The Fizz! Blog

The problem with the VAT Flat Rate Scheme

When the Flat Rate Scheme (FRS) for VAT was introduced, it was intended to make completing accurate VAT returns easier for small businesses.  Rather than a) adding up all the VAT that they'd received from customers, b) adding up all the VAT that they'd paid out to suppliers and then c) paying over the difference to HMRC, they could just add up their gross income from customers and then pay over a fixed percentage of that income to HMRC, the percentage being dependent upon their industry sector.

The idea is that the percentages for each business sector should pretty much reflect how small businesses in those sectors typically operate.  In industries (say management consulting) where businesses have minimal VATable costs, their VAT payments tend to be quite high, and so the FRS gives them a high percentage.  In businesses with greater VATable costs (say a shop), VAT payments tend to be low, and so the FRS gives them a lower percentage.

That sounds fair enough in theory, but in practice there's only one real reason why some businesses sign up to the scheme, and that's to pay over less VAT to HMRC each quarter.  There's a big problem with the table of percentages, which is that it's really poorly put together.  It's pretty likely that there will be two categories which seem appropriate, and very likely that there are none.  It's often the case that sloppy drafting means that a rate that's plainly intended for one type of business can be used by another.  Plus, since many pretty common types of business are omitted entirely, they can choose the "Other" category where that really gives a lower percentage than is really appropriate for their business model.

No blame should be attached to businesses that go for as low a percentage as is realistic, of course - they'd be mad not to.  This thread shows an accountant who's been able to claim (somewhat implausibly, to my mind) that he's not really an accountant, and he appears to have persuaded HMRC to agree.  The problem lies with the conception and execution of the scheme itself.  Keeping accurate records under the traditional system is no big deal - you've got to track your costs in the end, in order to get your year-end accounts done - and, apart from anything else, to know how much money you're making.  So the scheme wasn't really needed.  But what makes it worse is that hopeless table of rates.

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Are Sage really this hard up?

Last July we bought a copy of Sage 15.  We needed it because of the clients we have using it.  Sage is OK, as accounting software goes.  It is the epitome of adequacy.  It does double entry bookkeeping accurately.  If anyone tells you it's rubbish, they're wrong.  It is acceptable.

We then got an unsolicited invoice from Sage for a 12 month SageCover support contract, which we didn't want.  We told them that, and received a letter saying they were sorry we had cancelled our SageCover (not true, by the way, we had never wanted it to begin with) and asking us to reconsider.  In any case, it would appear that they had acknowledged our desire not to pay them for SageCover.  Fine, not a problem.

To my surprise, 14 months on (not 12 months, note) we've received a new invoice for 12 months SageCover until September 2011.  Obviously we're not going to pay it - though we still have the hassle of telling them to cancel it - but I imagine plenty of businesses would.  It's the equivalent of the bogus data protection, domain name or web directory invoices that are sent out by unscrupulous businesses to companies in the hope of payment being received out of inattention or confusion.

Rather than unticking the box on their database saying "customer has SageCover" (which should never have been ticked in the first place), instead they seem to have ticked a box saying "customer doesn't want SageCover, but in 14 months let's try sending them another unsolicited invoice for £40 + VAT on the offchance that they pay it by mistake.  Don't send it in 12 months, that would be idiotic, they'll be expecting it then.  Send it in 14 months, they'll have dropped their guard.  It's worth a go".

It's an odd sort of way for a reputable (which they generally are, whatever the Sage-haters say), listed company to conduct its business.  Are they really that desperate for revenue that they'll just send out speculative invoices on the hope that some will be paid?

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Plug pulled on Microsoft Office Accounting

Microsoft have decided to withdraw their accounts package, Microsoft Office Accounting.  It was launched a couple of years ago, and, as I wrote at the time, it appeared likely to cause Sage and QuickBooks some real problems, particularly as the basic version was free.

Well, it didn't work out that way.  Firstly, Microsoft never really seemed to push it too hard.  Although I'm sure it was available, I didn't notice it coming through any of the channels I would have expected to see it.  And, although they launched an accountants' "club" to try and promote the software via firm like Fizz, after initially giving us an MS Office licence as an incentive to join, they just went completely silent.

Secondly, the thing that has actually caused problems is the rise of online accounting services, like our own FizzBooks.  They meant that the market for traditional accounting software has been gradually contracting anyway, so not only did Microsoft not get as big a slice of the pie as they hoped, but the pie was shrinking at the same time.

Fortunately, we've no clients using the package.  For companies that are using it, there should be minimal disruption if they want to continue using it for accounting - ongoing support is being provided, and you often don't need support or upgrades for accounts software anyway - I'm still happily monitoring my personal finances on a copy of Microsoft Money 1999.  For companies using Microsoft Office Accounting for their payroll, there is a problem, as the use of that is just being withdrawn in December, in the middle of the PAYE year.  So users will have to process the remaining three months and the year-end of their payroll some other way.

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Online accounting with Fizz

We've launched a new web-based bookkeeping system, which, here in the office, we're calling FizzBooks. Rather than keeping your accounts on a software package on a PC in your office, you log into our system and create and maintain your accounting records online.

