We move from 2020 to 2021 with hope that 2021 will be nothing like the year before.
In this article, we examine what we believe will be the top 10 challenges and opportunities for small accounting firms in 2021.
1. The extension of Making Tax Digital
Making Tax Digital has regenerated more times than Doctor Who over the last 10 years but it finally went live in a much diminished form on 1st April 2019.
The eventual aim is to move nearly all personal and corporate taxation to the platform but, at time of writing, it’s now the way for companies, sole traders, and partnerships to report and pay VAT to HMRC if their turnover is greater than £85,000.
From 1st April 2021 (postponed one year because of the COVID-19 pandemic), VAT-registered businesses under the £85,000 threshold will have to use the Making Tax Digital system.
Income tax is expected to move to Making Tax Digital from April 2023 with Corporation Tax likely at the same time according to HMRC sources.
2. The extension of IR35 rules
Originally due for April 2020 but postponed to April 2021 because of the pandemic, HMRC’s mission to destroy as many of the financial benefits of contracting as possible steps up another gear.
In April 2018, HMRC changed the rules for contractors working for public sector organisations by decreeing that it was now up to the client to declare a contractor’s employment status and not the contractor themselves.
Despite genuine worries among contractors that clients would err on the side of caution and declare their working arrangements as within the scope of IR35, it turned out, 18 months after the rule change, 89% of public sector contracts were still outside IR35.
The evidence is that the rule change did not have the desired effect wanted by HMRC. The rules for contracting for medium- and large-sized businesses will mirror those for the public sector from April this year.
Accountants (and any friendly solicitors you work with) should prepare for the questions and concerns of any contractors on their books with a view to helping them stay IR35-compliant to keep as much of their money as possible.
3. Post-COVID economy working practices
Ever since the UK-wide lockdown was announced on 23rd March 2020, many businesses including accountants started to operate remote working.
The recently-deployed vaccine should herald a return to work, according to Bloomberg, but employees don’t want to go. Many accountants we speak to are having exactly the same issue.
If your team has managed well during these unwelcome times, well done to them and well done to you for quickly creating the infrastructure required for your accountancy practice to function properly.
However, we are worried, not just for accountants but for all other office-based businesses, that remote working will deprive companies of their team atmosphere and leave junior and trainee members of staff exposed and alone.
It’s fine doing a job from home if you know what your job entails and how to overcome the challenges presented by the work you do. But if you’re a newbie, it’s not so simple.
4. HMRC post-COVID
The tax gap is the difference between what HMRC believes it will collect during the course of a year and what it actually collects. Historically, the gap has been falling in recent years partly because of HMRC’s very proactive approach in launching investigations into taxpayers’ activities particularly in the area of IHT.
While we believe that they will continue this campaign, the number of investigators assigned to closing the tax gap may diminish for two to three years as HMRC investigates potential fraud in relation to the furlough scheme, the COVID loans schemes, and other supportive measures.
They’ve already begun. One lady was in court in November after making eight separate claims for £30,000 bank loans on behalf of her employer totalling £240,000.
We don’t expect that this case will be the last.
5. Function outsourcing
Standalone payroll firms have been around for decades although very few accounting practices actually outsource any work to them.
We expect in 2021 and over the coming years more and more functions to be outsourced by accounting firms especially R&D tax credits, IHT planning, due diligence teams, and so on.
The types of services accountants offer which are not covered by the monthly direct debit are often sold adhoc and, unless a specialist within a firm is kept constantly busy, their employment may act as a drag on a practice’s profitability over the year.
A better solution for many practices may be to engage adhoc with third party service providers with particular experience in a given field with a revenue split between your firm and that specialist.
6. Mastering social media
For many accountants, spending time building a social media presence is difficult to justify. It’s much harder to measure results from social media marketing and it requires you to create brand new content every day (including downloadable material) to build up your base of followers.
Given the workload of the average practice, it’s hard to imagine many accountants having the time, energy, or creativity to create pithy and actionable copy accompanied by an infographic at the end of a long day.
However, as the number of accounting firms grow, so does the competition and you need to make sure that your practice name is as prominent as possible to potential future clients. This is especially so as it can now take up to 13 exposures (or “marketing touches”) to your company name before a potential client makes an enquiry.
