Is the self-employed workforce managing its finances properly?
Over the last ten years alone Europe has seen its self-employed workforce expand by 82 per cent, according to The Boox Report 2014. What’s more, the Professional Contractors Group (PCG) showed that in 2011 businesses without employees accounted for eight per cent (£202 billion) of turnover in the UK private sector, further emphasising the positive impact self-employed workers have on the economy.
This increase of self-employed professionals also means a rise in the amount of those who must account for their own business finances. The report from Boox highlighted a number of interesting features regarding this topic, but just how well do the self-employed manage their finances and should they seek out help to do so?
Perhaps one of the most significant findings from the recent Boox Report is that the majority (68 per cent) of the self-employed (including contractors and freelancers) manage their own finances. Boox found that half of freelancers put aside money with a view to use it for future taxes, and the industries most likely to set do this are IT (66 per cent) and the banking and finance sectors (60 per cent).
Despite this, some 710,000 self-assessment forms were not returned on time this year, according to the HM Revenue and Customs (HMRC). This figure was down from the previous year’s deadline however, which saw 850,000 people fail to submit their forms on time, the BBC reports.
Considering that self-employment in the UK has seen rapid growth since the economic crisis in 2008 -– the Office for National Statistics (ONS) states that more than 200,000 people started working this way in 2011-12 alone -– it could be argued that self-employed workers are improving when it comes to managing their finances.
The deadline for the 2012-13 tax year slammed shut at midnight January 31st this year. Two days before this, HMRC announced that around 2.5 million self-assessment tax forms were still outstanding, which could be attributed to a lack of preparation on the part of those who are required to fill out the document.
However, the findings from specialist contractor accountants, Boox, highlighted that some of these late returns may not stem from a lack of preparation, but from error on the part of the freelancer. In the report, 34 per cent of freelancers admitted to making bookkeeping errors at some point in their career. The nature of the mistake varied, with 17 per cent stating they had paid too much tax in the past, six per cent not paying enough tax and a further ten per cent admitting that at they had missed a payment deadline altogether.
Errors of this nature are becoming less frequent, however, and Boox found that freelancers and contractors are making less mistakes with regards to paying tax, year-on-year. These findings do suggest that those who work in a self-employed capacity are getting better at managing their own finances, but that still leaves the question of why so many missed the deadline again this year?
Taking into account Boox’s findings that 50 per cent of self-employed workers aged 18 to 34 found the process to be a stressful affair, does HMRC need to offer more support to those people who are filling these forms out for the first time, or is it a question of freelancers and other self-employed workers not fully understanding their general finances?
The Boox Report certainly makes a case for both questions. It found that almost all of the people it asked (nine out of ten) did not know what percentage rate of National Insurance Contributions (NICs) they had to pay on taxable profit. Boox attributes this to the complex nature of the NIC system, as opposed to any lack of knowledge or negligence on the part of the self employed workforce.
Conversely, there are some areas that point to a lack of organisation on the part of freelancers. For example 33 per cent did not know the current level of VAT. While this is certainly a minority, it is a large number for people who work through their own business.
Uncertainty over figures like this could also explain why a third of contractors find filling out tax returns a stressful affair, and therefore why so many still miss a deadline that they are aware of at least six months in advance.
Recent changes to the self assessment tax form legislation could also explain why so many people missed the deadline this year. In 2013 a number of significant changes were made to self-assessment forms, mainly regarding child benefits. As a result of these amendments to the legislation, parents who earn over £50,000 are now required to pay back some of their benefits via the self-assessment tax return system.
What’s more, the Association of Chartered Certified Accountants (ACCA) had argued that the growing number of self-employed people in the UK meant that there were many people filling out the assessment form for the first time this year, some of which would need more time to do so properly.
It is these changes that have left many people confused this year, argues ACCA. Before the deadline, the body appealed to HMRC to extend the date, but this was to no avail. Hundreds of thousands of people will now receive fines over their failure to submit the correct tax form on time.
“When it comes to filing returns and paying tax, there’s good news and bad. The good news is that, on average, freelancers are making fewer mistakes, with errors down in all categories year-on-year,” said the report. “The bad news is that freelancers’ knowledge of tax affairs, specifically tax bands, National Insurance and VAT, remains surprisingly low.”