Some of the key benefits:

• You’ll never have to worry again about upgrades to your accounting software. Every time you log on, you’ll be using the latest version.
• If you’re away from the office and your usual PC, you can still access your accounts data. You can enter and review data from any PC with an internet connection.
• If you want your accountants to look at your records, they don’t have to have the same accounting software as you, and you don’t have to email a Sage or QuickBooks backup or a spreadsheet to them. They can just log on and see the same data that you see. If your accountant needs to make amendments to your data, you don’t have to stop your bookkeeping while they’ve got the live data file – they can enter the adjustments online and you can just carry on with your bookkeeping as normal.
• You don’t have to worry about losing your data if your PC dies and it’s not backed up; your data is continually backed up online.
• You can email documents straight from the site to your customers, email regular invoices to customers automatically, be notified by email when an invoice becomes overdue, and perform lots of other tasks more easily than with traditional accounting packages.

There's more on our website here.

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Should you be using accounting software?

One of the things I often have to do is to advise businesses on how to keep their records.  There's no "one size fits all" approach.  Here are some of the things that you should think about when making a decision.

For many businesses, using accounting software is overkill.  In most cases, there are really only two key benefits to accounting software when all's said and done:

1. It makes it easy to track amounts owed to you by customers.
2. It makes it easy to create reports from your accounting data.

Often, neither of those things are a concern.  Many small enterprises only have one or two customers, and might only invoice them once a month.  If that’s the case, the owner is unlikely to have much interest in tracking amounts owed to the business – he or she will always know how much is owed.  Similarly, it’s all very well being able to easily create a profit and loss account for a given period with your accounting software, but if you only raise a single invoice each month and have fairly fixed costs, you may well feel that you know perfectly well how much you’re making.

So, for businesses like that a simple Excel cashbook can do the trick – it accurately captures details of income and expenditure in a form adequate for year-end accounts (and, if necessary, VAT returns) with minimal effort.

But many businesses are more complex.  For complicated or growing businesses it can be important to track amounts owed by multiple customers, and to report on accounting data to track profitability, solvency and growth.  That means that accounting software is really useful.

Lots of accountants have a favourite accounting package.  Many are fans of Sage.  Many are fans of QuickBooks.  Most of the Sage fans sneer at QuickBooks.  Most of the QuickBooks fans sneer at Sage.  We’re now seeing a big move towards browser-based online accounting systems.  Most of the fans (and providers) of the online accounting systems sneer at both Sage and QuickBooks.

The thing is, for most businesses, any of those systems (and others, like MYOB and Tasbooks) are fine.  They’re good products.  Double entry bookkeeping hasn’t changed for around 600 years, and Sage, QuickBooks or any other similar package is really reliable at doing double entry bookkeeping.  They can all track customers who owe you money.  They can all provide you with a profit and loss account, or a list of your most lucrative customers.  For most businesses, choosing between Sage and QuickBooks is like choosing between a blue pen and a black pen.  They’re both perfectly adequate tools for the job.

For what it’s worth, I like QuickBooks a bit more, as I find the reporting function more flexible and I find it quicker to enter data and correct errors.  And I think it looks a bit nicer.  But if I pick up a new customer who uses Sage, I won’t encourage them to change if they're happy, because Sage is fine too in 90% of cases.

The interesting thing over the next year or two will be the progress of the online, browser-based services.  These have a key benefit: easy sharing of data between a business and their accountant, or between different members of staff at a business.  Rather than being emailed a data file at the year-end or when there’s a problem, I can just log on to my customer’s account to check their data and make adjustments or corrections where necessary.  Where a single company has multiple employees in different locations, or employees who need access to the accounting records but travel a lot, an online system that can be accessed from a PC anywhere – or even a smartphone -  makes a lot of sense.
I think it’s likely that before long we’ll be partnering with an online accounting provider so that we can offer this service to our customers.  Watch this space!

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Sage and Intuit may be a bit worried right now

Microsoft has launched a new accounting package which looks likely to shake up the UK accounting software market:

http://www.msofficeaccounting.co.uk/product.aspx

It's called Microsoft Office Accounting Professional.  There's two versions of it.

The full blown version, which is £149.95, has similar capabilities to the mainstream Sage and QuickBooks products which retail for somewhat more (maybe £250 to £400 or so) - although no doubt both Sage and Intuit, who publish QuickBooks, will be assuring us that their offerings have significant advantages!

More significantly, the Express version, which is pitched at the level of Sage Instant Accounts or QuickBooks SimpleStart, is free.  That's right, free.  Instant accounts is around £100 and SimpleStart about £50.  In my experience, while that's not much money for bigger businesses, for whom getting the right package is more important than getting the cheapest package, the type of business looking for an entry-level package will be happy to save even £50, and rightly so.  I would think that Microsoft have just wiped out the market for those products, particularly for those businesses buying the software themselves, rather than being pushed in a particular direction by their accountants.

Now, a fair chunk of the sales of the "grown up" versions of Sage and QuickBooks are businesses upgrading from Instant or SimpleStart as their business grows and their needs become more complicated.  So it won't just be the sales of the basic products that are affected, in time it could be the full blown versions too.

But the recommendation of accountants counts for a lot with new businesses, and accountants are reactionaries who will carry on recommening the Sage and QuickBooks that they're comfortable with, right?  Maybe, maybe not.  Microsoft have got a plan.  I've got a copy of the full version of the new MS package - firstly because I need to know if it's good enough to recommend to clients, and secondly because MS are bribing accountants by giving it to us for free - along with a copy of Office 2007 as well.  So, I'll have a play, and will report back in due course.

http://www.fizzhq.com