There’s No Accounting for Taste
Do you remember that scene from the original Ghostbusters movie when The EPA nerd lets loose the ghosts that the team has trapped and kept in a special Ecto-Containment Unit in the wall of the converted firehouse (actually located in Tribeca just off West Broadway)? The team is forced to describe to the mayor what will happen if the ghosts get out. Venkman says, “This city is headed for a disaster of biblical proportions.” Stantz says, “Real wrath-of-God type stuff. Fire and brimstone coming down from the skies. Rivers and seas boiling.” Spengler says, “Forty years of darkness. Earthquakes, volcanoes…” Winston adds, “The dead rising from the grave.” And Venkman caps it off with, “Human sacrifice, dogs and cats living together – mass hysteria.” Rarely has a potential catastrophe been better described than that. I mean really, the thought of dogs and cats living together might be a bit too much to ask people to grasp.
The chaos that occurs when non-accountants get together to discuss an accounting problem is very similar. First of all, let’s all agree that accounting has very little to do with numbers. Accounting is about concepts and bookkeeping is about numbers. Accounting is one of the more esoteric and conceptual arts that exist in the business world. Most business people spend their time trying to generate and capture revenues and profits. But accountants care less about what is in the till than they do the concepts of when that revenue or income should be recognized. I must admit that when I hear that I think of The Honeymooners when Ralph decides to learn how to play golf and Norton tries to help him. He is reading from an instruction book that tells him to address the ball. Norton takes this literally and tips his hat and says, “Hello, ball.” So, I see the accountants looking at the revenues in the pot and saying, “Say, didn’t we meet at the Bernstein Bar-Mitzvah?”
Last year we took on an accounting firm in the U.S. that came highly recommended by one of our investors. It was a second tier firm, but it seemed more than adequate for our needs. We are a small company but we have a slightly more complex structure by virtue of having a bunch of our staff (more or less half) in Scotland. A decision had been taken before my arrival that we should move our intellectual property over to what is called a “patent box” regime in the UK in order to qualify for optimal tax treatment when we started licensing our inventions. Since we were setting up a large staff there, the logic was that the UK would become our operating entity that housed the IP and thus was the logical repository of our “recognized” revenues of the imminent future.
I’m sure the US firm thought they were doing right by us and that we would be forever grateful and use their services all the more. That sort of backfired on them as we suddenly were faced with all sorts of complexities of being a foreign parentage firm with a major UK subsidiary, and an operating entity at that. We decided we needed a UK accounting firm and while we were at it, we might as well make it a Scottish firm since that’s where we are located. First of all we are located a bit in the middle of nowhere and the big Scottish firms are either in Edinburgh or Aberdeen and we are smack in the middle. Secondly, these Chartered Accountants seem to be a more aggressive breed of what we have in the accounting arena here in the US. They very quickly made the case that they should be the primary accountants of our books and records since our main operating subsidiary is there.
We went along and put the US firm on reduced status. Then the Scottish firm made a play for our payroll services and won our HR area over, so we gave them all of that. They then told us we were missing a great opportunity for a UK tax rebate/grant program for companies doing R&D in the UK. That made us happy so we accepted their proposal to do the 9-step program to evaluate and file for that rebate/grant. Naturally that involved nine-steps of fees, but there was a lot of money involved so we went along.
They have now issued their report and suggested that we are not a Permanent Establishment in the UK and thus not eligible. Yes, you heard this right, the same people that said they should keep our books and records because we were operating out of the UK were now saying we weren’t really operating out of the UK. They had many of their facts wrong and we corrected them quite articulately and forcefully. They immediately saw the error of their ways and accepted our documentation for review. That caused them to say there was another interim step involved for an added bit of fees, but that they would be glad to handle it. Something tells me there will be a few more of these added steps before we are done.
In the meantime they have brought into question the entire basis of our patent box designation and wagged their finger at us saying that may end up costing us more rather than less in taxes. We have correctly deferred this future issue and chosen to keep what we have in place until the dust can settle a more. The thought that we have poked ourselves in the eye with our own pencil is just too much to contemplate at this moment of indecision.
I have a Finance Director who is a CPA and has an MBA in Taxation, and he is beside himself over all of this. The non-accountants among us are inclined to understand being fleeced by a counterparty that has you over a barrel better than our Finance Director does. Being a doctor getting misdiagnosed by another doctor is never a pleasing experience I guess, especially when his bill comes in twice for the original and then corrected diagnosis.
You may wonder why we are putting up with these accounting shenanigans and my best answer lies in that old Woody Allen story. He tells his friend that his uncle thinks he’s a chicken. The friend asks why he doesn’t have him committed. Woody says, he would except that he needs the eggs. Well, we would probably replace our Scottish accountants, but we also need the eggs.