“Whether this is due to a lack of education, or symptomatic of an over-complicated tax regime for the self-employed, is up for debate. The most likely explanation is that it is a bit both and there is a lot more that HMRC can do to make tax more easily understood and much less taxing,” the report concludes.
It seems then that there is room for improvement from both parties. Although the number of late returns has dropped this year – self-employed workers cannot be held accountable for all of these late returns – many still left it to the last minute, suggesting that more organisation could be needed on the part of the freelancer.
However, as The Boox Report and the ACCA pointed out, it could be time for the HMRC to simplify the legislation on self-assessment tax returns.
Beyond Transactions: The Payment Revolution
By Marwan Forzley, CEO of Veem
The uninterrupted disruption brought on by the pandemic accelerated the need for robust, digital-first tools created to support remote teams and accelerate online commerce.
As offices across the US moved to work from home for indefinite periods, specialized back office departments handling sensitive information have had to go a layer deeper to find tailored solutions that support the transition of their in-person workflow. For finance teams, payment approvals, issuance, and general management became a challenge overnight. Particularly for those who — even in 2020 — continued to send and receive paper checks through the mail.
For years and even to this day, millions of small business owners around the world have relied on slow and confusing bank processes to manage their business finances. Every day, they spend valuable time using old, complex and expensive platforms to transact with domestic and international vendors — never knowing where their payment is or even when it arrives at its destination.
With ongoing economic and logistical uncertainty looming as we move into 2021, this old norm should not be expected for much longer. This year has seen small business owners wear more hats than ever before, and has influenced a mass adoption of online financial applications that offer heightened security, save more time, and provide more value as budgets tightened.
A study conducted by Mastercard earlier this year saw online business-to-business payments skyrocket in popularity with more than half (57%) of small business owners across North America turning to digital services since the start of the pandemic to improve cash flow and modernize their payment processes.
If this study is of any indication, the days of making an appointment with a banker or sending a wire transfer through an outdated web portal have passed. And the time for the payment revolution is here.
Putting the user in the driver’s seat
Major world events have always acted as a catalyst for innovation and change. As of a result of the growing pains we experienced this year, in 2021 businesses can finally say goodbye to huge transaction fees and bank-imposed gatekeeping when it comes to managing their financial processes.
The financial technology firms, in partnership card and local bank networks and sometimes even each other, have been building and iterating on products over the past decade that were created to work flawlessly from a desktop or smartphone.
For the first time, small businesses have access to needed, user-friendly financial tools packaged to make their lives easier. No longer reserved for major enterprises, those previously underserved by traditional banks can sign up for applications that consolidate billing, payments, working capital and more to one central dashboard.
With the owner in the driver’s seat, they can better communicate with vendors and customers and reallocate their time previously spent manually sending, receiving and reconciling payments toward growing their business — without ever stepping foot out of their home.
Genuinely seamless and automatic integrations with complimentary functions aligned to core financial activities mark a fundamental change in how businesses will choose to operate moving forward. Not only should experiences be integrated, but the entire lifecycle of the transaction should be digital.
Consider a freelance contractor that uses a time tracking and invoicing software to invoice a client. Through an integration between the time tracking tool and Veem (a complete online business payment tool) the client receives and captures the invoice within their Veem payment dashboard. Because Veem and Quickbooks are integrated partners, as soon as the invoice is received, a bill is automatically created, marked as paid, and reconciled on the client’s accounting software as soon as the funds are issued.
In this flow, the contractor only needs to send an invoice, and the client only has to approve the payment for everything else to move. Thoughtful integrations like these empower businesses to log-in to one application, but benefit from several, ultimately eliminating inefficiencies.
Understanding that old habits die hard, it’s expected that businesses of any size have questions when it comes to moving payments from a bank to an online provider.
Answering these questions with unprecedented product value and relentless transparency is the best way forward to bring more businesses onboard in 2021.
This means providing up front pricing, tracking, choice and flexibility to users. Before, during and after the pandemic, cash flow management remains the most critical part of running a small business. Digital payment providers enable the entrepreneur to have unparalleled insight, visibility, and control over their cash flow.
