The FreeAgent Blog
A recent survey found that 34% of microbusiness owners were using spreadsheets as the main method of managing the business’ day-to-day financial accounts*.
Helen Christopher, Operations Director of OrangeGenie Accountancy, gives us her experience of the risks that spreadsheets pose from an accountant’s perspective - and reveals how switching to FreeAgent resulted in a cool £11,000 tax refund for one happy client.
For the last nine years I’ve worked exclusively with contractors and freelancers, heading up teams at national specialist accountancy firms. I’ve experienced both spreadsheets and cloud accounting software over this time so I have pretty robust knowledge of both methods of bookkeeping. When we were using spreadsheets, I knew no different and we managed! But with hindsight, we could have done so much more and served our clients better with simple online accounting software such as FreeAgent.
The problems with spreadsheets
In my experience, spreadsheets were responsible for a range of problems back in the bad old days. Spreadsheets are prone to error; they’re often delivered to accountants on deadline days at the last minute, incorrectly completed, sometimes even corrupt and therefore practically useless! We could end up with a document we just couldn’t work from and clients were often frustrated when we needed to contact them during busy working hours to resolve the problems with the spreadsheet. Duplication was also a common issue. It wasn’t unheard of for various copies of spreadsheets to exist and for client and accountant to be looking at what they thought was the same document, that turned out not to be.
When I set up OrangeGenie Accountancy, I was determined to do things differently. Our clients deserve better than spreadsheets and the stress they cause. Spreadsheets leave us being reactive accountants, rushing to put things right in time to file documents and often delivering bad news with no time to rectify problems prior to deadlines. Introducing FreeAgent’s online accounting software has fundamentally changed the way we work with clients and vastly improved their experience. A win all round.
An easier way to work together
FreeAgent is intuitive to use and most clients pick it up very easily. If clients add the basic data correctly then they can step back while the software does the “number crunching” and we as their accountants support them with our expertise. No matter where our clients are, they have real time access to their full accounting records across all their devices. We can be sure when talking to them that both parties are looking at the most up-to-date information and the only version of the data! Through FreeAgent’s document centre there’s no need for copies of spreadsheets and documents to be emailed, because all important information can be uploaded directly to the centre. Data accuracy and security is far better using the cloud system.
Features that spreadsheets can’t offer
The benefits of FreeAgent over spreadsheets just go on and on. The software can easily cope with multi-currency transactions, it also can prepare profitability reports for individual contracts and jobs and provide high level financial reporting. Unlike spreadsheets, it incorporates both payroll and VAT functionality so all of your business’s records are in one place, easily accessible and constantly updated. Contractors can invoice their clients professionally and use the software to help them ensure they are paid on time, which is a huge priority for everyone.
As accountants, we always remind clients of important tax filing dates, file approved returns and provide details of how to make the payments. FreeAgent supports this with their Tax Timeline, which highlights future deadlines and liabilities based on the records that have been entered. We monitor the records of all of our clients and send monthly or quarterly advisory health check reports, providing tax planning advice and opportunities. We can analyse and interpret the data, identify trends, spot issues and provide solutions much earlier than in a spreadsheet world. FreeAgent creates reports, we interpret and can then advise at any time and very quickly.
How switching from spreadsheets saved one client £11,000
A particular client stands out in my mind as having turned his business accounting around by switching to FreeAgent. For years with his previous accountant, the client had paid large tax bills; almost always late because his accountant had to sort the spreadsheet. He just accepted the filing penalties and thought that it was the norm. He was eventually referred to OrangeGenie Accountancy by a friend. We use FreeAgent for all of our clients and having got him set up we spotted some obvious opportunities. It wasn’t enough for us to accept the past and move on – we restated two years’ worth of accounts and managed to get the client an £11,000 tax refund in time to pay for his wedding! He is now on track every year, pays nothing like the tax he used to, despite his business being more profitable. He’s in control and that’s due to ditching the spreadsheet!
Cloud software has allowed us as accountants to collaborate better and forge deeper relationships with our clients. We can spend time getting to know clients, understand their business and aspirations, and work with them to ensure they achieve their goals knowing we have accurate reports and systems to rely on. Gone are the days when an accountant was only contacted at the yearend for a set of accounts and a commentary on what their client should have done to reduce tax bills. Now we can talk to clients all year and everyone involved feels secure in the knowledge that they’re working with the safest, most efficient accounting solution on offer.
*YouGov 2015, Microbusiness Owners and Their Finances
About Orange Genie
Orange Genie Accountancy are a specialist firm of Contractor Accountants. We focus on building exceptional relationships with our clients, working together to achieve their aspirations. Working in partnership we can ensure that clients stay on top of ever evolving legislation and changing rules, they benefit from efficient tax planning and they can concentrate on their business in the safe knowledge that we understand theirs.
From the moment the Chancellor mentioned “rising incorporation and self-employment eroding tax collection” in the early part of his debut Autumn Statement speech, we suspected that there may be some bad news for small businesses lurking in the full report - and it appears we were not wrong.
A new high VAT flat rate for service-based businesses
From 1st April 2017, “businesses with limited costs, such as many labour-only businesses” will have their VAT flat rate percentage increased to 16.5%.
A technical note published today by HMRC indicates that this will not be as simple as an increase in rate to trades that currently use the 14.5% rate. Instead, businesses will need to check how much they have spent on goods, compared to how much they make in sales, to see whether they have bought enough goods not to have to use the 16.5% rate.
Unfortunately, this feels like a very real complication to a scheme that was originally designed to simplify VAT for small businesses.
IR35 reform for the public sector confirmed
The Chancellor did not mention IR35 in his speech, and searching the full documentation for the term told us nothing, as “IR35” was not explicitly mentioned. However, we were very interested to read this highly relevant announcement about “off-payroll working rules”:
“Following consultation, the government will reform the off-payroll working rules in the public sector from April 2017 by moving responsibility for operating them, and paying the correct tax, to the body paying the worker’s company.” … “In response to feedback during the consultation, the 5% tax-free allowance will be removed for those working in the public sector, reflecting the fact that workers no longer bear the administrative burden of deciding whether the rules apply.”*
This raises the question of whether a public sector client will simply pay all of its contractors as employees in order to avoid any penalties for non-compliance. In that scenario, contractors would be taxed as employees but would not be entitled to employment rights, such as paid holidays and pension - the worst of both worlds.
The one positive point to note is that the government is not yet extending these “off-payroll working rules” to contractors who work in the private sector - but who knows whether that is yet to come?
Making Tax Digital: the elephant in the room?
The public consultation on the government’s Making Tax Digital initiative only closed a few weeks ago, so we were unsure whether there’d be any news on it today. In the end, the only mention of Making Tax Digital in the full Treasury report was:
“In January 2017, the government will publish its response to the Making Tax Digital consultations and provisions to implement the previously announced changes.”*
It will be interesting to see what changes, if any, are made to the original plans for Making Tax Digital, based on the responses to the consultations.
Small business opportunities missed
Disappointingly, the Autumn Statement made no mention of increased legal powers, as we had hoped it would, for the Small Business Commissioner to help small businesses collect what they are owed.
Nor was any kind of relief introduced for home working, which is a pity, given that home-based businesses are much less reliant on the road and rail infrastructure that the Chancellor had to promise a great deal of money to help prop up.
Better news: Class 2 NICs to be abolished
It was confirmed that from April 2018, Class 2 NICs will be abolished altogether, with self-employed individuals qualifying for entitlement to State Pensions through Class 4 and voluntary Class 3 NICs.
Since it represents a simplification, this is potentially positive news, though it remains to be seen whether it will ultimately cost more in the form of an increased rate of Class 4 NICs.
Looking ahead: government vs contractors?
Reflecting on today’s Autumn Statement, there were a few pieces of good news for small businesses. Increased finance is being made available for exporting, additional funds are being made available to borrow through the Small Business Bank, and Corporation Tax remains on track to fall to 17% by 2020.
However, when it comes to its latest set of announcements for contractors, we cannot help but wonder if this Autumn Statement shows that the current government simply does not support contracting as a way of working.
*The emphasis here belongs to FreeAgent.
The new government will publish its first Autumn Statement, the annual update on the Treasury’s plans for the economy, this Wednesday. As usual, we don’t know exactly what the Autumn Statement will contain, but here’s some announcements I’d like to see from Philip Hammond that could benefit small businesses.
Tax simplification: OTS at front of process
The Office of Tax Simplification is currently detailed to review the UK’s existing tax systems and rules in order to suggest changes which would make the calculation and payment of tax easier. For example, it has recently investigated whether it might be possible to amalgamate income tax and National Insurance.
