The FreeAgent Blog

which year image

When it comes to running your business, there are a lot of “years” to keep in your head – tax years, financial years, accounting years. But which is which? The type of year often depends on the type of business you run, so we’ll break down the different “years” that small business owners should know about.

All businesses

First, we’ll start with the easy one! The calendar year runs from 1st January to 31st December, and thankfully this ‘year’ is the same for all businesses!

Limited companies

For limited companies, the financial year runs from 1st April one year to 31st March the following year. This is the date that the government typically sets new tax rates and rules to start on – for example, a new corporation tax rate may begin on 1st April 2015.

The accounting year end is the date that a limited company chooses to prepare its accounts to every year. It runs from the day after the previous accounting year end to the next accounting year end. Many limited companies, but not all, choose 31st March for their accounting year end so that their accounting year matches the financial year.

The date you choose to begin your accounting year will affect when you pay tax on your profits, as companies pay tax nine months and a day after their accounting year end. For example, if you prepare your company's accounts to 30th April each year, Corporation Tax will be due by 1st February. This isn't good news if you also prepare VAT returns for calendar quarters, because you'll have two tax bills to pay in early February, and Self Assessment tax would be due 31st January as well. It’s worth double-checking that your accounting year isn’t setting you up for a tricky cash flow situation.

Sole traders & partnerships

For sole traders, partnerships and individuals working for a company, the tax year, also known as the fiscal year, runs from 6th April one year to 5th April the following year.

Many sole traders, but not all, choose 5th April for their accounting year end so that their accounting year will match the tax year. By concession from HMRC, a sole trader who chooses 31st March for their accounting year end is also treated as having an accounting year that matches the tax year.

Having your accounting year match the tax year means you won’t have to pay tax twice on the same profits in your early years of trading! Also, under the “basis period” guidelines, the basic rule for when you pay tax on your profit is that you pay tax on the profit for the accounting year that ends within the tax year in question. So if your accounting year end matches the tax year end, it’s easy to identify which profits are taxed each year.

That doesn’t mean that sole traders and partnerships can only start their businesses in April! No matter when you start your business, you could pick whichever accounting year you like. That might be the end of June, the end of December, or indeed 5th April. Just make sure that you report the right profits on your early tax returns using the basis period guidelines mentioned above.

If a sole trader or partnership runs its accounting year to any time other than 5th April, it’s important to correctly identify which profits are reported on which tax year’s tax return. For example, let’s say you’re a sole trader and you pick 30th April as your business’s accounting year end. When you prepare your tax return for the tax year 2014/15, you’ll be reporting your business’s profits for the year ended 30th April 2014. This is almost a year before the end of the tax year, because that’s the accounting year that finished in the tax year 2014/15. This means that you’ll pay the tax on that profit a long time after you made the profit, so make sure you have cash put aside ready to pay that tax!

And there you have it! If you’d like any more guidance on these terms or others, check out our handy Accounting Glossary.

We’re delighted to announce the latest addition to the comprehensive range of apps, widgets and add-ons that play nicely with FreeAgent: EdgeDocs, the UK’s only fully integrated export documentation solution.

Edgedocs is designed for small and medium-sized businesses that sell stock both nationally and internationally. It provides support for activities including export documentation, stock control and customer relationship management.

FreeAgent’s new integration with EdgeDocs automatically syncs historical contacts and new invoices that relate to completed sales in EdgeDocs to FreeAgent - no need to duplicate the information manually!

If you already have an EdgeDocs account, you can set up the integration to FreeAgent by navigating to ‘Administration’ and ‘Settings’ in your EdgeDocs account. From there, simply select the FreeAgent logo and follow the instructions! If you’re a FreeAgent customer and you’d like to give EdgeDocs a try, check out their special offer.

FreeAgent’s Chief Accountant, Emily Coltman FCA, takes a look at today’s Budget and what it might mean for small businesses.

Self Assessment

The Chancellor, George Osborne, promised in today’s Budget that the annual tax return is set to be abolished, with information being uploaded automatically, tax collection “radically simplified”, and online portals to manage tax.

What isn’t clear yet, either from his speech, or from the full Budget report, or from the government white paper “Making Tax Easier”, is just how this will happen.

Tax returns do include information that HMRC already has, such as salaries for directors of limited companies, but they also include a great deal of information that’s not visible to HMRC until the tax return is filed, such as sole traders’ income and expenditure, rental income from let properties, and sales that give rise to capital gains tax. How will this information be collected? Will sole traders be compelled to report their income and expenditure to HMRC in a system similar to RTI? Will all institutions have to share their customers’ financial information with HMRC?

