“Which accounting software should I use for my business?” It’s a question my team and I get asked all the time. The real question is:
“Do I actually need it at all?”
The honest answer for some businesses is no, you don’t. BUT (and it’s a big but) if you don’t get this right, you are either:
- Potentially breaking HMRC’s rules without realising it
Or
- Spending £30+ a month on software that a spreadsheet could’ve done for free.
So, in this article we’ll cover your choices, including:
- What records HMRC actually requires
- When spreadsheets are great – and when not
- How to pick the right software if needed
Legal requirements and accounting software
There is no legal obligation to use accounting software for your business, but you do need to comply with HMRC requirements.
- The Making Tax Digital for VAT rules require VAT registered businesses to keep digital records of all transaction data, including dates, names, values of your income and expenses.
- The Making Tax Digital for Income Tax rules catch out many sole traders not keeping full digital records when their self-employed TURNOVER exceeds the current threshold. (more on this in this full video guide on the subject.)
Both Making Tax Digital (MTD) rules require you to submit regular returns to HMRC. There is no government supplied free tool for this, so you need your own solution.
You can use a spreadsheet to keep your records, but you need to consider whether a spreadsheet will
- Do the job you need it to,
- Cost you more time (and money) in the long run
The pros and cons of spreadsheets
A spreadsheet alone will not enable you to send HMRC regular MTD returns. You can buy ‘bridging’ software that links to your spreadsheet to do some of these returns. However, for sole trader MTD, many solutions can’t do the final HMRC annual return, so you are better off with ‘proper’ accounting software that can.
The biggest challenge with a spreadsheet is that in 95% of cases we see, the file is only a record of income that was paid and expenses that were paid out.
If you are a sole trader and:
- Has less than £20,000 turnover (and therefore does not need to worry about MTD)
- Is not VAT registered
- Prepare your tax return on the ‘cash’ basis (this is the default)
A spreadsheet may be sufficient as you only need the total income and expenses figures, to put in the boxes on your tax return.
Not the whole story
Basic spreadsheets only provide half of the story. Most spreadsheet we see just use the business bank transactions, and show what was received and what was spent. We call these ‘single story’ sheets as they don’t cover important transactions such as:
- Invoices issued but have not yet been paid
- Bills you’ve received but not paid yet
- Stock you’ve paid for, but not sold yet
For small sole traders this may be sufficient, but for a limited company, there is a big difference, regardless of how much you’re bringing in.
Why buy accounting software for your limited company on day 1
With a limited company, every penny matters as all the money is the company’s money. To be compliant with HMRC and the accounting rules, you need a complete overview of all your financial transactions including unpaid invoices or bills, so you can calculate your profits, and work out the tax bill.
It’s also important to understand your business numbers and to know with confidence
- If you are really making money
or
- How much money is (in theory) available to pay you.
The right software will show you this information, something most spreadsheets won’t do, and in semi ‘real time’ too.
Save time with automatic bank feeds
One of the key (and cool) features of accounting software is automatic bank feeds. You can connect certain bank accounts to your accounting software, and it brings all of your statement data in each day. This is a massive timer saver as you are not typing in every date, name and amount manually. So it’s important to pick a bank account that connects to your accounting software (or vice versa!).
In our experience…
AI assisted software can learn what a given statement line is, based on your initial manual allocations. For example, if you normally allocate Starbucks expenses to Travel & Subsistence, the software will suggest this next time.
However, as with all things AI, it gets things wrong, so you may not want to switch on the suggestions features quite yet. Only this week a client with the auto feature on saw the AI guess that an £80,000 payment to the owner was a £100,000 USD transaction for bank fees…
Invoices and spreadsheets
One study found that the average UK small business is owed £23,000 at any one time. This is a big problem for many. Sending invoices via accounting software will help you get paid quicker.
In our experience….
One of our electrician clients now sends his invoice from his van before leaving the job. (Previously he waited to do them all in a batch on a Sunday night.) It’s been a game changer for him. He simply added payment links and a PAY NOW button to the digital invoices enabling his clients to pay straight away with a card. He now gets paid on average 10.3 days earlier than before.
Picking the right accounting software for your business
Not all software is built equally. At a basic level they all capture data so you can make your business records and collect evidence if you ever need to show it to HMRC. However, some software offerings are not fully double-entry, so they only show you half the story. These include some of the “glorified spreadsheet” with some time saving features built in, often offered by banks.
Ideally, you want general ‘ledger’ software that captures the ‘full story’, such as Xero, Quickbooks, Sage and FreeAgent. From our experience, you need to consider four key ‘buckets’ of features.
🪣Bucket #1 : What do you need to send and receive from the system?
Think about how your business operates.
- Do you need to send invoices?
- Do you need to be able to enter bills due (if you pay bills later than when you get them)?
- Can you attach receipts (and how easy is that)?
- Can you send bills / purchase invoices by email?
In our experience….
Be aware that key features might be capped in the cheaper plans. For example, Xero ‘Ignite’ is capped at 20 invoices per month, which is only relevant if you send invoices. However, for growing businesses, 20 may soon not be enough.