What I would very much like to see in this year’s Autumn Statement would be a requirement for the involvement of the OTS at pre-legislative stage as well, to ensure that any new tax legislation is scrutinised for potential complexity and kept as simple and straightforward as possible.
The UK’s tax laws, taken as a whole, are already long and complex, and introducing more complication can only inconvenience business owners and hamper economic growth.
Involving the OTS before changes are passed into law, as well as after, could be an invaluable help to simplifying the tax system, and simplification could only bring benefit to all concerned.
IR35: simplify or abolish
The current legislation around whether a contractor is in fact an employee for tax purposes is subjective, complex and very difficult to interpret. A by-product of this is that a contractor may be treated as an employee for tax purposes but not under employment law, giving the contractor the worst of both worlds.
I would like to see this legislation (commonly known as IR35) either vastly simplified, with just a few straightforward objective tests, or else abolished altogether, allowing contractors and their engagers to make a free choice as to whether the contractor is to be treated as independent, or as an employee, for both tax and employment law purposes.
Making Tax Digital: more flexibility needed
There may be some news on Making Tax Digital, the government initiative that sets out a vision for "a transformed tax system and the end of the tax return" by 2020.
I’d like to see the smallest businesses given a bit of additional time to prepare for Making Tax Digital, rather than facing the same deadline as larger companies who will be better equipped to make the changeover.
In FreeAgent’s official response to the Government’s consultation over MTD it was recommended that all unincorporated businesses making less than £83,000 - the VAT threshold - should have an additional year to prepare before they have to adhere to the new digital tax regime.
I would also like to see the turnover threshold for the cash-basis reporting scheme increased to £166,000 - double the VAT threshold - to make Self Assessment easier for more UK businesses.
SEPA recommendation implemented
One recent project of the Office of Tax Simplification was to investigate potential ways to simplify small business taxation, while keeping at least a certain amount of limited liability, to protect a business owner’s own personal assets such as their family home.
They have recommended a full investigation into the possibility of launching a model known as a SEPA (Sole Enterprise with Protected Asset), which would allow a sole trader to “ring-fence” their house and protect it from being seized to pay their business’s debts.
I would like to see this investigated further with a view to implementing the SEPA model, since it would give sole traders increased peace of mind without the additional legal and regulatory complications of turning their business into a limited company.
Legal powers for the Small Business Commissioner
The government’s recent appointment of a Small Business Commissioner to help small businesses facing the scourge of late payment from customers is welcome, however the Small Business Commissioner currently has no legal powers to force late-paying customers to pay their dues on time; the only sanction available is to “name and shame”.
That renders the Small Business Commissioner much less effective since they are able only to recommend that late-paying customers change their approach - which will not at all deter persistent late payers, such as large businesses who pay late as a matter of policy.
I would like to see the Small Business Commissioner given legal power to compel late-paying customers to make payment on a timely basis, particularly where large customers and small suppliers are concerned.
Stay tuned to our Twitter feed on 23 November as we’ll be live tweeting the announcements. Hope to see you there!
I have big news - as of this morning, FreeAgent is trading as a public company on the AIM market of the London Stock Exchange. Roan, Olly, and I marked the occasion by opening the markets this morning in London.
Trading as a public company is a really important step forward for FreeAgent. Because of the detailed scrutiny that quoted companies undergo, our customers and partners can be even more confident that we are a robust, well-managed business. It also means that we now have more financing options to really accelerate our progress towards our vision of making the UK’s five million micro-businesses happier and more successful by putting them in control of their finances. You can find us on the AIM market of the London Stock Exchange trading under the stock symbol FREE.
Over the past nine years, we’ve gone from us three co-founders sharing a tiny office to a business with over 100 full-time employees. This is the biggest milestone yet in FreeAgent’s story and we couldn’t be more proud of what we’ve achieved as a team, but none of it would have been possible without all of our customers and partners, some of whom have been with us since the very beginning. On behalf of everyone here at FreeAgent, thank you - for believing in us, for recommending FreeAgent to your friends and colleagues, and for your continued support.
Onwards and upwards!
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- Spreadsheets versus FreeAgent: an accountant’s point of view
- Autumn Statement 2016: contractors feel the impact
- Autumn Statement 2016: how could the new chancellor show he cares about small businesses?
- FreeAgent is now a public company!
- 3 spreadsheet horror stories from the world of work