The Fizz! Blog

The cash basis becoming the default for self-employed people’s taxes, why it’s happening, and why it’s stupid

The default for preparing accounts for sole traders and partnership is the accruals basis - or what we habitually refer to as proper accounts. That means they show how much profit you really made in a period, regardless of when you remembered to send an invoice, or when your customers actually paid you, or when you paid your suppliers and so on. Accounts are supposed to be a useful record of how a business is really doing, giving you important information about what’s working and what’s not working, and, in extremis, whether you’re wasting your life and should get a job. They’re not just a glorified bank statement or a reflection of the admin inefficiencies of you, your customers or your suppliers in sending out paperwork or making payments.

For a few years now, small sole trade and partnership businesses have been able to base their tax returns on cash in and out instead, so as to make preparing tax returns easier (and also as an acknowledgement that many of them were doing it already). Accountants will rarely use this cash basis, as preparing proper accounts isn’t hard and gives you useful information, though sometimes there can be some benefit to using it for a year or two in niche circumstances where the timing of payments happens to result in a worthwhile tax saving. But generally, proper accounting is the way to go. It’s nice if accounts can be useful AND as easy to prepare as possible - but if you have to pick one, it should be the first.

Anyway, regardless of all that, from 2024 the cash basis will become the default for unincorporated businesses, with an option to use the accruals basis.

The reason for this is basically Making Tax Digital and the ongoing intention (which may or may not ever happen - we’re nine years into the process now) to make sole traders submit quarterly updates to HMRC of their income and expenditure. The government has realised that this will be easier to sell if people are just submitting what their bank statements say rather than having to properly account for their real earnings for the quarter. Part of the drive to this reporting is so as to be able to make more regular assessments of entitlement to things like Universal Credit and Tax-Free Childcare, and a sole trader with smooth underlying income but erratic payments from customers could have interesting problems with their claims if and when this quarterly reporting ever comes in. But for now, we’ll just need to watch this space. For avoidance of doubt, we (along with most or all other competent accountants, we imagine) will continue to default to proper accounts!

www.fizzhq.com

Why you should raise sales invoices on your accounting software

It’s very surprising how many businesses don’t create their sales invoices on their accounting software. It’s far from uncommon to take on a client and find they create sales invoices elsewhere, send them out, and track whether or not they’ve been paid using either a spreadsheet - or even via some more informal system. This is a shame, for a few reasons:

• It doesn’t save any work at all - it probably creates more work, as a VAT registered business is going to have to recreate the invoice in its accounting software anyway.
  It could mean confusion. They might send out an invoice, amend the invoice, and give the old invoice to their accountant for accounts or VAT prep, meaning there’s work to be done to figure out why the amounts coming into the bank don’t match what’s being paid.
  As a worst case scenario, it could mean they lose out financially. For example, they might send out an invoice, forget to track it, never be paid, and never notice.

If the invoice is created in accounting software in the first place, and emailed out from there, there’s one unambiguous source of truth about how much the invoice is for (if you amend it, you’ll amend it in the software), and one unambiguous source of truth about whether it’s been paid or not - amounts coming into the business bank account must be logged against the invoices they’re settling, so if everything’s up to date you can generate a list of outstanding invoices at the click of a button.

The most common objection to generating invoices using accounting software - particularly amongst businesses in creative industries - is that they won’t look precisely as the business would like them to look. That’s true - but they really do look fine, and are quite customisable, and you’ll also know for sure that they include everything that’s legally mandated to appear on an invoice. Businesses are very used to receiving invoices generated from all the major accounting platforms and are unlikely to judge the appearance of a Xero or FreeAgent invoice with your logo on harshly. Ultimately, the important thing about an invoice is that it gets paid!

www.fizzhq.com

Investing in cryptocurrency? Here’s how the tax side works

Cryptocurrency and tax has fast gone from being a largely theoretical subject to a quite practical one. Buying and selling them has become both more popular and more easy, and far more people are having to address the consequences of the activity now.

So, how are profits on selling cryptocurrencies taxed on an individual?

For 99.99% of people it’s a Capital Gains Tax (CGT) matter. CGT is fundamentally a tax on disposals (i.e. sales) of assets. The principles and calculations are the same ones you’d follow when figuring out CGT on profits from selling shares. Most people seem to assume that the fluctuating value of their cryptocurrency during the year has some impact, but it doesn’t. Similarly, often people think that the value of what they hold at the end of the tax year makes a difference, but it doesn’t. If you don’t sell any cryptocurrency, there’s nothing to declare and no gain to tax. It doesn’t matter if you bought it for £10,000 and it’s now worth £200,000. It’s not until you actually sell something that tax becomes a consideration.

