TaxInsider Blog 1 - The difference between legal and illegal dividends
Blogs – Accounting Insight News
Dividends are a reward given to shareholders for taking the risk of investing in the company. Payment is not automatic and in the absence of any provision to the contrary, dividends must be paid in proportion to the shares held by each shareholder of each class of share.
A dividend is paid from retained profits made by the company therefore if no profit has been made over an accounting period or there are no undistributed profits brought forward from previous years, generally no dividend can be paid. Even if the bank account is in credit the company needs to have sufficient retained profits to cover the dividend at the date of payment. Any dividend paid in excess of this profit, or out of capital or when losses are made is ‘ultra vires’ and, in effect, ‘illegal’ (termed ‘unlawful dividends’ in the Companies Act 2006). Therefore, technically, every time a payment is made management accounts should be prepared to confirm that there is enough profit to support the payment.
The consequences of a dividend being designated as being 'illegal' will depend upon the status of the company. If the company goes into liquidation the liquidator or administrator reviews the past three years accounts and if it is found that a dividend has been paid ‘illegally’ then directors will be expected to personally repay the dividends payments made. If the liquidation is of a family or owner managed company it could be argued that the directors should have known or at least been aware (or had reasonable grounds to believe) that such a payment breached the conditions laid down by the Companies Act 2006 and Insolvency Act 1980. A director can also face liabilities for the breach of duty associated with authorising the payment of an unlawful dividend.
If the company is not in liquidation rather that HMRC are making enquiries into the validity of the dividend if they find that a dividend has been made 'illegally' then they will invariably try to reclassify the dividend as either salary or a loan to the shareholder. If reclassified as salary, then they will demand Income Tax and National Insurance payments on the amount each shareholder received. Conversely HMRC could take the stance that rather than being a dividend, the payment was in effect, a loan under s455 CTA 2007, the consequence being that the company would be charged 32.5% of the gross amount paid unless repaid within nine months and one day of the company’s year-end. After the original loan is repaid the s455 charge can be reclaimed but not interest.
If reclassified as a loan, not only does the amount become repayable but either interest will be paid on it by the shareholder, or they may be liable to income tax on the benefit-in-kind received should all loans received in the tax year total in excess of £10,000. The company will also be liable for employers National Insurance contributions. If all loans are less than £10,000 in the tax year, no benefit in kind charges apply.
If the shareholder is not a director in the company, they may only be required to repay an 'illegal dividend' if they know or have reasonable grounds for knowing that it was made illegally when the distribution was made.
Having 'illegal' dividends showing in the company accounts can make the company look insolvent having negative balances on the balance sheet which could affect the company’s ability to gain credit from a lender or suppliers and may breach current agreements with lenders or supplier.
Transferring property into a trust – tax implications TaxAssist
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Trusts are created for a number of reasons but with reference to property that reason is invariably for protection.
The beneficiary may become unable to manage the property themselves or become mentally incapable of doing so or be a minor who is unable, as yet, to take on responsibility for the property themselves; the donor may wish for the property to remain within the family which might not necessarily be the case should the beneficiary become bankrupt or divorce.
Whatever the reason there are capital gains tax (CGT) tax implications on the transfer of property into the trust because the settlor is treated as having disposed of the property as a gift at ‘market value’ at the date of transfer. The ‘market value’ rule applies because the settlor and trust are deemed to be ‘connected’.
'Hold over’ relief may be available which effectively allows a chargeable gain to be deferred (‘held over') and passed to the recipient of the gift (in this case, the trust itself) until either the property is sold or transferred out of the trust or the trust ceases. The charge is on the increase in value from the date of transfer into the trust and the final sale proceeds as usual, but the CGT ‘hold over’ amount is added to the final amount payable. Broadly, where trusts are involved, ‘hold-over’ relief is only available on a transfer that gives rise to an inheritance tax (IHT) liability (such as a gift of property into a 'discretionary' trust) or on the transfer of business assets. The settlor must be UK resident for this relief to be claimed.
Should CGT be charged the calculation is after deduction of the annual exempt amount for trusts, taxed at 18 per cent (20 per cent if the transfer is of residential property).
No CGT is charged on the transfer of property into a trust created on death (a 'Will Trust'). In addition, for the purposes of any later CGT liability, the acquisition cost by the trust is deemed to be the value at the date of death, thereby creating a ‘tax-free uplift’ in the base cost of the asset.
