In addition, the non-acceptance of information whilst it is subject

to audit could lead to delays in the provision of the service which the individual is

seeking.

The only statement as to veracity on most financial information from individuals

will be that of the self-employed person her/himself. There are a range of

difficulties here. At one extreme, the information provided may be deliberately

fraudulent, the threat of audit having been insufficient to act as deterrent. At the

other the individual may have insufficient technical skill to realise the deficiencies

in poorly kept records (or even to recognise that records are inadequate) and

produce information which is unsound. And of course there are a range of

possibilities in between these two points.

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Not only do the public bodies who use this information have to mindful of their

own interests in this matter they also have to account for their use of public funds.

As such, stories of fraudulent behaviour by, for instance, social security

applicants, do not sit well with the attempted public image of the Department of

Social Security distributing funds to those eligible and in need. The National

Audit Office in particular will be anxious to ensure that rates of fraud are as low

as possible.

A further problem arises with the ability of such organisations to train and

maintain the staff necessary for investigatory audits. The Inland Revenue has a

significant body of junior level inspectors who investigate the self-employed. But

their training is expensive, as is their employment. They are however cost-

effective in terms of their yield. Other organisations do not have a tradition of

expertise in this area, and the potential recoveries might well be much lower given

that for elective interaction there is unlikely to be huge disparities between real

and declared income. In addition some organisation work centrally by post and

telephone, unlike the Inland Revenue which has a network of local offices. If the

organisation is centrally administered it makes local investigations particularly

problematic.

The Child Support Agency has, albeit possibly inadvertently, introduced an

interesting new dimension to audit and control. At present when the income of the

absent parent has been measured the parent with care is then notified of the

figure. Thus personal financial information is revealed to a former partner. This

has produced a critical response by some parents with care who express disbelief

at the level of declared earnings and then challenge the figures- either by seeking

judicial review of the CSA’s acceptance of the absent parent’s declarations, or by

using the new departures procedures under which they may obtain a departure

from the formula on the grounds that their erstwhile partner’s lifestyle is not

congruent with income as measured.

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As a final issue, the lack of harmonisation between the various information users

and the rules of confidentiality to which such users are generally bound means

that, even if audited by one organisation, the results of that audit will, most often,

not be divulged to another organisation. The audits which are undertaken are, in

that sense, bounded and extremely private.

vi) Costs

The provision of financial reporting information cannot be cost free. An important

system design issue here is how compliance costs are to be divided between the

reporter and the user of the information. In times of straightened public

expenditure the temptation may be to get the individual to bear the lion’s share of

costs, either financial or non-financial. Yet this may impose intolerable burdens

on some people (particularly if they have to report to more than one organisation)

and act as a deterrent to use of any elective services offered.

The Inland Revenue is now moving towards self-assessment for the self-employed.

There have been arguments that the complexity of the new system, relative to the

abilities of taxpayers’, may mean much greater use of some sort of accounting

practitioner. This is the case in countries such as Canada and Australia, where

similar systems have engendered a growth in the provision of taxation services to

the public. But of course such services must be paid for. This approach can be

contrasted with the Child Support Agency. Here, such is the level of concern to

gain the cooperation of self-employed absent parents that the agency is

undertaking a significant level of work for some individuals- even working with

prime records to produce some measure of income.

As reporting requirements proliferate there may well be inexorable pressure for

serious attention to be given to the compliance cost burden being imposed on the

self-employed. Interestingly this issue has been largely absent from Government

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pronouncements as part of the much vaunted Deregulation Initiative, and the self-

employed have received only scant consideration in any formal compliance cost

assessments5 undertaken by regulation makers. This may be because these

assessments are concerned primarily with business costs and, as far as the self-

employed are concerned, it can be difficult to distinguish costs which are

associated with the business and costs which are particular to them in their

capacity as private persons. For instance, if an absent self-employed parent incurs

costs in dealing with the Child Support Agency then it is arguable whether that is

a personal or a business cost. Yet if the same person were an employee then the

costs incurred by the employer in dealing with the CSA would clearly be a

business cost.

vii) Staff training

The need to deal with a broad range of self-employed people engenders a

requirement to have staff within the State adequately trained to deal with the

technical issues which will arise. As accounting skills become more central to the

regulation of individuals it is apparent that staff within organisations will need to

acquire these. The reasons here are multifold: the systems must be operated

correctly and in accordance with the rules, policy will have to be formulated

sensitively and in such a way as to meet imperatives; staff will need to engage on

equal terms with professional accountants; staff may have to explain matters to

individuals acting for themselves; and there will be a requirement for

audit/investigation.