A useful thing to bear in mind is that we can all make some capital gains free of tax each tax year. For 2021-22, your first £12,300 of capital gains are tax-free and it’s only the surplus above that amount that’s taxable. If your gains are below £12,300 and the total proceeds are less than four times that amount - £49,200 - then you don’t even need to tell HMRC about the transactions at all.

So, what are those principles?

Let’s say you sell some Ethereum for £15,000. You need to figure out how much it cost you. This might be quite simple. If that’s all the Ethereum you have, and you bought it all in one go for £7,000, you’ve a profit of £8,000 to be taxed. Easy!

What if you didn’t buy it all in one go? If you’ve bought Ethereum on two or more occasions, you have to keep track of all the times you bought Ethereum, and keep a running record of the average cost of each unit - a record of your “pool” of units and their average cost. Then, when you sell X units, you need to take the relevant number of units at the average cost out of the pool, and figure out the profit you made on selling them. Fairly easy!

There’s a further complexity, though. Sometimes you have to look at the units you bought afterwards as well. This is because of rules designed to stop people realising tax-free profits at the end of one tax year and then buying the same things back a day or two later at the start of the next. In our example, if you buy some Ethereum in the 30 days after you sell some, then you need to match that purchase against the disposal instead of the older units, and for tax purposes you’ll still be deemed to hold those older ones at their original cost. Not easy!

These rules are thorny enough for share trades, but there are a few factors that make them trickier still for cryptocurrencies:

1. Cryptocurrency transactions are often far more frequent. When you sell some shares, it’s usually fairly easy to identify when you bought them and how much for, and to therefore work out the profit you’ve made. With cryptocurrency there are often far more transactions to assess (though in fairness this may become more common in share trading too, as apps and push notifications encourage people to trade more frequently).
2. Most people do their share trading via a single broker account, but many people have multiple accounts/wallets for cryptocurrency. You might need to match a sale of cryptocurrency from one wallet against a purchase made via one or more other wallets.
3. A big trap is that you might not even dispose of cryptocurrency for actual money. If, say, you exchange some Ethereum for some Bitcoin, that represents a disposal of Ethereum to declare and pay tax on, even if you’ve no GBP to show for it. Someone may never have cashed out any cryptocurrency at all, but still have multiple taxable disposals. We’ve written about this before.
4. Similarly, you may use some cryptocurrency to pay for something - that represents a disposal of the cryptocurrency at its market value and a potential tax bill.
5. Finally, even if you gift the cryptocurrency to someone, that’s also a disposal at whatever its market value is at that point (unless you're gifting it to your spouse or civil partner, anyway), with tax to pay if you’ve made a gain - that’s the same with shares and any other assets too.

All this means that, for someone with complex cryptocurrency activities, some software that can pull everything together is likely to be necessary!

For the time being, the £12,300 annual exempt amount is likely to keep most people from having to report anything to HMRC (though if you make losses you might want to report them, so you can offset them against future gains). Even so, make sure you keep proper records - if you’ll be selling cryptocurrency in future it’s important to have your precise trading history on record so that you can figure out the profit on each disposal when the time comes.

www.fizzhq.com

 

NFTs and Tax

One of the hottest financial topics at the moment is NFTs - Non Fungible Tokens.  Leaving aside questions of the degree to which they could be considered a bubble or environmentally wasteful, we’re starting to get questions about how trade in them might be taxed.

The good news is, there’s not really anything special about them in that regard.  If you’re in business making and selling NFTs, then that’s a trade and you’re going to pay tax on the profits.  You’ll have identical considerations around structure and tax planning to any other business (one interesting one might be - if your main business is VAT registered, might you want to keep this sideline out of the VAT net by keeping it separate?).

One thing that might be a bit different is that you’re probably much more likely than most businesses to get paid in cryptocurrency.  That’s fine - as with any other business, that’s just taxed the same as if you’d been paid in real money.  If you get paid one ETH (say) today, that’s about £1,200.  That’s your income, whatever you're going to do with the ETH subsequently - you can't defer the tax by keeping the revenue in crypto. 

If you convert the ETH into real money at that point, we’re done.  If you don’t, and hang on to it, then you need to retain an awareness of the potential Capital Gains Tax consequences of buying and selling crypto.  That’s taxed in more or less the same way as buying and selling shares.  We wrote more about the traps people might not realise they’re falling into here.

www.fizzhq.com

 

 

Fast support isn't necessarily good support

We work with a few software providers - some of old-school software, some of cloud products - and sometimes need to ask them questions.