'Will Trusts' are treated as being a disposal of part of the estate’s assets subject to the Nil Rate Band and seven-year rules. In addition, any estate which includes a property that at some time during its period of ownership had been occupied by the deceased as a main residence, downsized to a less valuable home, sold, or given away after 8 July 2015, qualifies for an additional allowance named the Residence Nil Rate Band' ('RNRB) so long as the residence is transferred into a specific type of will trust; e.g. an IPDI trust for a lineal descendant (or their spouse/civil partner).
HS295 Relief for gifts and similar transactions (2015); TCGA 1992, s 165
Inheritance tax : timing is everything
Mark McLaughlin points out that inheritance tax business property relief can easily be lost due to the timing of certain transactions
Business property relief (BPR) is a potentially generous form of inheritance tax (IHT) relief, which can reduce transfers of ‘relevant business property’ (e.g. shares in an unquoted company) during lifetime or upon death at rates of up to 100% (or alternatively 50%), if certain conditions are satisfied (IHTA 1984, ss 103-114).
However, BPR will generally be denied if there is a ‘binding contract for sale’ of the business property at the time of its transfer (IHTA 1984, s 113). This is an anti-avoidance provision. The underlying principle of BPR is that relief should be available in respect of relevant business property, but not cash.
For example, if a chargeable lifetime gift of unquoted shares (on which BPR is claimed) was followed shortly afterwards by a sale of the company, it might be argued that the gift was effectively a transfer of part of the company’s sale price. HMRC may seek to apply the anti-avoidance rule in such circumstances (see below).
Not ‘caught’
There are two specific exceptions to the anti-avoidance rule on contracts for sale. The first exception can apply to some business incorporations, i.e. if the binding contract is for the sale of a business (or business interest) to a company which is to carry on that business, where the consideration is wholly or mainly the company’s shares or securities. It should be noted that an incorporation in the form of a business sale wholly or mainly for cash is not within this exception.
The second exception relates to company shares or securities, where the sale is made for the purpose of reconstruction or amalgamation (IHTA 1984, s 113(a), (b)).
Lifetime transfers shortly before sale
HMRC is alert to BPR planning such as chargeable gifts of business property made shortly before its sale to a third party (See HMRC’s Inheritance Tax manual at IHTM25291).
In the above example of a chargeable lifetime gift of unquoted shares followed by a sale of the company, the BPR position might be “carefully checked” by HMRC to see if there was a binding contract for sale at the date of transfer. If there was a binding contract, BPR will generally be denied. HMRC guidance (in its Shares and Assets Valuation manual at SVM111120) suggests that the following cases will be subject to close scrutiny:
Lifetime transfers where a sale of the company (or of part of the share capital including the transferred shares) occurred within six months following the transfer; and
Any other such case where a sale occurred outside the six months period, but the circumstances suggest that the sale may have been in prospect at the time of the lifetime transfer.
In those circumstances, HMRC is likely to request any paperwork relating to the original transfer of the shares, together with the subsequent sale of the company, to determine whether a binding contract for sale existed at the time of the original transfer.
Look ahead?
The binding contract for sale provisions were not in point in Swain Mason and others v Mills & Reeve (A Firm) [2012] EWCA Civ 498 as the share disposal in question had already taken place, but the case highlights the importance of considering the timing of business sales for BPR purposes in the particular circumstances. In that case, the claimants were executors of their late father’s estate. The deceased (CS) was the managing director and majority shareholder of a company, which was the subject of a management buyout (MBO) completed on 31 January 2007. CS had a history of ill-health, and he sadly died in February 2007 shortly after being admitted to hospital for a heart procedure.
The proceeds from the sale of the deceased’s shares became liable to IHT, whereas if CS had died while still owning the shares, no IHT liability would have arisen due to BPR. A claim of professional negligence was made against the defendant firm on the basis that, if due advice had been given, completion of the MBO would have been deferred until after the heart procedure. However, the court held (among other things) that the defendant firm had not been asked for advice on the potential tax consequences of CS’s death in the light of his forthcoming heart procedure. The claim was dismissed.
