FreeAgent interview – ASLI Conference Sponsor

Emily Colton
(FreeAgent – Chief Accountant)

Rob: Hi Emily, nice to meet you. I’m wondering if you can tell me a little about FreeAgent’s history. Who was it established by, and why?

Emily: Well, FreeAgent came about because there were three gentlemen, all freelancers, who wanted something that was online, simple and straightforward, that they could use to do their books. Ed our chief exec is an ex-RAF jump jet pilot. Roan who is our Product Director is a designer and Olly, who is our CTO is an expert programmer. They were all working freelance and their accountant presented them with a spreadsheet to keep their books on and

Robert Skinner
(Conference coordinator)

Ed thought ‘I really don’t like this; there must be a better way!’ There wasn’t anything available, so they built it. And that’s how FreeAgent came about. So the idea was to keep it robust; it’s underpinned by full accounting principles. It is a fully fledged accounting system, but really simple and straightforward to use. If you are an ASLI member, you are an expert in sign language, but you’re not necessarily an expert in accounting and bookkeeping. And you shouldn’t have to be. The idea is that if you keep your records on FreeAgent and you do your invoicing through FreeAgent, we do the heavy lifting and you do the interpreting.

Rob: Why do you think someone would choose to use FreeAgent instead of employing an accountant?

Emily: The thing with FreeAgent is that it’s not meant to replace an accountant. It’s meant to complement an accountant in terms of services. FreeAgent is, in its purest form, a day-to-day bookkeeping system. So what you would use it for is to track your day-to-day running costs. For example, if you are about to catch the train to go and see a client, then you could get your smartphone out of your pocket, photograph your train ticket, and add that into FreeAgent as you stand on the platform waiting for the train. If the exit barrier at the other end swallows your ticket, no problem, you’ve got that proof already in FreeAgent. So, you can track your costs and you can use it to track where your cash flow is coming and going.

Because you can link it up to your bank account and get a bank feed operating, your bank tells FreeAgent what’s happening and then all you have to do is say ‘ok, that money came in from that customer, this money going out was for accountant’s fees..’ so you gradually build up a picture of your finances. You can also use it to issue invoices; I think that is really quite important. You can use it to send invoices to your customers, to track your time and your costs against a particular piece of work. Then it’s one click to pull those through on to your invoices and send the invoice to the customer. FreeAgent can also chase up invoices that have gone unpaid; you can set up reminder emails, you can also set up thank you emails to thank a customer who has paid you. Basically, it is a tool for day-to-day bookkeeping that you can use anywhere, so long as you’ve got an internet connection. If you’re a sole trader or Director of a limited company, you may well be able to use it to file your tax return to HMRC, as well as the VAT returns. If you’ve got employees, you can use it for payroll.

But in terms of complementing an accountant – what accountants like is to have customers who are keeping their books up-to-date and accurately, because then the accountant can say ‘well hang on a minute Rob, you’ve done this project here but you are actually making less profit on it than you have in the past. Do you think it’s time to put your prices up?’ Or, ‘Your bank charges have gone up this year and your bank has changed its terms, why not move bank?’ So your accountant can be offering you some really practical, helpful advice. But why would a freelance interpreter need an accountant? Well, because it goes back to this whole thing of you being an expert in your field, but you’re not necessarily going to know when you should and shouldn’t include the price of the cup of coffee you have while you are travelling in your books. Your accountant will, but you won’t necessarily know that, so you’ve got a friendly expert there that you can ask. That is the kind of thing that no piece of software will be able to tell by instinct, just looking at a receipt for two sandwiches from Marks & Spencer. They’re not going to know whether you are with your spouse, or with a client or an employee. No piece of software can ever know that, it is only a human who can know that. It is that kind of in-depth tax relief that you need the help of an accountant for, so that’s why I would say FreeAgent complements an accountant, rather than replacing them.

Rob: To clarify – bank feeds are the automated system that links FreeAgent with your business bank account?

Emily: Yes that’s right. If you have a Barclays business bank account then FreeAgent talks to your bank account directly. For any other bank, we use a third-party feed provider called Yodlee. FreeAgent talks to Yodlee, who talk to the bank and then send the data across.

Rob: So does that mean if you bank with Barclays, whatever happens to your account on a day-to-day basis is automatically fed through to FreeAgent?

Emily: Correct!

Rob: Emily, in your experience, what are the most common accounting mistakes that freelancers make?