🪣Bucket #2: What do you need to connect to?
You need to make sure your bank account can provide a direct feed to the software. Otherwise, crucial time savings disappear as you will likely have to export your bank statements and upload them into the system manually.
In our experience….
Other connections will depend on your own workflow needs. You might have a CRM or booking system that creates clients invoices when they book in and pay. The CRM system could potentially send a copy of those invoices direct to your accounting software. However, not all software companies build their product to connect to every accounting platform.
🪣Bucket #3 : Who needs access?
You need to consider how many people require access to the software.
- Are the number of users (desks) capped?
- If you want to add more, how much is the upgrade to do this?
- Can your accountant access it, and do they have a preference themselves? You might get a discount on their fees if you use the same software as them.
🪣Bucket #4: The niche features
You may also need particular features for your business including:
– Multicurrency
Do you have various bank accounts in other currencies? To connect and manage these within your accounting system, you usually need a multicurrency feature, which can be a costly plan upgrade.
- Other potential niche needs
Get those lined up and the right one may basically pick itself.
Which software is the easiest to use?
Our clients tell us that they find Xero the easiest to use, partly because of the straightforward way its bank feed works. The vast majority of our clients with Xero are on a “Grow” plan because it’s a great balance of price and features. By way of an example, at Heelan Associates, we have a client with a £16 million turnover business using that plan alongside small side hustles.
If you are interested in trying Xero for yourself, visit heelanassociates.co.uk/xero for a crazy discount on a subscription.
How much does accounting software cost?
The average cost for a good plan level, (at the time of writing) is around £35 or more plus VAT per calendar month. Look at how “cheap” this actually is for all the features you get, and the time it will save you, rather than viewing it as a “cost”. Accounting software subscriptions are usually tax deductible for your business anyway….
There are ‘free’ ones
The good news is that you can get ‘full story’ software for free. If you bank with Natwest or RBOS you can get access to FreeAgent for free. This is proper ‘full story’ software as a perk from your bank, and shouldn’t be confused with the ‘single story’ types they create themselves. It might not be our favourite, but it works.
Can I switch if I get it wrong?
If you choose the wrong accounting software, you CAN switch later. There are tools online to help you move your data and do this. However, doing so is time consuming and a bit of a pain. So our team always recommend you test out some of the discount paid deals or take a trial, and see which software you like so you can avoid having to do this later!
More example scenarios
A few example scenarios and the best software solution for each.
Tiny, side hustles = spreadsheet
If you are a sole trader with under £20,000 income (so currently not in MTD), you will be fine with a spreadsheet as you just need income and expenses for your tax return. You don’t need to pay for Excel either: the free Google Sheets will do the job OK.
However, if you find your business is growing and you want to start sending invoices and statements, and then tracking when you get paid, now is a good time to opt for accounting software.
VAT registration and £50k MTD = Xero
If you need to/opt to become VAT registered, or you turned over say £50,000 (for MTD), you’ll need software to keep your digital records and file your returns. Rather than struggle with bridging software, you might as well go the whole hog with ‘full story’ software such as Xero.
New limited company (ltd) providing services = Xero Grow
Xero Grow would suit almost all start-up ltds, with the exception of those requiring multicurrency (see above). Annoyingly Xero sees multicurrency as a more advanced feature available on their ‘compressive’ plan, which at full price is £55+VAT pcm. The feature works great, but there is a popular alternative:
Limited company requiring multicurrency = various
QuickBooks Essential could be a good choice as multicurrency is built into it, and a standard subscription is currently £38+VAT pcm (at the time of writing). It is a good product and really good value for money, and also has the best mobile app on the market (in our opinion), so is a solid choice.
Sage is another proper ‘full story’ option, although in our experience we only see clients use it if they had previously used the old desktop version, as it feels familiar.
E-commerce business = Link My Books and Dext Commerce.
To save time and effort, you need both accounting software AND a solution that brings in the data from your selling platform such as Amazon or Shopify. Investigate Link My Books and Dext Commerce for starters, which bring in all charges such as selling fees, transaction fees, etc. Trust us on this one, you will want to use two products, as book-keeping for ecommerce PROPERLY is far harder than it seems.
Summary: do I actually need accounting software?
Limited Companies
YES. Treat accounting software as a day one essential purchase.
Small sole traders under the MTD thresholds (and not VAT registered)
NOT YET. A spreadsheet will still do the job just fine at the moment.
Got an accountant?
Ask them for help and what software they use. Using the same might earn you a discount.
Not got an accountant or not 100% happy with the one you’ve got?
Contact us here at Heelan Associates.
About the author
Dan Heelan is the Business Services Director of Heelan Associates, an accounting firm that helps small business owners across the UK start, survive, and grow.
With a background as a small business owner himself, he discovered his passion for accounting and tax early in his journey and now focuses on empowering fellow entrepreneurs with the knowledge and tools to navigate the financial side of running a business.
You can see and hear Dan in action in his regular: