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Crunchers Accountants

The End of Year End?

Archive for March, 2015

The End of Year End?

There was little of great immediate significance in this year’s budget for small business.  However in years to come we may look back at it as the beginning of the end of year end accounts.

George Osbourne announced that by early 2016 – in other words, in less than a year, all small businesses and 10 million individuals will have access to their own digital tax account.

The present system requires tax payers to keep documentation of all their forms of income (P60s from PAYE, Accounts for trading income, Interest Statements for savings) and then transfer all the data onto the Self Assessment form which then gets submitted to HMRC.

As the Government’s document ‘Making Tax Easier’ sets out, the new system will be integrated so that instead of having to hold onto your P60 and put it on your tax return at the end of the year, you will log on and find that the information has been sucked into your centralized records the moment your employer submitted your wages report to HMRC.  Presumably at that point you will simply need to check that it tallies with your records.

In this way the process of calculating tax due will become automatic.  And instead of finding out the tax you owe once a year, the expectation is that you will pay tax month by month.

Most people agree the present system is a headache.  Accountants experience a nightmarish crush of information being dumped on them in January.  Individuals scrabble about collecting documents and finding the tax due.  Everyone suffers.

Perhaps we like the pain because the announcement has been met with as much criticism as applause, but we suspect that once we have experienced the ease of a joined up system, the idea of returning to the current one will seem ridiculous.

The bit of this that has caused most confusion in the accounting profession is how the information for trading income will be fed into the system if there is no ‘year end’ process.  To understand the problem, one first needs to demystify what accountants do to get to year end figures.

The process starts with what are known as primary records – the building blocks of financial reporting.  By these we mean bank statements, purchase receipts, sales records.  These records are then categorized into lists in a process we call bookkeeping.  At the end of the year these lists get given to the accountant to create a set of accounts.  The accounts are nothing more than an accepted, formalized way to present the numbers.  Accountants check that the bookkeeper has categorized the transactions correctly than makes various adjustments – for example pushing income into the next year if there is money received in advance for work.  Depreciation is added and so on.

The trouble is that these adjustments affect the amount of tax you pay.  So the question becomes how to reconcile the desire for a joined up rolling calculation of tax with this ‘year end’ process.  The alternatives are:
  • leave trading income out of this automated rolling tax calculation (but tax works on thresholds of income so without trading income the whole calculation is wrong)
  • do the process more often (but this will increase work and cost which automation is supposed to reduce)
  • let go of the year end process
One of the issues is that whilst year end process affects the timing of tax getting paid, over the life of a small business it probably affects the amount of tax actually paid very little.

For us, the direction of travel is unmistakable.  Two years ago the Government gave dispensation to sole traders below the VAT threshold to dispense with the year end process, other countries are already bringing this in for small businesses across the board.  We predict that by 2020 year end accounts will be a thing of the past for small business.

If we are right, there will be various consequences for small business and, of course, accountants.  One thing implicit is the use of cloud computing.  Increasingly small businesses are going to have to move their systems into the cloud.  We can see a time when this could become a requirement.

And what will accountants do if they are no longer collecting Self Assessment information and doing Year End Accounts?  It looks to us like accountants will be redundant for some small businesses. But where they continue the role must surely change.  The roles we foresee are
  • experts in setting up and maintaining these cloud systems,
  • overseeing the bookkeeping (which becomes more important since it is the final process before tax is calculated)
  • business adviser
  • interface between HMRC and business owner
We welcome the change.  The less time spent dealing with admin the more time we can all spend creating something of value.

 

 

Xerocon – Add-on Exhibitors

A big part of the Xero experience, and indeed the cloud computing experience is the integrations between applications.   Xerocon exhibition hall was a thronged with stand holders hoping to ride the Xero wave with their particular add on application.

As we outlined in our Xerocon overview, the competition to become market leader in particular fields is fierce.  If you have never visited the Xero Add-on Marketplace it is worth a visit and if you have here are some of the exhibitors that we feel warrant a look:
 

And just in case you having trouble keeping up with the new add-ons: XU Magazine – a monthly digest of what is new in Xero.