Emily: That’s a very good question. There are lots of different mistakes that you can make as a freelancer, but I would say the classic one is either claiming too many costs in your accounts, or not enough. For example, you might not know that you can include part of your home running costs in your accounts if you do some work at home. You might not know when you should be claiming for things like food and drink when you’re out and about. We try to provide helpful infographics at FreeAgent to help you make those decisions; we can’t give you accounting advice ourselves because we are not a firm of accountants, we sell software, but we can at least provide you with some guidance to help you decide. Other errors I’ve seen people make are that people quite often get confused between what is being spent out of your business bank account and what is being spent out of your own back pocket. If you ever do get a visit from the taxman, one of the first things they’ll check is what do your accounts say is in your bank and what does your statement say is in your bank. If those two figures are different, then you can get the taxman asking ‘well hang on a minute, are you withholding income from us!? I think we should have a bit more tax…’ which is obviously not a good idea. I’ve seen that kind of mistake made, not so much by businesses who are using something like FreeAgent, but far more so in the days before I joined FreeAgent, when I was an accountant in practice. That was the kind of mistake that clients made which could potentially take hours, if not days to sort out. The other classic one is people invoicing for the wrong amounts – it is very easy to write £450 instead of £540.

Rob: There has been some confusion around digital tax returns and the need to file information quarterly. Can you talk about this a little and just offer some clarity? When will that begin and what is likely to be the main impact on small businesses and sole traders?

Emily: That’s a very interesting one because of course, the picture is not fully complete. We haven’t got all the pieces of the jigsaw; for example we don’t know how much detail the business is going to have to give on a quarterly basis, whether they will only be required to give one total figure for all their running costs in that quarter or whether they’ll have to break it down and say ‘ok, it was this much for travelling and this much for professional fees, and this much for premises costs’ We don’t yet know that, but in terms of the timescale, we do know that it’s going to start in April 2018 for any sole traders whose turnover is above the VAT threshold.

VAT threshold is going to be £85,000 from the 1st of April 2017. I would expect it will go up again in April 2018 but I don’t know for certain. From April 2019, any sole trader whose turnover, which is just a fancy way of saying ‘sales’, is between £10,000 and the VAT threshold, will fall into making tax digital at that point and that is also when VAT returns will have to be filed from making tax digital records. Limited companies get a bit longer. For a limited company, making tax digital won’t start until April 2020; that’s for corporation tax reporting.

Rob: Digital records are..?

Emily: So, that would be if you keep your day-to-day business records using a piece of software. We’ve not had a full specification for what a ‘piece of software’ means in that sense, there was some talk that the Revenue would accept records being kept on a spreadsheet, but we are yet to see what that will look like in terms of getting your information from the spreadsheet through to the Revenue. We can safely say that if you use FreeAgent, you’ll be fine. We have every plan to support it; that is something that our chief executive feels very strongly about and I would imagine that other online accounting software providers will follow suit. But as to how far down the line you have to go…Whether ‘software’ just means online accounting software or whether a desktop package that you connect to the internet once a quarter would also be acceptable. And how useful the spreadsheet will be..? Again, it’s all to play for.

Rob: Do you feel that the landscape has changed in the last five years for small businesses? Our members often report an increased difficulty with contracts; bookers honoring fees, getting paid on time, or bookers trying to negotiate a cheaper deal to the detriment of the service. As a service provider, we are often at the end of a long chain of purse string holders. So, say a Deaf person worked here and we were booked to interpret in this office, FreeAgent would claim money back from the government to pay us.

Emily: Yes, like statutory maternity pay. The answer is yes; I have seen that and obviously in the last seven years since I’ve been here, I’ve been more exposed to it. I have had reports from our customers that they’ve found it harder to get paid. They have had people say things like ‘oh we’re not going to use your work, can I just buy you a pint and call it quits?

Yes, you are right to shake your head. I think that’s dreadful behavior. If you’ve engaged someone to do some work for you, you should pay them and particularly if they are a small business owner. But you often hear stories of small business owners, who have for example won a contract with a large business. The small business says our payment is within 30 days, the large business says we never pay anybody until 60 days have passed and those are our terms, take it or leave it. And the small business owner’s hands are tied and I know the government is introducing this ‘small business Commissioner’, but personally I think that is a toothless wolf because the small business Commissioner isn’t actually going to have any power to make the larger business cough up.

Rob: And the IR35 ruling seems to be both a blessing and a curse for people who work as freelancers. Can you expand on what it is, who it will affect and what the likely implications will be for freelance interpreters?