You don’t have to do it yourself – there are specialist social media marketers for accounting firms. If you do outsource the work, expect it to cost in the region of £250 to £500 a month.
7. Getting onto Google’s first search engine results page
“The best place to hide a dead body is on page 2 of Google’s search results” is a common expression heard among search engine optimisation experts.
They’re right. Most people don’t scroll past the first five organic (in other words not-paid-for) search results so, if your practice isn’t in those first five search results, finding new clients is going to be difficult.
This is further complicated by a recent trend among consumers and business decision makers to ask Google a question before they ask a professional. This trend not only affects accountants – it affects double glazing installers, dentals, car repair garages, and solicitors.
In addition to making sure that you’re seen on page one when someone is searching for “accountant”, you also need to create a library of very high-ranking content specifically asking clients’ questions like “salary dividend split”, “sa301”, and “IR35 tax calculator”.
Spending money on search engine optimisation does not bring immediate results – you may have to wait up to 3 to 6 months before you see a return on your investment.
However the investment is worth it because, unlike other forms of marketing, a library of online content continues to deliver new enquiries months and years even if you stop spending money on it.
8. More accountancy practices offer advisory services
As more and more clients migrate to online bookkeeping platforms and their accountants encourage them and train them to keep their financial records up-to-date, there’ll be more data available to accountancy practices than ever before.
More data presents more opportunities to analyse financial and performance data and for accountants to benchmark their clients’ performance against competitors in the same sector.
The introduction and widespread adoption of online accounting and bookkeeping platforms has been a mixed blessing – as we cover in point 10 during this article.
We expect that, during 2021, more small accounting practices will widen their range of services (and their fee base) to include advisory services as they seek to find more income in a market beset by downward price pressure in the last five to ten years.
9. Being cybersecure
Accountants hold sensitive financial information on their clients and their businesses. The main targets for cybercriminals targeting accountants are clients’ personal details (for creating new and hijacking current credit accounts) and company payrolls (for the same reason but to make multiple fraudulent applications).
Cybercriminals may also spoof emails making them look like they come from your company. In these emails, they’ll ask your clients to make a transfer to a supplier or to HMRC but with bogus bank details. It may be weeks before the client realises that no-one from your firm actually made that request.
Accounting Today’s article on the 10 cybersecurity practices which accounting firms need to implement now is particularly helpful.
10. Increasing automation for better productivity
Two-thirds of accountants believe that cloud-based accounting technologies like online bookkeeping platforms will help them do a better job in the future.
Most interesting in that survey was the caveat “in the future”.
Many in the industry currently believe that lack of accountant-specific functionality on online bookkeeping platforms makes their job more difficult.
Added to that, we’ve essentially transferred the responsibility for accurate bookkeeping to our clients – very few clients now hire a bookkeeper to visit their premises.
Bank reconciliation is complicated and many clients make mistakes with it. In addition, clients don’t often classify items of expenditure in a way which allows us to save them money if, indeed, they classify items of expenditure at all.
It’s a bit of a mess.
And it’s made all the more complicated by the fact that many of the online bookkeeping platforms promised us time savings (which really didn’t occur) and incentivised us for signing up lots more clients (creating significant backlogs of work as we attempted to correct up to 12 months’ worth of financial recordkeeping per client).
In order to alleviate these backlogs of work by spreading it out over a 12 month period, we spent 18 months developing Hindsight, a plug in for Xero.
Hindsight logs into each of your client’s Xero accounts every morning and it automatically analyses the state of each client’s business and the quality of their bookkeeping.
If your client’s bank balance is too low, too many invoices are unpaid (and those invoices which are paid are taking too long), or there are unreconciled transactions, it warns you or the colleague you assign a client’s account to.
There are currently 12 different alerts but we expect that to grow to 50 very quickly.
Not only does it create alerts but Hindsight also informs you or your colleague about the best way to approach the client to describe the problem and help them overcome it.
Throughout the course of the year, you better manage your clients’ ability to update their online bookkeeping platform and you have a much clearer vision on how each clients’ business is performing.
This means that you need much less retrospective work on a client’s books to complete their year end, period end, or Self Assessment and that you have much more time for you and your colleagues to maintain and build on your relationship with each client.
To find out more about Hindsight and how it frees up your and your colleagues’ time and delivers a better service to clients, please click here to arrange a phone call with our team. Alternatively, please click here to email us.