Outside taxation authorities there is little indication at present that staff are

being given the intensive skills-based training or access to resources which they

need. Thus policy makers in the CSA rely upon the Agency’s in-house management

accountant for technical help, and Child Support Officers have had only 5 days

5 For an explanation of these procedures see Boden, R. and Froud, J."Obeying the Rules: Accounting for Regulatory Compliance Costs in the UnitedKingdom", Accounting, Organisations and Society, December 1995

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accounting training. There is some evidence of possible pooling of expertise- for

instance there are relatively experienced investigators within the Contributions

Agency who may be used by the CSA to conduct audits.

viii) The role of professional accountants

If commercial accounting principles have only a limited impact on the rules

developed for the self-employed by various agencies, what of the role for

professional accountants within the procedures for dealing with the self-employed?

In reality few self-employed people will employ chartered accountants from "the

big six"- their fees are too high relative to income levels and the service they offer

is possibly not apposite. Yet the family credit work discovered that a number of

self-employed people do employ accounting practitioners in very small firms,

principally to help them with their tax returns. A number of accountants also

acted for their clients in respect of social security claims, and there is growing

interest professional interest regarding the Child Support Agency and the self-

employed (Accountants Digest, 1994). The family credit research found two major

issues of importance. First, the Department of Social Security was not

particularly well geared-up to interacting with professional accountants: there

were no arrangements for recognising the accountant as an agent of the applicant

and therefore there were communication problems with matters such as the

Benefits Agency not responding to accountants’ requests for information and

challenges unless pressure was applied. Improved arrangements are now in place

to meet this problem. When the CSA was set up it immediately put in place

arrangements whereby accountants could be recognised as agents and has not

apparently experienced the same problems in this regard as the Benefits Agency.

The second issue was that many applicants for family credit were simply too poor

to afford the fees of accountants to act on their behalf. Some accountants we spoke

to wrote off such charges, or deferred them in the expectation that their client’s

business would return to prosperity. Interestingly such altruistic behaviour by

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accountants appeared to be more noticeable in rural farming communities were

the client-accountant relationship was, intuitively, more stable.

The role of professional accounting help is of great importance here. If financial

reporting systems are constructed in such a way that the average self-employed

person has neither the skills nor the confidence to negotiate their way effectively

and cheaply then they will be seriously disempowered if they cannot afford the

services of a professional. Similarly, if accountants consequently do very little of

this work then they will not gain the necessary expertise with which to help their

clients. Some social security applicants gain valuable assistance from bodies such

as the Citizens’ Advice Bureau, but ultimately there must be a continuing concern

that some self-employed people are disadvantaged by the system. Radically, there

may be a case here for offering "Accountancy Aid" as a sort of parallel to legal aid

here to assist those who are too poor to pay for assistance themselves. The possible

need for such a scheme is indicative of the shift in emphasis from legal to

accounting skills within the regulation of the self-employed.

The alternative approach, or one which could be allied to the above, is to make the

financial reporting systems imposed on people as user-friendly as possible, with

explicit commitments by the agencies to get things right, to offer help advice and

assistance and to construct their procedures in such a way that they are open and

explicit to the lay-person. Such an approach would mirror recent attempts within

the legal system to make that system more open and responsive to ordinary

people’s needs.

V SUMMARY

The self-employed are a group defined for regulatory and administrative purposes.

The definition is imposed rather than being a matter for self-selection because the

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aim is control. But the definition, like most, is far from unproblematic, dependent

as it is on a number of assumptions and buffeted by a number of conflicting policy

aims.