Through non-bank payment options, businesses can secure their information over a secure data network, watch their money move from origin to destination, and choose the speed at which they would like funds to move. By these tools working in harmony, the user can remove friction and spend more time focused on their business.
Separating the signal from the noise
2020 is a year that changed everything for the global small business community. In a report by Veem issued at the start of the pandemic, an overwhelming 80% of businesses shared that they anticipated COVID-19 to impact their business over the next 12-16 months. Problems surfaced that many didn’t even realize they had. And in finding those problems, businesses turned to technology to support them.
As enabling technology, it’s our job to listen and bring clarity and solutions to those contributing to and growing our local and global economies despite the hurdles and challenges they’ve faced.
Right now, small businesses deserve more. More access, more choice and more credit. In the road ahead we expect online payments and bundled user friendly financial services to play a pivotal role in the recovery of small businesses. The payment revolution will see the continuation of important and meaningful products that value the users time and enable businesses to launch, grow, and scale regardless of what’s to come in 2021.
The UK’s hidden payments crisis: why businesses should rethink their payments strategy
By Edwin Abl, Chief Marketing Officer at Modulr.
As the economic conditions imposed by the Coronavirus endure, businesses are facing a dilemma about how to reduce operational costs while meeting customer needs in as economical a way as possible. And all without compromising on their quality of service.
A recent survey of 200 payments decision makers across the UK, revealed there are hidden costs of payment processing which will have an exponentially greater impact on wider businesses if left untreated. It found, UK businesses are spending an average of £1.5m a year in costs attached to payments – money they simply cannot afford to lose to inefficient processes in these uncertain times.
Businesses need to plug any holes in their boat to avoid sinking. And for many this includes the examination and recalibration of their payments strategy.
The research reveals that the payments process now represents a huge 12% of a business’s total operational expenditure. With two-thirds (64%) of all businesses expecting the cost of payment processing to increase over the next two years.
Two thirds (67%) of payments decision makers surveyed believe the way they process, and service payments has had a direct impact on their customer experience. In fact, 62% of respondents believe the hidden costs of poor payments outweigh the hard costs. This indicates that a poor payments strategy is no longer something business leaders can ignore, as it now has a far greater and unseen impact on wider business mechanics.
The top three hidden costs attached to inefficient payment processes were ‘impact on customer experience/satisfaction’ (38%), ‘influence on relationships with other teams and departments (35%) and ‘impact on competitor differentiation’ (31%).
These findings suggest there is widespread consensus that getting payment operations right, directly creates performance boosts elsewhere in the business. When asked to estimate, as a percentage, the business performance boost received if hidden payment inefficiencies were resolved, the average margin for improvement was +14%, with traditional banking the sector most likely (31%) to predict a performance gain greater than +15%.
The 5 key steps UK businesses can take to drive payment efficiencies
There are five key areas payments decision makers and tech leaders should be looking to change, so that they can drive end-to-end payment process efficiencies:
1 – Locate hidden payment process inefficiencies
Visibility is a key issue. Respondents across large (46%) and small businesses (47%) say they have very clear metrics directly related to payment process costs. Only 8% say that they don’t understand the costs involved. Yet, businesses know they could do better with improved visibility of costs. Both large and smaller companies cite ‘lack of visibility for operational costs’ as the top challenge when it comes to achieving strategic goals around payment process and money services provision.
Digital banking companies, including lenders and FinTechs, identified ‘lack of visibility for operational cost’ as a challenge when it comes to increasing payment services revenue (37%). This is in comparison with all respondents mentioning other issues such as lack of skills (25%) and constrained resources (25%) as secondary and tertiary challenges respectively.
For many businesses, developing a cost model for current and projected payment process costs, both hard and hidden, is a top priority.
2 – Make payments key to stakeholder experience management
Customer, departmental and even supply chain partner experiences are increasingly intertwined. There is no doubt that customer experience is a top priority for payment services strategy. But enhancing the broader stakeholder experience is a close second, and certainly complements the former.