No binding contract
HMRC accepts that, in certain specific circumstances (which are not considered in this article), particular types of agreement (e.g. options to purchase) may not constitute binding contracts for sale so as to prevent relevant business property from qualifying for BPR under the anti-avoidance provisions in s 113 (see HMRC’s Shares and Assets Valuation manual at SVM111120). However, care is needed, and expert professional advice should be sought if necessary.
- Mark McLaughlin CTA (Fellow) ATT TEP is a co-founder of www.taxationweb.co.uk – see www.markmclaughlin.co.uk. This article was first published in Tax Insider (www.taxinsider.co.uk)
More career advice for the newly qualified accountant Scott Lowes Levitate
Candidate pool and competition for jobs
As external audit is a specialist area, accountancy firms are unable to hire just any qualified accountant. They need people that have relevant experience in audit within certain sectors and people that have years of experience in working with a range of reporting standards. Since the day I started recruiting in practice (over 10 years ago) there has always been a shortage of experienced auditors both in the UK & overseas, which means there is a great opportunity for you to capitalise on this and push on into a more senior role.Within industry, this is a totally different scenario! Yes, there are roles available for NQs to secure but the competition for these roles is extremely high. You will be up against people from all different backgrounds that have worked in different firm environments and within different sectors. Many of the larger FTSE firms will have some criteria based on the career path they have followed and will generally seek out Big 4 trained professionals or those with a specific sector background.You will also find you are not only up against newly qualified individuals from practice but a much larger candidate pool of people that have either trained in industry or those that have already made the move and now have industry experience. As an employer looking to make the best hire, it is much easier to take a safer bet and employ someone that already has industry experience and is settled in that environment rather that a practice first time mover who hasn’t had this experience and may require some further on the job training.Touching on the point above: Remaining with your current employer where you have built a legacy and proven loyalty will generally be respected and rewarded. If you are making a move into industry with a new employer then building loyalty and trust is back to the start.Moving to another practice firm For some of the people we speak with about their next step, it needs to be totally different. They need a change as they really do not enjoy the area of accountancy they are working in. Some leave accountancy all together as they realised early on that it wasn’t for them but didn’t wish to lose the time they had invested in working towards the qualification. Others that need a change will often work out that it’s not the work that is making them unhappy and clambering for change but the environment they are working in or the people they are surrounded by. Some are unable to work this out for themselves so it is important that you take time to consider the pros and cons of your role so that you can understand what it is that makes you unsettled. If you are struggling with this then speak with a specialist recruiter who can assist you to break down what you do and don’t enjoy.A move to a new firm and role provides a new start and is often viewed as an opportunity for you to shine and progress. As an experienced consultant, We will always advise everyone we speak with to sit down and speak with their current firm about their career path and what is on offer as it’s impossible to make an educated decision if this hasn’t been explored. If we are being totally honest, it’s also a way of protecting our time as firms do not wish to lose employees and 9 times out of 10 will sit down with their employee after they have tendered resignation to work out what they can do keep them before providing a counter offer to keep them. It is always the first place to start when considering options but we will also advise people to at least consider speaking with other firms at the same time so that they can get a better view of what else is on offer and how this compares to what is available within their current firm. Those that do this can then confidently move forward in their career knowing they have researched and considered all options before making a commitment.Working OverseasAchieving ACA or ACCA status means you can literally work anywhere in the world that recruit’s accountants. Most of the major International cities will have the same Top accountancy firms you would expect to see in the UK. If they don’t then there will most certainly be some kind of affiliation to one that you know. As in the UK, qualified accountants from a practice background are always in high demand and there is no better time to make an international move than at newly qualified stage as this is when you are viewed as being ‘the most flexible’. Moving at a later stage in your career is still possible but there will always be less opportunities to consider. We also find that the older someone gets then the less likely an International move will be as their situation changes and can sometimes dictate available options.Making an International move in industry is possible but is less likely if you do not have prior industry experience. As a recruiter that has assisted people to move all over the world to places such as Australia, New Zealand, The Caribbean, Canada, Luxembourg, Switzerland and South Africa, we have never once spoken with a newly qualified accountant from practice that has successfully made this international move without travelling over to work in a practice firm first. My advice is to make a move for a minimum of 12 months in a similar practice role and then make the move into industry. This way, you will have more locations & opportunities to consider, the move will be smoother as you are doing something you know and you will also have a chance to gain understanding of any differences there are in accounting rules and processes whilst working with a wide range of specialist accountants.As a specialist recruiter for accountancy practice roles, we will of course lean towards remaining in practice as a great option. We have seen the benefits of further training and career progression and witnessed people progress from newly qualified to Director and Partner level. Whilst this is the case, Industry also offers people great opportunities and we have also seen many people make great moves where they have progressed to FD and even CEO.If you are unsure about your next step then we are always here to assist and provide advice. It may be that you want to consider both options and if this is the case then the best option is to also speak with recruiters that specialist in industry roles and try to meet with several firms that can offer you a different outlook on how your career can progress and develop. If you do your research and take your time then hopefully whichever way you go will be the right direction for you.
