Emily Coltman of FreeAgent on surviving as a small business, tackling tax and getting paid

Emily Coltman is Chief Accountant at FreeAgent, the online accounting software specifically made for freelancers, small business owners and their accountants. With over 45,000 customers signed up – myself included (five years and counting) – FreeAgent brings everything together, from invoice and expense management to VAT, payroll and Self Assessment tax return filing.

Emily and I first crossed paths at 10 Downing Street when Enterprise Nation had invited us both to meet one of David Cameron’s advisors to talk about small business. Emily spoke eloquently and passionately about accounting and making life easier for small business owners, and I’ve been keen to interview her ever since – to pick her brains and share her wisdom with you. I luckily caught up with Emily to talk money, the challenges of small business and making music…

Tell us more about how your career got started. Is it true you studied music at Cambridge? What changed?

Yes, that's quite true! I chose to study music mainly because I enjoyed it, without having too much of an eye on my future career. The music course at Cambridge is very theoretical, focusing on essays and analysis rather than performance and composing – you didn't actually have to do any playing as part of the degree course. But surrounded by highly talented musicians such as Alexandra Wood the violinist and Andrew Kennedy the tenor, who were both in the same year as me, I quickly realised that I didn't have what it takes to succeed as a musician – and moved into accounting!

So today, you're Chief Accountant at FreeAgent – please tell us how that came about

I started off on a blue-chip company's graduate training programme, but after about a year I realised that the small business world was where I wanted to be. I moved to an accounting practice where the clients were small businesses, and became fascinated with how accounting software could help solve their record-keeping dilemmas. Online accounting software was just beginning to emerge – and this path led me to FreeAgent.

You apparently felt an immediate connection with FreeAgent’s whole ethos of making accounting easy. You’ve even written three books for small business on the subject. You’re clearly passionate about demystifying this topic?

Yes, yes and yes again! The UK’s tax laws, in their entirety, are four times as long as the complete works of Shakespeare! How can a small business owner be expected to read and understand all of them, especially when they are written in legal and tax speak?! I try to at least translate them into plain English, as well as campaigning for simplification.

What’s often the biggest challenge small businesses face when it comes to money – and how would you advise they deal with that?

I think that would have to be late paying customers. FreeAgent carried out some research among UK web designers and developers and discovered that a staggering 97% have had to deal with a late payer at one point or another. Far too many small businesses find their customers don't pay them on time or in full, and that can mean the business doesn't have enough money to pay its own costs or taxes.

I’d always recommend that a small business asks for upfront payment of some, if not all, of what a customer owes – that way the business owner knows the customer is committed to the project, and the risk is shared.

"It’s tempting to set your prices low to attract customers, but this could well attract the wrong kind of customers who will quibble over your prices and try to pay even less!"

The first year in business is often the most difficult for any freelancer – what are the key things to look out for?

Everything will feel very new and it takes a bit of getting used to that it’s your responsibility to collect the money and pay the bills as well as do the work you want to do.

It’s often hard as a new freelancer to charge what your services are worth – it’s very tempting to set your prices low to attract customers, but it’s important to remember that this could well attract the wrong kind of customers who will quibble over your prices and try to pay even less!

There are also a lot of taxes you may have to register for and tax deadlines to keep track of, especially if you are paying salaries to staff. I was recently a co-author of FreeAgent's free ebook on managing freelancer finances and in it, I outline the taxes and charges that freelancers need to look out for. It’s definitely worth checking out and making sure you’re up to speed.

And it’s important to keep track of all your business costs. Don’t be tempted to miss out any of the little expenses, such as stationery and stamps – these all mount up and if you miss any out, your profit will be too high and you’ll pay more tax than you have to.

Things have changed somewhat since 1st April regarding dividend tax – what should small business owners now bear in mind?

This will only affect limited companies, as no other businesses pay dividends. If you’re running your business through a limited company, read on, but if you’re a sole trader you can ignore this bit!

Up to 5 April 2016, dividends were subject to a lower rate of tax, because they were treated as already having had 10% tax taken off them. Basic-rate taxpayers paid no extra tax on their dividend income before this date.