Emily: I am interested that you said it would be a blessing and curse because I have yet to honestly see how it would be a blessing. But I will expand a little bit about it certainly. IR35 is basically a piece of law that says if you, as a freelance interpreter, have your own limited company (IR35 does not affect sole traders), you’re working through your own limited company and the company invoices your clients for the work that you do. If that company wasn’t there, if your limited company didn’t exist, you would be an employee of your client. Basically, you are an employee in all but name. A ‘quasi-employee’ is how I like to refer to it. What IR35 tries to do is to tax quasi-employees as employees, instead of allowing the contractor to invoice through a limited company, pay corporation tax through the limited company at its lower rate and then withdraw their money from the company in a tax efficient fashion, using a mixture of low salary and high dividends. Because there’s no national insurance on dividends, the contractor and the company between them, could end up paying less tax than they would’ve done had they been an employee of their end client. Also, the end client does not have to pay employer’s national insurance if they’re recruiting someone as a contractor not an employee. So, that’s briefly the change that is coming in at the beginning of April 2017. Up until now, it’s been the contractor’s responsibility to determine whether or not each of their projects is within IR35; in other words, whether they should pay tax as an employee on a particular project. Come the beginning of April, it is actually going to be the responsibility of the end client. If they’re within the public sector, so for example, if you’ve got a locum doctor working in an NHS hospital, it is no longer going to be down to the doctor to determine whether or not he or she is a quasi- employee. For freelance interpreters, I would guess if you are engaged by somebody in the public sector then you could well find yourself affected by the changes. You could find that your end client has to question you and put together a picture of how you’re operating. There is a questionnaire that has been released by the Revenue, that’s on their website, which aims to help contractors and their end clients work through whether or not they should actually be paying tax in a different way.

That’s how it might potentially affect you and also in terms of thinking back to the changes in the small business landscape, one thing that seems to be happening in recent years is that people who are in business on their own, whether that is as a sole trader or operating through a limited company, the tax seems to be getting more burdensome to these people in terms of how much you pay. The recent budget announced an increase in national insurance for sole traders, which was later repealed. I mentioned briefly the low salary, high dividend route that a lot of limited company freelancers take; they take enough salary to use up their personal allowance and make sure they qualify for the state pension, then draw a balance of their income as dividends because there is no national insurance on dividends. But the government has just increased the level of tax on dividends, which means that those contractors will be at a disadvantage. The government is all for making a ‘level playing field’ between people who are doing what it says are the same job as other employees or contractors. At FreeAgent, we take the view that they are overlooking the additional risks that contractors take; because as the contractor, of course you have got to find your own work, do your own invoicing and bookkeeping, find your own suppliers, do your own tax. And there are high business risks. Things like; if you go into work on Friday, you can be told not to come in on Monday if you’re a contractor. You just don’t get that as an employee and for a government that is supposed to be making Britain the best place to start and grow a business, it’s got a funny way of showing it in my humble opinion!

Rob: There are quite a few interpreters who just work regularly with one person for two or three years as a freelancer. What are the rules around that, do you know?

Emily: Yes, I do. The thing with IR35 is that it is very subjective. What one HMRC IR35 inspector might say points to employment, another might say doesn’t. Longevity of a contract used to be a possible pointer, but I don’t recall it actually being mentioned on the new questionnaire, which is interesting. What they’re looking for are things like: can the engager determine where, when and how the contractor does their work. How expert is the contractor? Because that obviously interplays with whether the engager can direct how the work is done. If the contractor is an expert, then there’s less scope for the engager to direct how the work is done. Control is a big part of IR35, but it’s not the only factor.

Rob: And FreeAgent has recently started floating on the stock market? Why did they decide on this route and how is it going? Will this have any impact on users’ experience?

Emily: We hope it will only make it better, floating on the stock market obviously gives us access to a much bigger pool of potential investors and so we hope that we will be able to continue growing; to grow rapidly, to develop the product, it means we get access to the best developers, the best marketing and communication staff, the best support staff and we can really focus on making the user experience as good as it possibly can be.

Rob: And I guess part of the user experience is offering free online events as well?

Emily: Yes we do!

Rob: We have had a few member questions. One was around claiming for meals when out and about. FreeAgent guidance seems to support claiming, but HMRC have regularly stated that claiming food and drink isn’t allowed. So what is the issue?