This is all still “to be announced” or “to be consulted upon”, though the “Making Tax Easier” white paper mentions the possibility that by 2020, small businesses will be able to link their accounting software to government systems to share financial information. It also says that “taxpayers will still be responsible for ensuring their tax bills are right and telling HMRC about information that is not reported by other means”.

Payment of income tax and NIC

Additionally, the government plans to implement “a new payment process to enable tax and NICs to be collected through digital accounts, instead of Self Assessment”. This could spell the end of twice-yearly payments and the attendant payments on account, which cause cash flow difficulties for many small business owners. The “Making Tax Easier” white paper mentions a “pay-as-you-go” option for tax, though again the detailed mechanics of this are not yet explained.

Is this change for the good?

Abolition of the tax return would be a massive change for both small business owners and their accountants, but whether that change is positive or otherwise, I reserve my judgement until I have seen how this will work in practice. RTI payroll reporting has been far from trouble-free, so I have my doubts as to how well a similar system would work for collecting other data.

Class 2 National Insurance to be abolished

Class 2 National Insurance, the flat-rate National Insurance which entitles the self-employed and partners to certain State benefits, is also to be abolished in the next Parliament. The contributory element will be replaced by a reform to Class 4 National Insurance. The mechanics of this reform haven’t yet been decided; there’s going to be another consultation on that.

This simplification is welcome, as having two kinds of National Insurance to pay is confusing for partners and the self-employed.

The Annual Investment Allowance

The Annual Investment Allowance (AIA), an allowance that gives 100% tax relief on the cost of many items of new equipment that a business might buy, is due to fall to £25,000 from 2016. Although the Chancellor did not promise to keep AIA at its current level of £500,000, he did say that a drop to £25,000 was “not acceptable” and that the revised level, to be announced in the Autumn Statement, would be “much more generous”.

Restriction of travel and subsistence relief

The government has been investigating the possibility of restricting the availability of tax relief on “home-to-work” journeys for individuals operating through agencies. The Chancellor mentioned this in passing in his speech, promising to “protect the genuinely self-employed”, and the full report did not detail the proposed changes, which are due to take place in April 2016. Instead, the report said further consultation was needed, but mentioned that the measure would affect both umbrella companies and personal service companies. So this is another case of “watch this space”.

So, as we might expect from a Budget that pre-dates a General Election by less than two months, there are a great many promises here of simplification and radical change in the future, and very little in the way of definite and immediate changes for small business owners. Watch this space!

Today we’re launching a completely redesigned way of explaining your bank statements, and yes, it’s kind of a big deal.

If you go to the Banking section of FreeAgent and explain a bank statement you’ll notice a big change in how this is done. Over the past few months we’ve been completely redesigning the interface for bank reconciliation. It’s a fundamental rework to a key part of FreeAgent and we think it’ll make a huge difference to how quickly you get your books done.

Previously, clicking on a transaction in the statement list would take you to a new page (with lots of options!) where you could explain the transaction, before coming back to the statement page. It was a bit tedious, especially if you had lots of simple transactions to explain.

In the new interface, clicking on a transaction lets you explain it immediately from the list view, so it’s now it much faster to move through your statement, explaining transactions one at a time.

explaining a bank transaction

For most of your transactions you should be able to explain them quickly from the statement page, but you can also click through to the original view via the 'More Options' link, if you need any of the other options like project re-billing.

Advanced filtering

bank statement filtering

Aside from the faster way to explain transactions we’ve also added new filtering options, so it’s possible to filter the list of transactions by status type as well as date range. So you can easily see all unexplained transactions in March or all transactions marked for review in February if you’re using Bank Feeds.

And the list of months displayed in the sidebar now only links to each month’s unexplained transactions. Which is both logical and handy.

Small improvements but ones we think will make a huge difference to your workflow.

But why can’t I...?

You’ll notice that we haven’t added all the explanation functionality to the new interface. Things like project re-billing and using an explanation for matching transactions still reside unblemished in the original screen which you now access with the 'More Options' buttons.

We’ve tried to balance making the new interface fast and easy to use while ensuring it’s functional enough to deal with the vast majority of your transactions. Using the almighty twin powers of DATA and SCIENCE we think we’ve struck a sensible balance, but we’re still open to feedback.

Our improvements to the banking area don’t stop here. Over the next few months we’ll be working on more features to help speed up the bank explain process, and we know you’re going to love them.

Now, go forth and explain!

Roan and the team at FreeAgent

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