A recent survey by the UK200Group revealed that 65% of its members’ small business clients do not currently use software to manage their accounts – but this wasn’t the biggest surprise.
According to the membership association the biggest shock was that 16% of small business (SME) owners do nothing to record business transactions, leaving it to their accountant to fill in details prior to their tax return each year. Meanwhile, 27% of SMEs used computers for their bookkeeping – with the assumption that this involved Microsoft Excel or another spreadsheet-based application.
The question is why small businesses are not using accounting software, particularly when the government’s Making Tax Digital (MTD) programme is due to start in just over a year and this requires software that can plug into MTD.
First and foremost, it is worth noting that HMRC has confirmed that free software will be available to meet MTD requirements, though this is only for very small businesses with the most straightforward affairs.
Hazel Gough, partner at accountancy firm Chiene + Tait says that this raises the question of how and why the software companies would make a free-to-use product available when they also have a similar one to sell.
“It seems likely that any free software will be very basic – possibly fine for some businesses, but limited in scope in terms of features,” she said.
Gough suggests that software houses would also look to make revenue in ways other than subscription fees such as selling customer data, while she thinks businesses should be wary as the software companies may want to restrict the free software to the extent that businesses are forced into moving to paid versions if they want to effectively manage their accounts and submissions to HMRC.
So is cost a stumbling block for many small businesses, if they were to use a commercial software product rather than free software?
Small businesses are unlikely to want to splash out on the latest software if they think they can manage without it. But according to Dave Chaplin, CEO and founder of SME Contractor Calculator, an online advice portal, his company has actually saved money by using accounting software.
“We are finally getting around to using Xero this year, and we will save £3,000 per year in accounting costs – because we can now do our own book keeping and not have to pay someone,” he said.
The cheapest cloud-based packages cost about £10 a month, and HMRC is putting the cost of MTD at £280 for each business – although there have been suggestions that the cost will go far beyond this estimate.
Picking the right package
Gough doesn’t see costs or ease of use as an issue; the toughest part is picking the software package which has the right features for their business. The business needs to understand whether there are better options than the free software being promised by HMRC “if and when that does arrive”, she said.
Accounting software providers will point out that there are numerous benefits of using their products: better record keeping, more efficiency, fewer resources used, and so on.
But for Rachel Carrell, CEO of a childcare tech start-up Koru Kids, there are also drawbacks to using software. After selecting Xero because it had a “good reputation among start-ups”, she said that she didn’t find the software intuitive, and warned that once the business has committed to one form of software it’s a big effort to change, and there’s no guarantee that rival offerings like QuickBooks are any better.
She also stated that her accountant finds the lack of personal customer support with software packages frustrating.
“It takes a long time to be able to interact with a human being when something strange happens with the figures,” she said – so software doesn’t necessarily mean that small businesses won’t run into complications that they hadn’t had before.
Costs and benefits
One big reason for many businesses not to switch is because they feel that the benefits don’t outweigh the costs – it is only MTD that is forcing them to have to think about software.
Even then, there isn’t clarity about what will happen to businesses that don’t have the software in place. A recent consultation outlined potential options including fines, a point-based system, compliance checks and suspensions, but the details have not been confirmed. And for most small businesses, there’s still time to comply.
“Anyone with a turnover of under £85,000 a year has an additional year to prepare,” said Jason Kitcat, head of policy and public affairs at Brighton-based online accountancy firm Crunch Accounting,
“Furthermore, HMRC has said it will be offering a year’s grace before applying penalties for non-compliance with MTD and it has also shifted its policy to now allow spreadsheets as a form of digital record-keeping for MTD compliance,” he added.
Carrell said that she is taking a ‘wait and see’ approach.
“There will inevitably be bugs, and many people are saying the timescales are overly ambitious. Given this, I’d rather wait for others to find the bugs and squash them. Accounting is too important for experimentation, we must have exactly accurate figures at all times,” she said.