Introduction
In 2015, the then Chancellor, George Osborne, announced one of the biggest changes to the UK tax system since the introduction of Self Assessment in 1997. He stated that taxpayers would no longer have to complete an annual Self Assessment Tax Returns and there would be ‘a revolutionary simplification of tax’. These may be great promises. However, difficulty, complexity and a necessity to use digital accounting records appears to be the reality. Making Tax Digital (MTD) will become the new Self Assessment system.
Why spreadsheets
As a practicing accountant, with well over three decades of hands on practical experience, I’m a firm believer in using the right tools for the job. For many small businesses owners, the simple spreadsheet is the right tool. Spreadsheets can to be found on most computers, they are quick to learn compared to specialised accountancy software, are easy to use, require little training and are highly customisable. Whilst they have their flaws, especially in the hands of those that do not understand some of the basic concepts, they allow quick and easy correction when used by bookkeepers and business owners untrained in the art of keeping accounting records i.e. a lot of our clients!
Spreadsheets may not be great for collaborative working with other employees and accountants supporting their clients, as they don’t sit well with online access and group working. However, they can be great for the smaller business and buy-to-let landlords that do not require these features.
Smaller self-employed businesses and landlords predominantly use spreadsheets where an all-singing, all-dancing bookkeeping package does not add sufficient value to warrant the additional investment in time and money.
I believe that the demand for spreadsheets will increase significantly in the next few years. Given the ease with which they can be used by smaller business owners and buy-to-let landlords who will be legally required from April 2024 to keep digital records
In this article, I’m going to focus on a few of the practicalities which hopefully will get you thinking about MTD and recordkeeping before it’s too late!
Your choice
Unless you have more complex accounting requirements then spreadsheets are perfect. However, what is important, and will become more important with the launch of MTD for ITSA, will be to use an appropriate spreadsheet template that will link to bridging-software. I expect most accountants will use this type of software to bridge the online filing requirements between clients’ standalone spreadsheets and the online HMRC systems.
The template needs to be able to record transactions, not only for you, as a client, but will also be useful to your accountant, to prepare your annual accounts and file your quarterly and year end income tax updates to HMRC.
Please do not be conned by the TV adverts you keep seeing regarding popular accounting packages. If you don’t understand how to use accounting packages then you’ll end up becoming unstuck and creating a mess. Accountants may even have to double or triple their charges if you decide to use such an accounting package!
We are hearing a myth that bridging software cannot be used after April 2022. This is not true. This story is often being spread by the big software companies attempting to entice business owners away from using spreadsheets. HMRC have made it very clear that bridging software is a long-term solution to continue filing VAT returns. HMRC understand that many tax payers either prefer, or have to use a spreadsheet to file their VAT Returns and have no intention of stopping them from continuing to use spreadsheets for their VAT affairs indefinitely.
Going it right
We all understand that ‘having a go’ can create more cost and mess than doing things right in the first place. Have you ever tried doing a bit of simple carpentry, plumbing, electrical work or fixing things around the house only to then call in the experts? It tends to increase your stress level and the total bill. As well as sorting out the underlying work, we have to sort out the initial mess.
Clients who like to explain their accounting numbers with words and lots of copious notes will have to change. The HMRC computer system will only accept numbers to explain your business income and expenditure. If it can’t be added up with a simple spreadsheet formula then it cannot be used to make your quarterly update submissions.
If you are one of our clients that love to type out, print or photograph their records before emailing or posting copies to me then you will certainly need to change.
To those of you that like to hand write your accounting records, once a year on the back of an envelope, I would suggest moving as soon as possible to try and replicate what you do now within a spreadsheet. That might give you one year to practice and refine your offering before we actually have to move to the full blown electronic system in early April 2024. It is only two years away, and for some clients, accountants may only see your accounting records a few months before this date, when dealing with your final Tax Return for 2022-23.
We speak spreadsheets
As an accountant, as well as an English speaker, I am fluent in spreadsheets. I may not be able to whisper sweet nothings to you in multiple European languages. However, I can create some wicked formulas and designed some great spreadsheet templates to match your requirements, and that of the needs of HMRC, and still be useful to us in preparing your annual accounts and tax filings.
In the past, clients have used all sorts of weird and wonderful methods of recording their accounting transactions. Sometimes with a bit of patience, I have been able to figure out what a client is doing with their spreadsheet record-keeping. However, if we are doing this on a quarterly basis, and realistically we only have a short time to review and file for each client, then if it is not provided in a suitable format then it is going to take us a lot of time and therefore cost clients a lot of money to address.
Remember, that we might have to review and use your electronic spreadsheet accounting records six times a year rather than the current once a year. i.e. four quarterly updates, one end of period statement for each business/property portfolio and one final declaration… And that’s excluding actually preparing your accounts and tax calculations.
As I hope you will be able to understand, if there are any shortcomings in your accounting records, any problems are going to be multiplied six-fold.
An appropriate template
Please remember that whilst quarterly submissions will be a necessity going forward for most self-employed people and buy-to-let landlords, the data within the quarterly submissions is not actually used to prepare your final accounts or to calculate your final tax liability.
Accountants therefore need all clients who will be impacted, i.e. the self-employed and/or buy-to-let landlords, with combined gross income of over £10,000, to use an appropriate template. This will allow accountants to easily check that clients’ records make sense, are complete, correctly analyse each transaction within an appropriate category and fully add-up etc. We can then simply connect the underlying digital quarterly accounting transactions to HMRC’s systems, through ‘bridging’ software.
Sometimes, we are presented with a pile of bank statements once a year to prepare annual accounts and tax returns. You will shortly have to keep your accounting records up to date and at least on a quarterly basis. As an accountant, we are going to have to file all the quarterly updates within a single month each quarter for all my clients. I can almost guarantee that most clients will give their records to their accountant in the last week or two of the quarter!
Working smart
Being able to export transactions from your online bank, electronically import into a spreadsheet or possibility send them to an accountant / bookkeeper to help is going to save time, cost less and ensure accuracy in recording amounts, dates and the nature of transactions. I suggest clients familiarise themselves with exporting transactions from their online bank into Excel or csv format. It’s not complicated. Just Google it for your banker.
I think for most clients, I would suggest opening a dedicated bank account purely for business purposes. If you are providing your accountant with paper bank statements or transaction downloads from your online bank and then having to sift through lots of personal transactions is only going to take more time, make life more difficult and cost you more.
I will be designing and releasing a suitable Excel template that will be applicable for the simple accounting needs of smaller business clients. In the meantime, I think that if you intend to use spreadsheets to maintain your accounting records then you should familiarise yourself with some of the basics, like typing details into cells, editing and changing details, inserting rows, entering dates correctly and generally ensuring you feel comfortable with the software. YouTube may be a good place to start learning.