TaxInsider log 2 - Principal Private Residence – proving PPR
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The sale of any property is taxed under the capital gains tax (CGT) rules unless covered by exemption or subject to a specific tax relief. Private residence relief (PPR) is one of the better known and well used of such reliefs. However, we are so used to saying that the sale of a main residence is CGT-free that we are in danger of forgetting that there are two conditions that must be satisfied for a claim to succeed:
- the property must not have been purchased for the sole reason of making a profit (note the word ‘sole’) and
- the property must be an individual's only or main residence throughout the period of ownership (note the phrase ‘only or main’).
Legislation does not define exactly what constitutes a ‘residence’ but the courts are looking for “permanence, ... a degree of continuity and expectation of continuity to turn mere occupation into residence.” When considering whether a property is PPR exempt HMRC will not only look at the length of ownership but also what could be termed as 'quality' relying on the text in HMRC’s Capital Gains Tax Manual CG64441 which states that “occasional and short residence can make a residence; but the question is one of fact and degree.” However, in practice, the longer the better does appear to be the rule. Recent tribunal cases reveal that HMRC are querying situations where a property is being renovated before sale and as such can only be lived in for a (relatively) short period.
However, that does not mean that living in the property for a short period denies relief as the case of David Morgan v HMRC (2013) shows. The taxpayer and his girlfriend were engaged and (importantly) both names were on the mortgage offer. The couple split up, but Mr Morgan continued with the purchase, moving into the flat for two weeks, specifically to prepare it for renting. The tribunal found that, notwithstanding the short period, he actually lived in the property and had intended to occupy it as a residence, the proof being that his girlfriend's name appeared on the mortgage deed.
Recently HMRC have been targeting self-build builders, questioning whether the property really has been built with the intention of being the main residence. If a self-builder repeats the process of building, moving in and moving on, rolling equity gains into subsequent houses each time they could avoiding CGT. HMRC may take the view that the self-build has become a business and seek to tax the gains as income particularly if no other sources of income can be demonstrated or the person actually doing the self-build is working in the building trade already.
HMRC will require proof that the property has actually been lived in as the PPR. The following are suggestions:
- Documentary evidence in particular utility bills in the owners' name at the property address. Other receipts for home insurance, telephone bills, DVLA records or credit reference agency records should be kept.
- The property address being on the electoral register in the owners' name.
- Receipts confirming purchase of furniture and so on for the property e.g. delivery confirmation proving delivery to the property address under the owners' name.
- Bank accounts registered at the address.
- Confirmation that the mortgage plan has reverted back to a standard plan and away from a ‘buy to let’ mortgage, if relevant.
A final suggestion is for the owner to introduce themselves to the neighbours to let people know who actually lives there.
'Anti phoenix' companies - HMRC clarify the rules Tax Assist
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Payments made to shareholders are deemed to be distributions and taxed as income. Payments made to shareholders under liquidation are not distributions rather being taxed as a capital gains tax disposal of an interest in shares. This will be the case so long as the company has been liquidated for genuine commercial reasons (e.g. cessation of the business or following the sale of the trade and assets to another entity that is under substantially different control) and particularly where the liquidation is not motivated for tax reasons.
However in recent years, the beneficial CGT treatment has led to an increased use of tax-driven 'phoenix' arrangements whereby a company is liquidated, shareholders withdraw profits receiving a capital distribution (often enabling a claim to CGT entrepreneurs’ relief taking the tax rate down to 10%) and then the shareholder sets up another company in a similar field and the process is repeated.
The Finance Bill 2016 introduced the Targeted Anti Avoidance Rules (TAAR) to counter this practice and tax the distribution as income rather than a capital gain should four conditions apply:
- Condition A: the shareholder held at least 5% of the shares in the company immediately before the liquidation
- Condition B: the company was a close company at some point during the two years ending with the liquidation
- Condition C: the shareholder continues or is involved with, the carrying on of the same or a similar trade within two years following the date of the distribution
- Condition D: it is reasonable to assume that the main purpose (or one of the main purposes) of the winding up was the avoidance or reduction of income tax
Condition D is assessed by reference to intentions at the time that the decision was made to wind up the company. HMRC will also treat events occurring after the winding up as evidence and will want to look at all available evidence when assessing the main purpose.
Condition C has proved to be the main restricting condition not least due to the lack of clarity from HMRC. However, HMRC have become aware of schemes that have been devised whereby promoters claim to counter Condition C and in the past year have issued updates to its guidance on the TAAR in its Company Taxation Manual and last month published "Spotlight 47" entitled "Attempts to avoid an Income Tax charge when a company is wound up". "Spotlight 47" acknowledges that such schemes claim to circumvent the TAAR legislation by artificially modifying those arrangements which the rules target. An example would involve the selling of a company to a third-party company rather than liquidating. The third-party company pays for the target company by receiving a dividend from the target company; the individual shareholder carries on trading but using a different vehicle. The idea is supposed to work on the basis that no liquidation has taken place (and therefore 'phoenixing legislation' is not in point) and also because the transactions in securities legislation does not apply because the sale is to a third party.
HMRC consider that these schemes do not work, and as well as quoting the TAAR rules have confirmed that they will consider whether the General Anti-Abuse Rules apply, which could result in a 60% penalty. "Spotlight" states that for arrangements entered into on or after 16 November 2017, HMRC will also consider whether an 'enablers' penalty could be applied to anyone who has enabled the use of this type of scheme. The penalty amount will be equal to the amount of consideration received for enabling the arrangements. The user of the scheme may also be subject to penalties for filing an inaccurate return, with penalties of up to 100% of the undeclared tax.
A day in the life of Accountex Norths' sales manager
This post introduces Accountex and Accountex Norths' sales manager Rachel Gregory. Here she talks about what she gets up to on a daily basis. Read more
Accountants' guide: Where to start with marketing (Tide)
You’ve taken the leap, left the safety net of your full time job and started your own business. You know your product or service inside out and everyone you know tells you it’s a great idea.
Then it starts to get sticky.
You need a website, you’ve signed up to ALL social media sites, a friend has done some business cards and told you that you need to be better at marketing if you want to be a success.
That’s when you start to panic.
Marketing.
First Things First
Well, the clue is in the name: MARKETing… it’s about understanding your market.
Do you understand your customers?
Facebook promotions, Instagram posts and ads in your local paper are all tactical outputs of marketing, but they should all flow from the starting point of understanding your customer.
Success Starts With Strategy
The first step to marketing nirvana is to create a marketing strategy. Strategy conjures up images of huge documents, board rooms and dour consultants. You can take this approach, but for most start ups, I’d advise against it.
Instead, to create a marketing strategy, just answer these three questions in as much detail as you have:
- Who is going to buy what you’re selling?
- Why are they going to buy it?
- What are your SMART objectives?
When you’re answering these questions use your own experience, but also talk to people to get their input.
Avoid family and friends, they’re usually the least critical audience you’ll ever have. Instead, get groups of people who fit the profile of your customers and talk to them about the problems they have and how they solve them. Talk to customers (and potential customers) to understand their pain and how you can fix it.
SMART objectives are also crucial, they’re not just a line from a bad management handbook. SMART stands for Specific, Measurable, Attainable, Relevant and Time-bound and they help sense check the assumptions you’ve made about the target market. They’ll also help you budget and understand what you need to sell to stay in business.
And finally, make it visible. Put the highlights on a wall in your office, see who you’re talking to every day and know what your objectives are – it helps keep the customer at the heart of what you’re doing.
Move Fast And Break Things
Facebook once had a motto of move fast and break things, which is useful, to a point, for your marketing.
Once the new marketing strategy is stuck on the walls, many small businesses are left paralysed. They are overwhelmed by the plethora of channels available and end up doing nothing.
I can’t tell you if your marketing strategy is right or if your marketing strategy is wrong. But I can tell you that if you don’t implement your strategy, then it will never work.
