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Simple solutions will be needed for the 3.5m sole traders when they come into MTD for income tax
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Keep sole trader software simple


Richard Sergeant explores how software vendors are already trying to put simplicity at the heart of their sole trader offerings.

24th Nov 2021
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It’s far too easy to say that the very smallest businesses are the least engaged with their financial administration, however it is fair to point out that with 3.5m sole traders in the UK, the variation is huge.

Any member of AccountingWEB will happily point you to clients who are intelligent, articulate and completely disinterested in keeping accurate books. Indeed beyond the usual stereotypes are those who are unconfident with numbers generally, or intimidated by processes they have not been taught. 

Asking these peopl to engage with software is no longer just about managing their business, but the compulsion imposed by Making Tax Digital for income tax (MTD ITSA). Now that they have to keep digital records with “functional, compatible software” the main challenge now is how to create the easiest and least stressful path to compliance. 

Big ledger problem

Given the nature of this challenge, asking some clients to adopt a comprehensive bookkeeping product is likely to be too much. Too much choice, sophistication and buttons they won’t need will deter them and create a lot more repair work for the agent down the line. 

Finding the right solution could be about finding an approach that requires the least amount of change overall. Many products will be developed over the next couple of years to fill the gap opening up just beyond the main bookkeeping and spreadsheet options, and already they are falling into three camps.

Bank account and ledger in one

Typified by the likes of CountingUp, this approach sees a bank account or e-wallet and ledger software form part of the same system. By collapsing the two into each other, spending on a dedicated debit card will give reconciliation a higher chance of success. 

The process of taking up a new business account would not be a barrier to adoption according to Countingup chief operating officer Andrew Garvey: “Sole traders are mainly using their own personal accounts, in which case we are in addition to and not a change. It’s a way of keeping the lines clean between what they earn and what they draw for themselves.”

This approach, he reasons, also plays to the main interest of the self employed. “It’s the money that matters, so there’s a higher level of motivation to raise an invoice and check their balance rather than just remembering to snap receipts. It’s what keeps them coming back to the app and creates the engagement,” said Garvey.

The categorisation engine

But perhaps for some even this might be a step too far. Coconut takes the view that for cash accounting businesses, the existing bank account provides the majority of the data required, and that the more tricky stuff around categorisation for tax can be handled separately.

As long as the bank account or accounts are up to date, then the Open Banking feeds into their categorisation engine removes the need for the client to adopt any new processes at all. 

Sam O’Connor, CEO at Coconut, explained: “Often sole traders will use a personal account, multiple accounts or a business account and don’t want to switch. For the accountant, we wanted to be the workflow tool they could use to manage all of these cash-based sole traders. The idea of minimising change is central so that you can use it for as many relevant clients as possible.”

O’Connor characterised the process as connecting the bank accounts and forgetting about it. But once sole trader clients do this, “They’ll find the app is already producing insights like monthly income and profit reports going back 12 months, as well as an estimate of their tax liability.”

This little bit of feedback could go a long way towards encouraging more consistent engagement. 

Snap and go

The more well beaten path is with the data extraction tools like AutoEntry and Dext. Providing the client has a smartphone, they should be able to shift their habits from snapping selfies to snapping receipts. 

According to AutoEntry customer success manager Brian Carola, the difference with this option is, “We don’t rely on the bank account in any shape or form, but we can fill gaps in getting the bank data in.”

These products focus on data collection, including fetching invoices from regular suppliers. Minimising the client touch points has been central to this approach, with the advantage that little additional reporting is needed to provide extra feedback.

While each of these approaches is built around the accountant having access and control of the client records, data extraction tools offer more automated features and have a much wider potential use across all types of clients. In other words, they can scale beyond the current remit of the MTD agenda.


The good news is that all of these vendors acknowledge that keeping things simple is essential, and that putting the accountant at the centre of the process is going to deliver a much better outcome. As new entrants arrive, as they inevitably will - although I have my doubts about the so-called free software HMRC assumes will appear - we can only hope that they will keep to these two core principles. 

