UK accounting and bookkeeping firms catching up with leading foreign markets to accelerate client migration to the cloud ahead of new digital tax laws

• 18 per cent of firms now work exclusively with clients online
• The number of UK firms with at least 80 per cent of online clients is expected to rise within two years, from nearly a third (31 per cent) to over half (56 per cent)
• 28 per cent of UK firms currently have mostly desktop clients compared to 9 per cent in Australia and 5 per cent in the US – but the gap is closing
• Firms with 100+ online clients experience 16.3 per cent year-on-year growth compared to 9 per cent for those with up to five online clients
• Gary Turner, UK co-founder and managing director says, “…if not managed correctly, Making Tax Digital does run the risk of pushing some firms back to the Dark Ages…”

A new report revealing how UK accountancy and bookkeeping firms measure up against their peers has revealed that the UK is closing the gap behind the US and Australia in the percentage of firms with most of their clients online, as the findings suggest that moving to the cloud helps accelerate practice revenue.

The Benchmarking Report by Xero, which surveyed 400 UK accounting and bookkeeping firms of all sizes and types, revealed aggressive targets from UK firms who are encouraging more clients online before new HMRC digital tax laws come into force in 2018.

Whilst UK firms have the highest number of mostly desktop clients at 28 per cent – compared to around 9 per cent in Australia and 5 per cent in the US – the report suggested that UK accountants are intent on moving more clients online. Firms with fewer than 40 per cent of their clients online is set to drop to just 9 per cent by December 2018 (from 46 per cent). Positively, 31 per cent of ‘pace setting’ UK accounting and bookkeeping partners currently with at least 80 per cent of their clients online is expected to rise to 56 per cent of partners within two years.

Currently, 18 per cent of UK firms surveyed have between 98-100 per cent of their clients online, suggesting that this percentage is the most ahead of the curve in preparations for the Making Tax Digital rollout, which will require the vast majority of businesses to keep digital tax records and update the HMRC quarterly. The firms with the fewest online clients are at most risk of falling dangerously behind in the preparations to be compliant ready for the roll-out.

The report revealed that UK firms with larger number of clients using online accounting are adding more new clients and growing revenue faster. Those with 100 or more business clients using online accounting experienced 16.3 per cent year-on-year revenue growth compared to 9 per cent for those with between 0 and 5 online clients.

Revenue per employee also increases to become 33 per cent better than average in the group with 100 or more online clients, and firms that build up at least 125 online accounting clients get more word-of-mouth referrals which bring in new clients.

These findings point to how the industry is evolving, as Xero accounting and bookkeeping partners experience increased growth and revenue as a result of operating online.

Firms of all sizes most intrigued by their competitors’ MTD preparations and use of business apps

The participating firms were asked which areas of their competitors’ businesses they were most interested in. While the results showed that interests differ depending on business size, Making Tax Digital preparations and the use of business apps were of particular interest to firms regardless of their size.

Marketing appears to become more important as businesses scale up their online client portfolio. The report found there to be a clear step up in the interest in marketing when firms shift from fewer than 35 online clients to larger portfolios.

Concern about switching clients from hourly to monthly billing plans drops quickly and significantly as the online client portfolio grows. This indicated that monthly billing is a positive step for those who’ve made the move.

Learning which apps are the most useful for accounting practices was found to be of high importance to firms of all sizes. Those with small online client portfolios want to know where to start, while larger firms are looking to confirm their choices and add to the range of apps they use.

Gary Turner, co-founder and managing director of Xero commented: “The report shows HMRC’s new digital tax rules are informing a growing preference for cloud accounting in the profession with good reason; many professionals recognise the need to shift away from compliance services to adding value. However, if not managed correctly, Making Tax Digital does run the risk of pushing some firms back to the Dark Ages of compliance accounting, a loss for both the profession and the clients.”