Recent years in the UK has seen a remarkable growth in the numbers of people

classified as self-employed. This in turn has prompted a growth in the range and

nature of the financial reporting requirements placed upon them. The UK has no

centralised or fully harmonised system for either defining income, defining basis

periods for measurement or computational rules for the assessment of self-

employed earnings. Nor are there any centralised or fully harmonised systems for

operationalsing such measurement systems.

This proliferation of diverse requirements leads to problems for both the state and

the individual. On both sides transaction costs, the potential for error and the

potential for fraud/maladministration are high. Moreover, there may at present be

little congruence between policy aims and the systems in place.

The answer to this would not appear to lie in piggy-backing all users onto

measures computed by one agency- it is often suggested that taxable income

should be the measure of income used by all agencies. There are a number of

problems here, all of which have been encountered in Australia. In the first place,

to operate such a system is to allow the taxation system to effectively drive the

measures used by other agencies with quite different policy aims. In the second

place, the operational systems employed by organisations such as the Inland

Revenue may not suit the needs of other users- for instance, the figures produced

by the Inland Revenue may not be sufficiently timely for the purposes of other.

And finally, the agency which is to be the collator may not willingly accept the

responsibility for producing information for widespread use as it may constrain its

own actions or affect public perceptions of its role.

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This is a growing problem- and one which has yet to be addressed by government,

despite the Deregulation Initiative. The answer may lie in a more orchestrated

approach across government- for instance developing staff training, forms,

information packs, advice services and investigation units. There may also be a

need for greater cooperation between parts of government. And there may be

considerable scope here for a growth in professional accountancy services of an

appropriate level, for a fee. What is evident is that this is a problem which will

continue to grow, and which requires immediate attention if a group of disparate

and often low-income individuals are not to be further disadvantaged through

regulation.

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References

Accountants Digest (1994) The Child Maintenance Regulations Relating tothe Self-Employed, ICAEW Accountancy Books: Milton Keynes.

Boden, R. and Corden, A. (1994) Measuring Low Incomes: self-employmentand family credit, HMSO: London

Boden, R. and Corden, A. (1996) "Accounting for Outcomes: An AlternativeApproach?", in Measuring Outcomes in the Public Sector, ed. by Smith, P.,Taylor and Francis: London, forthcoming.

Corden, A., Eardley, T., Smellie, R. (now Boden) with Elliott, J. (1993), HousingBenefit for Self-Employed People, Social Policy research Unit Working Paper,University of York.

Boswell, J. (1985) London Journal 1762-63, edited by Frederick A Pottle, TheFolio Society: London.

De Beauvoir, S. (1991) Letters to Sartre, edited by Hoare, Q., HutchinsonRadius: London.

Eardley, T. (1991) Self-employment and social security: a review of research andother literature, DSS 868, Social Policy Research Unit Working Paper, Universityof York.

Eardley, T. and Corden, A. (1994) Earnings from self-employment: theproblem of measurement and the effect on income distribution in theUK, Paper for 23rd General Conference of the International Association forresearch on Income and Wealth, New brunswick, Canada, August 1994.

Hopwood, A.G. (1994) "Accounting and the Pursuit of Efficiency", in PublicSector Management, ed. by McKevitt, D. and Lawton, A., Sage: London.

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Pepys, S.(1970) The Diary of Samuel Pepys: a new and completetranscription, edited by Latham R.C. and Matthews, W., Bell: London

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Teubner, G. (1987) Autopoiesis in Law and Society, De Gruyter: Berlin andNew York.

Vogler, C. and Pahl, J. (1994), "Money, Power and Inequality within Marriage",Sociological Review, 2, 42, 263-288.

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TABLE ONE

1. Mandatory reporting and accountability:

Organisation Measures

Inland Revenue Taxation

Customs & Excise VAT

Child Support Agency Child maintenance

2. Elective reporting and accountability:

Organisation Measures

Department of Social Security Income Support, Family Credit,Disability Working Allowance

Local Education Authorities Student grants

Local Authorities Council Tax Benefit, Housing Benefit

Banks, building societies, credit Loans etc.organisations

Legal Aid Board Legal aid

Courts Relief from fines