Record Keeping for the Self-EmployedPrint

If you’ve just started up your own business or are considering such a move, you’ll be aware of how important it is to keep a record of all your business transactions. Keeping accurate records not only helps you to keep up to date for tax compliance, it will also benefit your business.

Accurate and clearly presented records will:

  • help reduce your accountant’s fees and make filling in your tax return at the end of the year straightforward

  • help you with budgeting and cashflow

  • help grow your business with the help of a business loan

  • help ensure you receive the correct Tax Credits

What You Need to Record

Records should show all the money coming in and going out of your business, whether cash, cheque or credit card transactions. It’s important to keep your business records entirely separate from your personal records, so you may want to consider setting up a separate business bank account.

For money in the records you should keep include:

  • payslips

  • invoices

  • till rolls

  • bank statements

For money going out keep a record of all:

  • receipts

  • purchase invoices

  • cheque stubs

  • motoring expenses

  • credit card statements

Cash Books

All small businesses rely on cash books to help keep track of their business income and outgoings. Cash books can either be paper-based or take the form of computer software. Your accountant will be able to advise you on the most appropriate type of cash books for your specific business.

If you decide to keep your records on computer you’ll need to be able to scan the front and back of all relevant documents and be able to provide these to HMRC in a readable form if necessary. It’s also important to keep the paper versions of all important documents such as P45, P60 and any paperwork that shows tax has been deducted.

  • Use a "petty cash book" to record all minor business-related cash transactions, and write a short description of each one.

  • Use a "cash book" to record payments to your bank account as well as any cash transactions. A cash book will have columns for income and expenses and a separate column for miscellaneous. You may find it helpful to use the same expenses headings as those used on HMRC’s tax return form. You should also include a "drawings" column for any money taken out of the business for personal use.

Profit and Loss Accounts

Although it’s not a legal requirement for small businesses to keep a profit and loss account, they can provide helpful information which may help you run the business more efficiently. It can be particularly useful to compare accounting results year on year to see how your business is building up. If you’re looking for funding a bank or other institution will ask to see three years’ accounts before considering granting a business loan. There is also a private benefit for drawing up an annual profit and loss account: mortgage lenders will also request accounts as proof of income.

Sales and Purchase Ledgers

More complex businesses may find it useful to keep sales and purchase ledgers. A sales ledger is a record of all the invoices you have issued and payments received for a given period. The figures are reconciled, usually monthly and allow you to produce a report "Aged debt" which shows you who has not paid you. A purchase ledger records all purchase invoices and those that remain unpaid. These ledgers can provide more detailed information about your business and help with cashflow, budgeting and claiming back VAT.

VAT

If your turnover of VAT taxable goods or services exceeds the VAT threshold you must register for VAT and keep the following records:

VAT account. This is a record of VAT charged on sales and VAT paid on purchases, noted under the headings VAT payable and VAT deductible. The VAT account aligns your business records with your VAT return.

VAT invoices. These show the VAT you’ve charged and the VAT that has been charged to you.

Penalties

HM Revenue and Customs (HMRC) may issue fixed rate penalties to businesses who fail to keep accounting records. Historically penalties were only levied in cases of severe neglect, however a newly penalty regime gives HMRC many more powers in this area, so it is wise to ensure that you have a fool proof accounting system in place, even if you run the smallest of businesses.


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The information contained in this article is intended to provide only a general outline of the subjects covered. It should neither be regarded as comprehensive nor sufficient for making decisions, nor should it be used in place of professional advice. The author and the publisher disclaim all responsibility for any loss arising from any action taken or not taken by anyone using the information in this document