Get started. Look at the analytics. Review what you’ve done. Track where the sales are coming from. Ask your customers how they heard about you. Use this data to improve what you’re doing. Don’t be afraid to kill things if they’re not working.
Tide Banking <> Andi Jarvis, Strategy Director and Founder of Eximo Marketing
Accountants face client software challenge
Research highlights a trend of accountancy firms struggling to move clients to digital bookkeeping. IRIS has found three in five (61%) practices believe the greatest challenge is to move clients to software.
Given the conflicting reports on the readiness of UK SMEs in the run up to MTD, it is now clear most accountancy firms will continue to provide core compliance services. The IRIS survey revealed nearly two thirds (60%) of practices will provide bookkeeping services – especially those using paper receipts and invoices.
Nick Gregory, IRIS chief marketing officer, says, “Regardless of the countless reports on the readiness of eligible businesses, accountancy professionals are still relied upon for core compliance services. Many SMEs are worried about the time and cost of adopting a digital approach to tax and compliance. As a result, they have - and will continue to - ignore pleas from their accountant and HMRC until absolutely necessary.”
There can be several reasons why businesses resist adopting a digital approach to tax compliance. Matthew Rawles, senior manager at GCSD Accountants, has found a huge lack of enthusiasm from owner/managed clients. “Especially in family-owned businesses, it’s often a non-IT literate parent, sibling or close relative who undertakes the bookkeeping. As the company evolves, they are reluctant to let go of the reins, especially when change is imposed at a cost.”
However, moving clients to digital bookkeeping is not akin to walking through treacle for every practice. Business leaders who have grown up with IT see the digitisation as positive, especially in areas such as bank reconciliation and receipt capture. Rawles continues, “the younger generation of business owners are used to IT systems, so love the idea and convenience of digital bookkeeping.”
IRIS has identified a knock-on effect in practice investment with over two-thirds (66%) of respondents investing below £1,000 to become MTD ready. Two in five practices (39%) have not changed practice technology and will be relying on bridging software; and almost half (48%) have invested in accounting software for use by clients.
Linda Gibson, director, Gibson Whitter, constantly evaluates practice technology and believes bridging software is a temporary measure. “We always look to improve our practice technology. Our firm is growing quickly, so it’s logical to identify efficiencies and increase productivity wherever possible. Especially when it comes to compliance work; using solutions such as receipt-capture software is a no-brainer. However, we have steered clear of bridging software as much as possible, as it’s a short-term fix. We wouldn’t advise taking any client down this road in the long term.”
IRIS Software Group also asked accountancy professionals if Brexit has impacted business plans and practice investments. Nearly three quarters (73%) of firms surveyed said Brexit has not impacted business plans and 87% said investment has remained the same.
Both GCSD and Gibson Whitter agree that Brexit has not made any day to day difference in their respective firms. Matthew Rawles says, “There are a few clients who we know will be impacted, but we cannot provide any specific advice until we know the outcome; if of course, there is one.”
Nick Gregory concludes, “Accountancy firms can make commoditised work pay and liberate fee-earners to add more value. Given the MTD news in the Spring Statement surrounding the light touch approach to penalties in the first year, we see opportunity for everyone.
“Bookkeeping software will be a fundamental tool in the future, so practices should use the ‘soft-landing’ period to encourage as many clients as possible to adopt a digital approach. This will free up time for the practice, allowing them to build on compliance services and capitalise on unexplored revenue opportunities.”
IRIS Software Group surveyed 231 accountancy professionals in early March 2019. Two-thirds of practices surveyed have 250 clients or under.
Accounting looks to a digital future
The entire business world is going digital and accountancy is no different, driven by advances in technology and constant changes in regulation.
The role of an accountant, once perceived as a number cruncher, has already evolved to encompass new skills, with even more of a focus on technology and relationship management.
To further explore the pace and impact of technological change over the next decade, in June of this year, Thomson Reuters commissioned research into the views of senior-level accountants in practice. Most of the 345 respondents work for an accountancy practice with fewer than ten staff and just over three quarters hold a senior level role within the firm.
In addition, Thomson Reuters also invited a range of experts to share their views on the findings for their Accountant of Tomorrow report. The report explores accountants’ needs, wants and visions for the future.
The findings
Over 95 per cent of accountants surveyed stated that their role was likely to change due to technology. Some 74 per cent of these understand this change to be very likely; displaying an acceptance that technology will indeed continue to play a pivotal role in the future of accountancy.
