MTD, IR35 and technology: the changing landscape for small business accountants
In the 2018 Autumn Budget, new rules were introduced surrounding IR35 and the private sector. Similar to those already in place in the public sector, the new IR35 regulations will place the onus on “medium and large businesses” who work with contractors to assess whether those contractors are caught under IR35 from April 2020.
Change is a common theme in today’s accountancy world. In addition to the IR35 changes, the government’s Making Tax Digital initiative begins its rollout out from April 2019 and the workforce continues to evolve, with more and more people opting for self-employment.
Here we take a look at the state of the industry and ask practitioners from the front line what they think of these changing times.
IR35: working off-payroll is becoming off-putting
The impact of IR35 is still being felt in the public sector following its introduction in April 2017. Research from consultancy Contractor Calculator has shown that a staggering 98% of contractors would actively turn down work that could lead to them being paid through PAYE, while a quarter would never take any contract that would make them liable for tax under IR35.
Meanwhile, recruitment consultancy Harvey Nash has found that 80% of contractors believed that IR35 had been a 'very negative' development for their businesses. HMRC also reported that half of public sector companies have found it difficult to comply with IR35 rules. More starkly, 63% of contractors have admitted they have considered changing career and 40% have indicated they may quit contracting altogether because of the legislation.
This groundswell of animosity in the contractor industry has not gone unnoticed by accountants who work with these businesses. Many are looking towards the future with trepidation, unsure whether this legislative change will lead to an exodus of contractors or if it will require a fundamental change to the way clients structure their businesses and manage their accounts.
Preparing for the future
Despite the expansion of IR35 into the private sector confirmed in the 2018 Budget, a recent FreeAgent poll of accountants with contractor clients found that 69% had not started any preparations for the rollout of IR35 to the private sector.*
Unfortunately, these accountants may well lose out to practices that have started to prepare for the changes. The market is already beginning to consolidate, with some companies actively expanding their operations in preparation for the new legislation coming into effect. In some cases, this has included purchasing traditional high street practices that do not want to deal with the challenge of IR35 or MTD compliance.
Some firms, meanwhile, are strengthening their umbrella offerings to make sure they can transition clients away from limited company status as easily as possible. Others are beginning to educate clients about the developments that lie ahead so they can mitigate the risk of their contractor clients terminating their businesses once the legislation comes into effect.
*Survey of small business accountants conducted in May 2018 with 110 total respondents.
The workforce is evolving
It's clear that the world of work is continuing to shift away from traditional employment. The Office for National Statistics (ONS) estimates that there are around 4.8 million self-employed people in the UK, while the Association of Independent Professionals and the Self Employed (IPSE) claims that around two million workers are now 'freelancers or contractors'.
Meanwhile, flexible working conditions and the ability to enjoy a good work-life balance are making self-employment an increasingly attractive prospect.
Our research suggests that almost half (49%) of working Brits have aspirations to start their own business and work for themselves, while 11% planned to do so by the end of 2018**
With many of these newly-formed freelance or small business ventures likely to have similar accounting requirements to established contractors - such as the need to maintain digital records, log and manage expenses via mobile devices and have any potential issues highlighted and dealt with quickly - they represent a rich opportunity for accountants.
**Survey of small business accountants conducted in May 2018 with 110 total respondents.
The MTD opportunity
The introduction of Making Tax Digital is likely to be a key driver for this area of new business. With MTD for VAT scheduled to come into effect in April 2019, and wider MTD implementation expected in the years ahead, many self-employed freelancers and small business owners are looking to make the switch to digital accounting systems as soon as possible - and need accountants who can guide them through this process.
MTD has already been identified as a key area of focus in the coming years among accountants who are well versed with digital software. Our research shows that 62% believe that digital tax will lead to new opportunities for growth in their practices, while many others believe that the legislation will lead to a fundamental shift in how they do business.***
Set up for MTD success: read our guide on preparing your practice and clients for MTD for VAT.
***Survey of small business accountants conducted in May 2018 with 110 total respondents.
The view from the front line
So how do accountants feel about these changes? To find out, we held in-depth interviews with two pioneering practices - ICS Accounting and Dolan Accountancy - and conducted a survey among a wider group of accountants. Here’s what we learned.
Steve Cornwall, Operations Director, ICS Accounting
"Over the next few years, I believe there will be an even greater dependency on technology for success. Contractors face having to comply with legislation like IR35, GDPR and MTD which could alter the way that some of them have to structure their businesses - but will also require them to embrace technology in order to keep their financial records and tax information in check.
"I envisage that we're going to see a shift towards practices expanding their services for small business clients, rather than simply for contractors. Some small business clients have similar accounting requirements to contractors and will need an intuitive, easy-to-use digital solution, which is something that accountants familiar with software like FreeAgent will be able to implement easily.
"We're already seeing traditionally contractor-focused firms starting to introduce small business-focused offerings. It's becoming increasingly clear that the industry is looking at this sector as a big area for future growth."
Lauren Monks, Operations Manager, Dolan Accountancy
“At Dolan, we provide both limited company and umbrella offerings, so the impact of future IR35 changes will be minimal for us. We're well set up to transition clients easily from one service to the other, and we'll be ready to educate and reassure clients when the legislation is introduced, which means that there should be little disruption to our day-to-day operations.”
"As all of our contractor clients are put onto FreeAgent when they join, we're already prepared for the introduction of digital tax, so MTD will be a pretty seamless piece of compliance for us. And that will be very important over the next 6-9 months, when we expect to see an upswing in enquiries from contractors and small business owners who need to comply with MTD but aren't sure how to do so."
How will the accountant’s role change in five years time?
In a survey asking accountants to consider what their work might involve in five years’ time****, we found that:
- 48% don’t think they’ll be doing the same day-to-day tasks.
- 75% think more sophisticated mobile apps and technology will arise to facilitate more digital accounting work on the go.
- 77% believe there will be more automation of data in their work.
- 78% say they will ‘definitely’ or ‘possibly’ retrain in some way to safeguard their roles in the future.
****Survey of small business accountants conducted in May 2018 with 110 total respondents.
Setting the stage for success
In an evolving market where the only certainty is the increasing pace of change, accountants continue to be asked for more, whether through acquisition, market expansion or detailed preparation and forecasting. With changes underway that have the potential to transform the way in which accountants and clients work together, this is a pivotal time for practices to stake out their position and set the stage for success in the coming years.
These may be early days in the digital age of accounting, but some distinct trends are already starting to emerge. It's clear that practices that are prepared to invest in the right technology, educate clients about the forthcoming changes and widen their focus beyond the contractor market will be best placed to not only survive, but to grow and flourish during these changing times.
Find out how FreeAgent can support you and your practice as the industry evolves.