Xerocon – Features Update

The new features and upcoming features naturally formed the ‘main course’ of the conference.

Before we outline them, the organizers felt they were coming to the end of the beginning in the development of the software.  What they meant by this was that the first phase of their plans was to incorporate the main and important functionality of bookkeeping software.  They feel that soon this will be in place and they will turn their focus to some of the less obvious functionality.

This does not mean that they will stop improving and updating the existing functionality, but that they feel the main bases of the core product are nearly all covered.

Some of what follows has already been released but is worth mentioning, some is due for imminent release and some is a heads up on what is coming through the pipeline.  The main feature release for 2015 is payroll and we will focus on that in more detail.

Recently Released Features, some of the  features that you may not be aware of:

New Reports – New Reports allows the user to customise the way information is viewed.  Including grouping data sets, customizing report layout, filtering account headings from reports and searching across account headings.  It brings a level of interactivity we have never seen in any other bookkeeping software.

Quotes - generating quotes and progressing them through to Sales Invoices.

Enhanced Remittance Advice - letting suppliers know that you have paid.

Purchase Orders – producing and managing purchase orders.

EC Sales List - for VAT registered subscribers who sell to the EU.

 

Coming new releases.
Payroll - Xerocon’s biggest announcement was the release of HMRC integrated PAYE software.  The feature will allow payroll to be managed in Xero and reporting made direct from Xero to HMRC.  As well as this basic functionality Xero made much of additional features such as giving employees access to their payslips, P60s etc, allowing for scheduling holiday and a mobile app.

The update will be available from 4th March for users to set up and trial and from 1st April the integration with HMRC will go live.  It is priced as follows: Standard users will be given payroll for one employee.  Premium subscription                will incorporate 10 employees at the same price until Mar 2017 and thereafter the price will increase to £30/month.

Subscriptions will then go up in increments for every 10 additional employees.From Apr 2014 the existing payroll functionality will not longer exist for Standard subscribers.  There has been some complaint in the Xero community                   about this because some users do not want to pay the additional subscription but wish to keep being able to post their payslips in the way that Xero currently allows them to do.The additional functionality for people managing staff                   certainly looks exciting and the pricing seems reasonable.

 Inventory – Xero flagged updating the inventory feature as the most last ‘big’ piece of functionality that Xero currently misses from the point of view of the business owner.  There is already a basic inventory functionality for Xero but it does not give the option for the inventory that is logged to connect through to the balance sheet.  The future inventory system will allow business owners to see stock levels on the balance sheet.

Accounts Production – of less interest to small business owners but of great interest to accountants is the announcement of the ability to produce Statutory Accounts and submit to Companies House.

Performance Indicators – at present Xero reports will give raw data but it is not possible to create performance indicators such as Profit Margins, Liquidity Ratios and so on.  Xero now promise to bring these reporting features out in the next year.

 

Xerocon – Overview and Insights

For the uninitiated, Xerocon refers neither to a brand of US politician nor a form of photocopier fraud, but rather to Xero bookkeeping software’s annual conference which took place in February.

We are reporting on this partly because technology is increasingly important to bookkeeping and other business systems, partly because almost all of our clients are now using Xero, but also because it is a fascinating insight into the way cloud technology is transforming business.

Our report is split into three parts – this general overview of the conference and the insights we gained on the future of business software; an overview of the new features and coming features in Xero; and finally a look at the add-on marketplace which was much in evidence at the conference.

Overview and Insights

‘Bookkeeping’, ‘software’ and ‘conference’ are three words that would traditionally be guaranteed to make the heart sink.  But of course Xero has set itself up in direct juxtaposition to anything traditional and the first impression on entering the conference is one of a buzz, excellent design, attention to detail and a down to earth welcome.

The accounting profession is not used to being cool, but walking around the conference you can’t help but feel that here is something cool.  It has all the elements – beautiful design, creativity, a sense of being slightly subversive and underground – albeit one that has been carefully planned.