Employee experience affects customer experience. So, payment services innovation must extend beyond customer touchpoints. Happy employees who feel they are working with effective and efficient payments systems will be best placed to enhance the customer experience. And, employees in commercial roles who have bought into the benefits of efficient payments will naturally want to extoll those benefits to customers.
Companies with a sophisticated and integrated supply chain are likely to be the frontrunners in implementing the integrated payment services that benefit all stakeholders, due to their historic experience. As customer experience management evolves into a broader discipline of stakeholder experience management, including employees and supply chain partners, it will become more crucial than ever to include payment services experience
3 – Integrate and automate to support payment innovation
Payment innovation is driving a culture change, connecting previously siloed functions such as IT and finance. There is increasing integration of systems from customer relationship management (CRM) and enterprise resource planning (ERP), into accounts and payments. The research tells us that payment processes are impacting nearly every department, affecting areas including customer experience, brand, leadership, business agility and ultimately, revenue. Integration enables new business models for paying suppliers and customers.
Automation is key to driving efficiency, replacing manual error-prone and time-consuming processes with real-time and responsive, digital ones. This is particularly the case when it comes to operational and payment processes.
Indeed, 52% of large companies say that team hours spent on payment processes was their biggest hard cost attached to payments, compared with 26% of smaller companies who share that view. This suggests that automation could contribute more to cutting the cost of payment processes in large companies.
A host of payments-as-a-service providers (including Modulr) are supporting customers to do just this by enabling them to stream a whole unified product ecosystem of payments functionality directly into their own software.
4 – Bring business leaders together
Payments innovation is driving systems integration and creating a more collaborative stakeholder ecosystem. As all the C-level roles become increasingly focused on the customer experience, the finance remit now includes overall business operations and its associated risks and opportunities. The role is evolving beyond just accounting, tax liability and funding. Therefore, closer collaboration between senior leaders is key to driving efficiencies and enhancing customer experience.
5 – Innovate by adding finance and payments to vertical services
Companies with a vertical focus are well placed to innovate by offering new payment services. In many vertical sectors, especially employment services, software vendors are increasingly embedding financial services facilities, such as payments, into their technology platforms. Employment services SaaS providers, across payroll, accounting, bookkeeping and more are offering financial services to existing and new customers within their specific ecosystem.
This means they can develop hyper relevant, convenient and delightful financial products and services for their end users through highly flexible, ‘plumbed in’ payments. This creates an ecosystem of stickier products while boosting the lifetime value of each end user.
Moving forward – engaging technology to drive efficiencies
If the onset of the Coronavirus crisis has taught us anything, it is that there are many advantages to investing in technology and having a digital infrastructure as responsive as your customer-facing experience.
However, whilst digital technologies enable companies to provide customer service in new ways during lockdown. These same businesses are failing to transform their digital strategies, with the biggest priority still being cost reduction (41%).
By not shedding legacy technology and shoring up operational efficiency, UK businesses are following an increasingly risky strategy. And one which will have an exponentially greater impact on the wider business if left untreated. Particularly when this widespread failure to act concerns the customer experiences that sit at the very heart of a proposition – the payments.
To find out how you can drive payment efficiencies into 2021 and beyond, download the full report here for all the insight you need.
Gain financial regulation qualification online
Gain financial regulation qualification online
Warwick Business School in partnership with the Bank of England are delighted to offer two online specialist Postgraduate Awards, which are perfect for anyone working in financial regulation to evidence their professional development.
- Financial Conduct, Leadership & Ethics – Starting in February 2021
You will debate and cover questions such as how do financiers judge ethical questions in financial markets? What are the implications for regulators and for clients?
- Financial Regulation & Supervision – Starting in June 2021
You will develop a comprehensive understanding around financial regulation by looking at topics such as its tools, benefit and practical application.
Studied online over a period seventeen weeks, you will gain a detailed knowledge of the subject, learn industry best practice and gain a qualification to evidence your understanding.
The wider Global Central Banking & Financial Regulation qualification offers three start dates and four qualification levels.
Invest in your career
Find out more about these Awards and the qualification levels offered by Warwick Business School in partnership with the Bank of England, by downloading the brochure here.
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