From 6 April onwards (6 April being the start of the new tax year), instead of the notional 10% deduction, everyone gets a £5,000 tax-free allowance for dividend income, which means that you can receive up to £5,000 in dividends each year and not pay any tax on them. After that, you’ll pay tax on your dividend income at 7.5% if you’re a basic-rate taxpayer, 32.5% for higher-rate and 38.1% for additional-rate.

In a nutshell, it costs more in tax to take more than £5,000 income as dividends from a company after 6 April 2016.

Any other changes to the Budget that freelancers should be aware of?

Yes indeed! I recently summarised the changes that small businesses and freelancers should be aware of following the 2016 budget on FreeAgent’s blog.

If you could wave a magic wand, what would you get the Government to change or implement to help small business?

Tax simplification, every time! Many people are put off starting a business, growing it and employing staff, because they are worried about paying the right amount of tax. The tax system should be simple – and it isn’t!

It's often difficult to find the right accountant. Do you have any tips to help freelancers find the right support?

It’s really important to find an accountant who knows the tax system as it applies to freelancers. If you go to an accountant whose expertise is in the world of big business, they may not be so comfortable with areas that are important for freelancers, such as the VAT flat rate scheme.

Ask around among your freelancer friends and networking contacts for recommendations, and do have a meeting with any prospective accountants to make sure you feel at ease with them and you can understand what they say.

Accountants can have a nasty habit of talking jargon that their clients don’t understand, but it’s crucial that you do understand what your accountant tells you because you’re still responsible for your business finances even if you’re working with an accountant.

"Many people are put off starting a business, growing it and employing staff, because they are worried about paying the right amount of tax. The tax system should be simple."

In the seven years I’ve been running Creative Boom, FreeAgent has gone from strength to strength. How have you got here?

FreeAgent’s changed out of all recognition since I’ve been here, too! I joined as only the second employee after our three co-founders, and now we have a team that’s over 100 strong. We’ve sourced funding both through private investment and equity crowdfunding to make sure we can hire the best people available and build and grow the software, improving it all the time.

There has been so much added to and changed in the system itself, such as VAT filing, automatic bank feeds, RTI payroll, Self Assessment filing… I could go on, but it’s certainly not going to stop there!

Any surprise discoveries along the way?

You mean apart from spiders falling into my colleague David’s tea mug in our very first office? That was a fun day. What we always have to be on the alert for is changes to the tax system, like the dividend income tax changes you mentioned above and also filing requirement changes such as the introduction of RTI. We need to watch out for these curve balls thrown from the government and respond to them in good time by making the appropriate changes to our software.

We also continue to be in awe of the fantastic feedback from customers we get all the time through social media, emails, phone calls and word of mouth - we genuinely never get tired of hearing about how FreeAgent, in the words of one customer, 'seriously takes the stress away'.

What’s in the pipeline for FreeAgent? Anything new that we should know about?

We have it in our sights to offer an end-to-end accounting and tax solution, from photographing receipts on your smartphone to filing accounts at Companies House. Sole traders can already file their tax returns through FreeAgent, as can company directors, but we want to extend that to allowing filing of micro-company accounts and tax returns with Companies House and HMRC.

Finally, what three pieces of financial advice would you offer to small business owners?

Those would have to be:

  1. Have a separate bank account for your business, so that you can easily track what’s coming in and what’s going out.

  2. Charge what you are worth! Do not be tempted to set your prices too low. And do not be backward in coming forward when chasing customers who don’t pay on time – you have done the work and earned the money, and you have every right to ask for it!

  3. Draw up a cash flow plan that’s as comprehensive as you can make it, so that you know when you can expect to have money coming in and going out. It’s too easy not to keep track of all those little costs, but they soon mount up, and you can find you’re left with less money than you need.

FreeAgent’s online accounting software is specifically designed for freelancers, contractors and micro-businesses, covering everything from invoicing to tax.

To download a free ebook copy of A Field Guide to Freelancer Finances, all about how to take control of your business finances as a freelance web designer or developer, just visit www.financefieldguide.com.