Of course it is important to look beyond the window dressing.  There is no doubt that Xero is not the only cloud system on the market and no doubt others have great features too, but as the conference progresses this emphasis on the beauty of the design and the attention to detail is something that comes up a lot.  And if I am honest I buy it.  Of course I am biased, Crunchers South London has invested in Xero and we use other systems fairly little, but they make an important point – which is that achieving an interface that is attractive to navigate and allows for intuitive functionality is not an easy thing to achieve.  It requires a commitment to and massive investment in designers.

There is an obvious parallel with Apple who have also made the quality of their design paramount and if Xero are to be believed, customers are voting with their feet.

Ultimately the next 10 years will tell whether they have got it right.  The established giants Quickbooks and SAGE are just waking up to the threat of Xero and the possibilities of a cloud system.  Xero’s bet is that they will always struggle to catch up, that they can’t become something that they are fundamentally not.

The scale of the thing, is also striking.  I hope this picture gives some sense of the size:

WP_20150210_002

And this brings me onto another point to make in this new era of cloud computing.  In the end as with traditional software – size matters.  There will be market leaders who will have the most resources and attract the most integrations and therefore the greatest functionality.

For example take Microsoft’s mobile phone operating system Windows Phone.  It launched in October 2010 and despite the might of the desktop giant behind it, despite users liking the phone, it struggles because there are a tiny amount of apps being developed by third parties for it in comparison to iPhone and Android.  It becomes a vicious circle, without the user base, the app developers will not programme for it; without the apps, the customers are put off.

The point of this is that it turns out that the bookkeeping software sits at the heart of a spider’s web of integrated business functions.  These other cloud systems – tend to all need to link to the bookkeeping and eventually we will all want and expect joined up systems so that when we raise an invoice in our bookkeeping software we want our CRM (Client Relationship Management) system to know.

At present it is battle being played out between the big software companies and naturally Xero are keen to show they are winning – exponential numbers of users, exponential investment, a brand strategy that knocks others for six.  It is important not to get carried away by the hype but it feels like Xero is a fairly safe bet.  Perhaps most important of all is that whenever we go back to using another system it feels slow and unresponsive.  If enough people agree with that experience, it seems to me it has built a very solid foundation.

The eagle eyed will have spotted a paradox at the heart of Xero’s narrative.  They want to be the outsiders ousting the lazy and complacent software incumbents but in so doing they risk becoming the monoliths they seek to displace.  Today’s iconoclastic brand is tomorrow’s stodgy norm.

This paradox is not lost on Xero’s management who referred to it more than once and already understand the new challenges their success is bringing.

One of the most interesting aspects of the conference was the attempt made to peer into the future.  Xero’s main insight is that the next phase in the cloud’s development will be much more about sharing data.  Imagine if your bookkeeping software told you a client’s credit rating when you raised an invoice.  It is hard to know if this is scary or brilliant.  It is certainly unchartered territory.

Xero’s management pointed out that they are now guardians of a huge amount of data (and were  at pains to show they took this responsibility very seriously).  At a basic level this is about hacking and confidentiality but at another level this is about stewardship of data.

For example, they now have better data than the government on small business.  They have better data than the banks, because as they highlighted, the banks don’t realize how many businesses have more than one bank.  They advised being wary of very cheap or free cloud applications because as they said in a memorable phrase ‘if you’re not paying, it’s probably because you are the product’.  In other words your data is being sold on elsewhere.

On the other hand, there is clearly a big opportunity.  This data can help small businesses.  Imagine if your bookkeeping software could tell you that you pay significantly over the odds for a product or service compared to other purchasers, or could tell you that your staff were under-performing compared to the industry norm.  That information could save your business.

At times the implications of the wider picture were bewildering and it was a relief to return the main foyer, queue up at the very trendy Shoreditch Grind coffee company dispensing free lattes and browse the exhibitor stands.  Which reminds me of the other theme that I strongly took home, namely that this is a great time to be running a small business.

Technology is bringing a plethora of systems to our disposal to make life easier, but more than that it just feels cool to be small.  It feels like a place for exploration, creativity and a place where smart people want to be.