Dealing with Accounts and taxation can often be very daunting for someone setting up in business for the first time, but there is a lot of help available out there. Many local colleges run courses on small business accounting and HM Revenue & Customs provide on and offline guides and courses on what tax you will need to pay. (www.hmrc.gov.uk).
If you are unsure or lack confidence in this area it is advisable to speak to a bookkeeper or accountant as soon as possible, as getting the right accounting systems in place from the start can make life a lot easier in the long run.
To monitor your cashflow and make sure you have enough information for your tax records, you need to keep track of all money going in and out of the business. You can purchase the relevant books and ledgers you need from a stationer or there are many good software packages available that are quick and easy to use. Again, see your bookkeeper or accountant for advice.
Some of the basics you will need in place are:
Cash book
Your Cash Book simply summarises all the money going into and out of your business bank account. You record money coming into the business on the left hand side and money going out of the business on the right hand side.
Sales
Every time you make a sale you should issue an invoice with a unique number that you keep a copy of in a 'Sales – Unpaid' file. When the customer pays an invoice, record all the details on your copy and move it into a 'Sales – Paid' file.
Once a week you should update your Cash Book with details of all paid invoices and also chase up any unpaid invoices that are due. If the business receives any money that is not from sales such as loans or grants, then this also needs to be recorded in the Cash Book on a regular basis by cross referencing with your bank statement.
Purchases
Every time you make a purchase from a supplier or anywhere else you need to ask for an invoice or a receipt and then file these in either a ‘Purchases – Paid’ or 'Purchases - Unpaid' file. Every time you pay an invoice you need to make a note of the cheque or transaction number on the invoice and move it into the 'Purchases – Paid' file.
You should update the Cash Book with purchases once a week using your 'Purchases - Paid file'.
Cash purchases
For small purchases you may make on a regular basis such as parking, milk, stationery etc, keep all receipts in a ‘Petty Cash’ file and refund yourself with a business cheque or payment each month. The receipts would then need to be stored in the 'Purchases-Paid' file and details recorded in the Cash Book.
Bank statement
Your monthly business bank statement should be used to go through in detail and compare with your Cash Book. When all errors are corrected, the balance adjusted (for payments made that month not yet showing on the statement) and reconciled with the Cash Book, the figures on your bank statement and Cash Book should agree.
Tax and national insurance
The first step with tax and National Insurance is to establish whether you are self-employed or not. Even if you have set up as a sole-trader or a partnership, you may still be classed as an employee for some or all of the work you do depending on the way you work and how it is organised. If you have set up as a director of a limited company, then you will be classed as an employee and taxed on your earnings for the company, even if you are the only employee. If you are unsure about your status, speak to your accountant.
If you are classed as self-employed, you must register with the Inland Revenue within three months of starting up in business and they will arrange for you to pay the correct flat-rate Class 2 National Insurance contributions throughout the year. You will have to fill in a tax return each year and will be taxed on all profits that the business makes (not just the salary you have taken out) above your personal tax allowance. Certain business expenses can be offset against your profit and it is worth speaking to your bookkeeper or accountant about this.
If you have set up as a limited company then you will be taxed as an employee of the company through the Pay As You Earn (PAYE) system but the company will also pay corporation tax on its profits and National Insurance contributions for its employees.
A good bookkeeper or accountant will be able to advise you in more detail in all of these areas.
Also see www.hmrc.gov.uk for latest rates of Income Tax and National Insurance.
VAT
Value Added Tax (VAT) is a tax that is charged on the sale of most goods and services. Businesses need to register for VAT if they anticipate that their turnover will exceed the VAT threshold
All businesses will pay VAT on most of their purchases which is called input tax. Businesses that have registered for VAT also charge VAT on products and services they sell, which is known as output tax. If a business collects more output tax than it pays input tax then it must pay the surplus to Customs and Excise at regular intervals.
If however, a business has paid more input tax than it has collected output tax, then Customs and Excise will refund the difference. This is why many businesses below the threshold still register as there can be advantages especially if you are paying a lot of VAT on equipment you need when you first start your business.
Different rates of VAT apply to different products and services and the current rates are:
- Standard rate – 20%
- Reduced rate – 5%
- Zero rate – 0%
See http://www.hmrc.gov.uk/vat/ for further details.