Emily: If you are a sole trader, the rules are quite a bit tighter than if you operated through a limited company. If you’re a sole trader, then HMRC take the stern view that everybody has got to eat in order to live and therefore your eating is part of keeping you alive as a human being, it is not necessarily a business cost and costs like that which have what HMRC call a ‘dual purpose’, they often stamp down on these quite hard. So for a sole trader, the rules are: when you are out and about on business you can claim cost of food and drink if a) you are away overnight, b) the journey is outside your normal pattern of business, but they don’t define any more clearly what that actually means and c) if your business is by nature itinerant. So they would use the example of something like a jobbing builder or chimney sweep – going from place to place to place to do their work.

If on the other hand you’re operating through a limited company, the rules are actually a bit kinder to you. You can claim food and drink whenever you’re out and about on business, away from your normal place of work.

Rob: We have got one member who regularly uses FreeAgent as a limited company; but still employs an accountant to manage the tax returns, write the letter of representation, manage dividends and salary statements. The accountant is also on a retainer to answer specific questions and to prompt them when to pay. Is it possible for a limited company to solely use FreeAgent without the need for an accountant?

Emily: In theory it’s possible, but we wouldn’t recommend it because there are so many potential pitfalls. Particularly when you’re operating through a limited company because even if you are the only person who owns and runs that company, it is still a separate legal entity from you. I like to think of a limited company as like your car – you own it, you run it, you drive it, you put petrol in it, but you never become the car. Physically it’s a separate thing from you, so from an accounting point of view, there are quite a few tricky things around that. Things like, how you can take money out of the company. Because there are rules on how much money you can take out of the company without having to pay extra tax on it and as an interpreter that’s not your field of expertise. Your field of expertise is interpreting, but your accountant will know that and be able to give you guidance. Equally, your accountant will be able to guide you around things such as ‘hang on a minute, if you take that much salary you’re going to be paying excess tax, why don’t you get the company to pay back some of the money it owes you instead and then you’ll save a bit of tax.

So that is why we do recommend our users do use an accountant, plus the fact that in FreeAgent, you can’t file a set of accounts to Companies House or file a company tax return to the Revenue. You can do your own tax return, but not the company’s. We are hoping to build that in the not too distant future, but it’s not there yet. So, typically people would use an accountant to do that, although it is perfectly possible to do it without an accountant.

Rob: Our final question asked about the benefits of setting yourself up as a limited company, compared to just working as a sole trader. If the company is just you, is it worth it?

Emily: That’s a very good question and the landscape is changing. It used to be, in terms of tax, a resounding yes. But the way that this government has changed how dividends are taxed, in particular, the advantages are much more marginal from a tax point of view. In terms of what the differences are; taxes are just one of them and to be honest, one thing that we accountants often say is ‘don’t let the tax tail wag the business dog’ – if you would save tax operating through a limited company, and this is when we consider you and the business in the round, if you would save tax by operating as a limited company, but you find that the paperwork is just too much of a pain or you can’t get your head round the idea of the company being a separate legal entity from you, then you might be better to stay as a sole trader. When you’re a sole trader it is a lot simpler to manage a business because legally a sole trader and the business are one and the same; there is no separation. So you can empty a business bank account as a sole trader and the Revenue don’t care. What the Revenue do care about when you’re operating through a limited company is money changing hands between two different legal entities. You haven’t got that as a sole trader, but equally what you’ve got to remember is that if, as a sole trader, your business is sued then your own personal assets could potentially be at risk – your house and your car. I have never known a sole trader’s assets to be seized for their business debts, but it is possible.

Rob: I wonder how many of our members know this?

Emily: It’s possible, but as I say, it is very rare. I have never known it to happen but when you operate through a limited company, if the business is sued, it is only the company’s assets that are at risk. Unless, as the Director, you’ve given your personal guarantee. So you might well have to do that if you want to take out a loan; your bank may say ‘ok, we’ll make the company this loan; if the company can’t make the repayments, you’ll have to.’ And if you then fail to make the repayments, then the bank can take your house and your car to pay the debt. Also, if you as a Director are found guilty of wrongdoing, the company’s debts can, in some cases, become your own. So if you basically empty the company’s bank account and high tail it to Barbados and leave the company’s debts unpaid, then expect the Revenue to come after you.

So it is not a clear cut choice is what I would say. Time was, there was a very big tax differential between operating as a sole trader and operating through a limited company and lots of small business owners ‘incorporated’, in other words turned their businesses into limited companies, but then found themselves hugely out of their depth with the paperwork.

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