Accountants are in the unenviable position of helping clients use something, or doing it for them, so trying to make the tech as easy as possible has to be a good starting point for everyone.

Replies (8)

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By johnjenkins
25th Nov 2021 10:00

VT cashbook is free and does simple income and expenses with analysis. What more does a small business need?
There seems to be this "marketing drive" by software companies to get small business to have "this and that app" or whatever, when there is no real need.
I've been saying this for a while now and it won't be long before there is a big clash between "high techies" and "low techies".
Richard, you're more on the frontline than me, I'm sure you can see it.

Thanks (4)
Replying to johnjenkins:
Richard Sergeant
By Richard Sergeant
25th Nov 2021 20:53

Regulatory change means the vendors have to respond- you can't expect them not too, it's there job.

Given the size of the cohort involved in MTD ITSA there has to be appropriate solutions for everyone. Horses for courses surely?

Thanks (1)
Replying to rsergeant:
By johnjenkins
26th Nov 2021 12:02

I would say it's a bit the other way around. Software Houses saying to HMRC "this is what you need to get more money in and quicker" when, in fact, it's just a marketing ploy to enable the software to be sold on a larger scale. Problem is the take up isn't there. Interesting to see what happens, especially if it's delayed again.

Thanks (2)
By adam.arca
25th Nov 2021 10:28


Good article and helpful summary of what's on offer for a low techie like me.

But if you can see the issues / challenges coming around the corner (and I assume you're not a practising accountant although you obviously interact with us a lot), then why can't HMRC?

We either have to assume:
a) HMRC are staffed by morons (which should be, but isn't, that far-fetched to imagine), or
b) The specific morons running the MTD project are acting cynically: they realise this is going to be a big issue but it isn't going to be their big issue so, as long as their CV looks good, they couldn't give a monkey's, or
c) They genuinely believe, despite all the evidence to the contrary, that they know better what's good for us than we do.

Words fail me if option c) is the case and I know which of the two other options I think it is.

Thanks (3)
Replying to adam.arca:
By Paul Crowley
25th Nov 2021 15:23

They will claim C, backed up by the sellers looking to rake it in
B is probably reality
How to explain that the project has been pointless and that the tax return system very nearly works is a problem they cannot face

Will MTD also reject Class 2 NI if HMRC think not registered ( but still collect class 4)
Will MTD also correct any calculation showing Marriage allowance even if the calculation is correct

Will HMRC really claim it is "calculating tax to date" when the software bought by taxpayer is actually doing it

The further this daft project goes the more HMRC loses credibility
They insulted the House of Lords, yet could not answer the most simple of questions

Thanks (3)
Replying to adam.arca:
Richard Sergeant
By Richard Sergeant
25th Nov 2021 20:50

Well Adam.arca I'm going to have to say that I think the reason they are going ahead with MTD is because they can!

The principle of a more digital tax system isn't unique or necessarily an inherently bad thing. However, I'm pleased there is resistance from the profession - especially as I think the ability to cope with the requirements has been overestimated

Thanks (1)
Jessica Pillow
By Jessica Pillow
25th Nov 2021 18:10

Richard, I`m surprised that you didn't mention Freeagent. Its integration with Mettle bank and the fact that it was written to be so user friendly for the smallest businesses makes it the hands-down winner for us for our sole traders! I`m excited that they are building tax return software into Freeagent for accountants too as well as a new product for landlords, which if it's up to their usual standards will be our landlord solution for MTD.

Thanks (1)
Replying to Jessica Pillow:
Richard Sergeant
By Richard Sergeant
25th Nov 2021 20:43

That's not unfair comment, Jessica! And I am fan of FreeAgent as you know. My only defense is that I wanted to deal with non ledger software as mentioned in the intro.

But Point taken.

Thanks (0)