Now the flurry of filing last year’s tax return has subsided, it’s tempting to shelve all thoughts of expenses and records for another year and focus on your business. In fact, it’s just what many self-employed people do. But simply keeping tabs on business during the coming months could avoid the annual headache around next year’s return.
Why keep good records? Tidy books mean self-employed and small businesses end up paying less money to an accountant. You also know what your tax liabilities are for the next tax year as business ebbs and flows – so you can budget and have greater command of cash flow. If you need to apply for a loan or expand your business during the year, you have records at your fingertips to show a lender.
Self-employment offers the simplest way to keep accounts, requires no registration fees and the accounting is relatively straightforward, although you do need to tell HMRC and register for business taxes. But this isn’t always best from a tax point of view. By contrast becoming a limited company can be more tax efficient and keeps business separate from personal affairs – owners can pay themselves a low salary and the rest of the money in dividends, which cuts income tax. A good accountant will be able to tackle the paperwork and comply with HMRC requirements – even accountancy fees qualify for tax relief.
It’s simplest to organise business records around the accounting year, which begins on April 6. Turnover - money coming into the business - is obviously crucial to record. From this you can deduct allowable expenses and are left with taxable profits.
As a minimum you need to record your incomings and outgoings – cash, cheque and credit card transactions. Documentation for incomings could include till rolls, bank statements, paying in slips. And for outgoings: purchasing invoices, motoring expenses or cheque book stubs. Always keep business records separate from personal records, accountants advise.
So how often do you need to record your transactions and expenses? It depends upon your business – monthly would be fine for a relatively straightforward line of work, whereas weekly or more frequently saves headaches for more complex affairs.
Whizzy mobile apps and relatively simple recording software now mean the days of boxes of scruffy receipts could be over – though many self-employed still prefer to book keep this way, say their long suffering accountants. In fact software developers have collaborated with HMRC to produce a set of simple record keeping apps for mobiles, some of them free – see http://www.hmrc.gov.uk/softwaredevelopers/mobile-apps/record-keeping.htm.
So what are allowable expenses? Those working from home commonly claim for business use of a home and car – though not the total cost of buying a vehicle. As of this next tax year (2013/2014), sole traders and some business partnerships can claim a new “flat rate” system which aims to simplify tax expenses for the self-employed earning under £79,000.
So instead of calculating what percentage of utility and cleaning costs you can claim for working from home, for example, or what proportion of car expenses and petrol goes towards business use, you can charge a fixed rate per hour worked or per mile driven – and this could include trips to the bank or post office.
Note that limited companies can’t use this system and it’s best to check with your accountant which method is most advantageous for tax. HMRC also provides an online checker to find whether this scheme suits your business. But remember this system doesn’t let you off the hook regarding recording mileage or hours worked.
Other allowable expenses include costs of stationery, business phone calls and a capped amount for banking costs such as interest or overdraft. You can’t claim travel between home and workplace, or meals out unless you’re on an overnight trip. If you buy a capital asset – a computer or piece of machinery for instance – you can claim tax relief but your annual investment allowance limits how much.
The government has also introduced “cash basis” accounting this year to simplify self-assessment returns for the self-employed. This means you can record money when it actually comes in and goes out of your business rather than the traditional method of recording income and expenses when you send out an invoice or receive a bill. This could help with cash flow because it means you won’t have to pay tax on money you didn’t receive in your accounting period – again, it’s worth checking with an accountant.
And as any professional will urge you, all electronic records must be backed up – you can do this easily through cloud-based services such as Google Drive or on a separate disc drive. Hang on to your records for at least six years – the legal requirement.
Human nature being what it is, tax help phone lines are buzzing in the days leading up to the January 31 deadline for submitting an electronic return (October 31 for a paper version). Little and often for dealing with niggling expenses works wonders throughout the year, as do government helplines outside the busy periods. And shipshape books save so much time and money in the long run.
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