Stephen Pell, founder of Pell Artists Accountants and one of the selected experts, sees technology as a positive for the profession. He said: “Technology is going to make life much more enjoyable and rewarding for an accountant, only bringing benefits to them as an adviser, and to their clients.”
However, many are concerned about the challenges that come with the digitisation of accounting over the next 10 years. A significant 25 per cent of participants were concerned about the digitisation of the tax authority, in particular Making Tax Digital, the government’s recent digital tax system. Some 16 per cent were extremely concerned about choosing the right software, while almost half (47 per cent ) were somewhat concerned with their software choices, giving the impression that digital tax is still a grey area for accountants.
Within the report, Thomson Reuters commented that with the significant progress in the next 10 years to move clients and practices online, cloud technology would be the most significant driver of change in the role of being an accountant. The report went on to comment that, in the same way as the anticipated requirements for Making Tax Digital, one of the consequences of cloud accounting would be the use of real-time data and more in-depth analytics.
Reflecting this, when asked which three specific advancements in technology would change their role in the next ten years, 67 per cent of accountants cited cloud-based systems, while 52 per cent highlighted the use of real-time data and more in-depth analytics. Also featured on the list of advancements were greater integration between the applications we use and artificial intelligence (AI), or machine learning.
But how will this digital influx directly impact services, and will digital free up accountants’ time – or will it impede day-to-day tasks?
When asked if participants’ time spent on standard tasks would be more, less or stay the same, most agreed that compliance exercises would see a very considerable reduction in the time required per task. Bookkeeping was viewed as the task that would most benefit accountants through digital technology. Personal tax and company tax were tasks considered to be eased the most following digital changes, whereas accounts preparation and VAT review and submission, albeit slightly less, were also deemed to be those that could be ‘digitalised’ in order to free up accountants’ time.
Automation is key
Since the introduction of digital processes, many have fought with the emergence of technology – and have been arguing that ‘robots will take our jobs’. Instead of feeling threatened by automation, it should be embraced as a means to spend time on more challenging (and chargeable) work. As Freddie Faure, co-founder at CooperFaure Accountants, argues: “Machines can only do so much, but they can’t think and they can’t interpret information. You would still need an accountant to do the critical assessments and understand how you can use that information to help the business in the future.”
When asked which critical accountancy tasks are most likely to become automated by technology in the next ten years, bookkeeping came out top, with 78 per cent of those asked agreeing that it was the most likely. Other common choices for tasks most likely to become automated were data collection and tax return submission/filing. On the other hand, those tasks deemed least likely were client communication, business plan creation and auditing.
Each of these findings lead us to deduce that the introduction of digital software will not hinder an accountant’s workload, but will instead allow more time for advisory tasks, planning, business development and nurture of the client/accountant relationship.
While accountants predict that technology will indeed absorb more traditional accountancy tasks, those such as advisory services and business development will take more time – although accountants foresee advisory to be a critical knowledge area and one with the greatest potential for growth.
Integrate new skills
Participants were asked how their role would evolve over the next ten years. Almost all agreed that they would need to integrate new skills and capabilities into their role, that their firm’s business model would be different in 10 years and that they themselves would become more efficient due to technology.
Just over 25 per cent agreed that their firm would outsource more compliance work in 10 years time. Some see this as positive – tasks absorbed through technology will ease their workload, whereas others worry that fewer accountants will be needed as a result. One thing all agree on: the world of accountancy will change.
Jon Cooper, co-founder of CooperFaure Accountants, says: “We’re at the start of a pivotal 10 years, with the advances in technology and artificial intelligence only likely to accelerate. It’s a game changer that could cut down the headcount for both accountants and businesses with in-house teams.”
So how can the ‘accountant of tomorrow’ prepare for the future? They must be open to changing core elements of their firm, such as technology, processes and their business model. Keeping clients compliant will continue to be at the heart of their offering, but much of the work to complete these tasks will be automated. More accurate and timely data will provide opportunities to offer more forward-focused services, and could cause accountants to adjust their business model.
Software partnerships will also be key in the digital age. As technology facilitates the digital world, Thomson Reuters is already working on the solutions needed to take accountants through the next 10 years, with the increasing use of real-time data and ever-changing regulatory requirements.
Download the ‘Accountant of Tomorrow’ report.