We are currently going through a revolution in small business accounting. Much of this is being driven by HMRC’s Making Tax Digital (MTD) program. This is costing a small fortune and it is questionable whether it will deliver the increased tax revenues that HMRC are looking for – but that is not what this article is all about.
One of the things HMRC are saying, which I agree with, is that a delay in recording transactions leads to errors in the final accounts. With the massive growth in smart phones and tablets, there are more and more (allegedly) user-friendly apps out there to help with keeping on top of things. For some people, these are going to prove invaluable.
Imagine that you are attending a CPD event; on the way there you stop at a motorway service station for a snack. Whilst eating, you can use your app to record the expenditure either in a simple recording system (such as in my Michaelbbennett app) or, for those of you who want to go fully cloud accounting, directly into your end programme (Quickbooks, Xero, Sage etc.) – again, these are all immediately available from within my app.
This means that there is no reason why you should not be completely on top of your accounting and recording on a weekly, if not daily, basis.
There are, however, a few dangers inherent in the new systems. A number of these systems have the capacity to submit your numbers directly to HRMC. This is great as it cuts out the cost of your accountant, saving you money. But it also cuts out the years of experience and invaluable advice that your accountant has as to what you can and cannot claim through the business. Yes, there is advice on the HMRC website – but are they really going to help you minimize your taxable profits?
You may also be interested in reading – Claiming expenses against tax.
Let me give you a simple example. If you borrow money for business (I am talking about as a sole trader or partnership), the HMRC guidance is to put the claim for the interest directly onto your tax return as a relief. This sets the interest off against tax. However, if you include the interest as a cost within your accounts, the interest also gets treated as a reduction in profits for Class 4 NI purposes – thus saving you 9%.
Neither the apps nor HMRC will give you advice about business structure to minimise tax – this is something you will only get from your accountant. Recently we have re-structured 3 separate yoga/pilates clinics in a way that is saving them at least £30,000 per year, per business.
The apps are great as record keeping systems and, if properly used, can be a real time saver. All of them now have live bank feeds, which means that they suck in the information from your bank account and then allocate it within the system. When you start using it, you will have to do a number of allocations yourself, but the apps “learn” over time where things go and eventually most bank entries are auto-allocated.
Much is currently being talked about the ability to take a photo of your receipt and link this directly to the software so that it can allocate the expense within the accounts. I am not yet convinced about this. Let me give you an example – you go to Currys and you buy a new laptop, some memory sticks and a kettle. All of these are on one invoice, but each would be treated differently within your accounts as the laptop is equipment (for those more technically minded among you – a fixed asset), the memory sticks are computer consumables and the kettle is small office expenses or sundry costs. As yet, the systems cannot differentiate and allocate appropriately.
Back to MTD. HMRC have announced that from 6 April 2019, sole traders, partnerships and those with rental income will have to upload information to HMRC every three months. As yet, they have not stated how or in what format. Using apps will make this easier but it is essential, as with any system, that you learn to use the app properly and I strongly recommend that you work with an accountant and get them to review your quarters entries before submitting to HMRC. Alternatively, consider asking your accountant to do your bookkeeping for you if you feel it is too much to handle yourself.
Written by our resident accountant and expert Michael B. Bennett. Find out more about how Michael can help your practice on his website.