The cloud provider that we interact with most often generally provide very very quick responses to support emails.  They seem very proud of that, which is completely understandable and reasonable on the face of it.  However, in almost all cases in our experience they haven't read the question properly and give you an irrelevant answer.  Example for accountants: Q: "The VAT Control Account is set as an equity account.  How do we change that?" A: "Yes, that's right, VAT is an equity account" (it isn't).  You then get an automated email saying your case has been closed, and asking for feedback on how well the person did from 1 to 10.  You obviously click "1", then you get contacted again and they generally actually engage with the problem properly.  It's maddening, especially since it's so predictable.  The problem isn't with the questions; we write carefully and, I'm pretty sure, unambiguously.

This is annoying for us but actually misleading for customers who aren't accountants.  If the person asking for support isn't an accountant (or isn't a very good accountant!), they're quite likely to happily accept the wrong answer as being accurate, and will think the support is brilliant because it's quick.  So, well done for giving the impression of giving brilliant support.  But you haven't.  It's rubbish support, delivered quickly.

I have no real hope that other providers are any better, sadly!

www.fizzhq.com

What we get out of Twitter

People often express surprise that Twitter is a tool that we find valuable in our business - most small businesses we speak to seem to think it's a waste of time.  I think that the key is that we know exactly what we use Twitter for:

1. Listening to people - it's interesting what's on the minds of clients, contacts and others.  Often people are concerned about things that it wouldn't have occured to me as something on their radar.  Sometimes they're unconcerned about things that I thought would be important to them.
2. Making it easy for our clients and contacts to direct their contacts to us if they want to.  A large part of our client base are big Twitter users.  If one of their friends or contacts ask "Does anyone know a good accountant?" then it's really useful for us to have a presence on Twitter that's at least somewhat credible, so our client can signpost us to them.  We're not trying to use Twitter to find new clients that are completely unknown to us, just to make it easier for "friends of friends" to find us and engage with us.

Note that the number of followers we have does not feature in either of those purposes in any respect - it's of no interest to us.

I'm not saying that we're using Twitter as best we could, and I'm not saying that we're using it the only way a professional services firm should.   But we have thought about what we use it for, and it works for us.  Many businesses we speak to, when put on the spot, don't actually know why they're doing it.

www.fizzhq.com

 

Adwords can work

We meet quite a lot of people who tell us that they've tried Google Adwords and it hasn't worked out for them.  Google Adwords, in case you don't know, is paid, click-through advertising.  You pick some search terms (say Plumber Aylesbury) and if anyone searches for that on Google then there's a chance an ad for your business (which you've written) will appear.  If the searcher clicks on it and comes to your website, you pay.

Pretty often, when we look at the website of the person who's told us Adwords doesn't work, it's not very good.  The thing is, it's really a three-step process:

1. Get someone to click on your ad
2. Impress them with your website
3. Impress them personally when they get in touch

Blaming or criticising Adwords when your website isn't up to scratch - or is inconsistent with the kind of click-throughs that you're getting - is missing the point.  It's like telling people to get lost when they phone up and then blaming Yellow Pages.

The further problem is that there are a ton of Adwords consultants in the market now, and some of them are so keen to get business that they'll encourage customers to launch into an Adwords campaign without making sure that steps 2 and 3 are going to work as well.

So, Adwords can work, but - as with any marketing - make sure that you're going to be able to successfully manage the whole process - clicks aren't worth anything in isolation.

www.fizzhq.com

The second least convincing Phishing email ever

Our email account remains up and running, so BB Sangma has yet to carry out last week's threats.

Today's attempt:

My Dear,

Can you confirm if you are still using this email address?.
 
There is information I think might interest you. First kindly confirm if you are the owner of this email address.

I am Mr. Nana  Bruku, I work with Barclays Bank. I do not know if I am talking to the right person, Already I have your name and email address in our file in the office, but somehow I am not comfortable and too sure that I am communicating with the right owner of this email. As soon as you confirm, I will furnish you with the information that I have for you.

I am taking this preventive measure because I do not want to talk to the wrong person because of the sensitivity of the information regarding the issue.

Please ensure that you reply this mail as soon as you can please

Mr Nana  Bruku

The least convincing Phishing email ever

I just received this from a gentleman apparently called BB Sangma:

Dear Subscriber

            TERMINATION OF YOUR EMAIL ACCOUNT
We are currently carrying out an upgrade on our system due to the
fact that it has come to our notice that one or more of our subscribers
are introducing a very strong virus into our system and it is affecting
our network.We are trying to find out the specific person.
For this reason all subscribers are to provide their USER NAME AND
PASSWORD for us to verify and have them cleared against this virus.
Failure to comply will lead to the termination of your Account in the
next 48 hours.

Information to send;
EMAIL ADDRESS:
USERNAME:
PASSWORD:

Hoping to serve you better.
Sincerely,

EMAIL SUPPORT

If you fall for that, you deserve everything you get!  Though if you have trouble getting in touch with us by email next week, it will have been genuine.

www.fizzhq.com

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.

www.fizzhq.com