Every business owner knows the importance of keeping their business records in check. But what you might not realise is just how costly a lazy approach to this procedure can be. Business records are what allows HMRC to cross-reference your stated income and expenditure with their own expectations. If these figures are dramatically different from one another, then you are likely to wind up paying a hefty penalty.
The key to keeping efficient records is organisation and accuracy. In order to ensure you only pay tax on genuine business expenses, it’s vital that you create a distinction between your business and personal life. The sooner you start this process the better, as the end of the tax year often comes round more quickly than you’d expect.
Find Out Everything You Need To Record
A tax return is your chance to ensure you’re not paying more tax than is strictly necessary. If HMRC doesn’t have access to all your records, then they will be unable to provide you with the tax break you deserve.
The documents you need to keep will very much depend on the kinds of tax you owe. But as a general rule of thumb, it is best to retain all financial paperwork for a minimum of six years. These documents include:
Invoices – all statements of income must be accounted for. Invoices should include information on the type of work undertaken, the completion date of each job and any useful company details such as registration numbers. Ensure invoices are in chronological order so you can tell if there are any missing.
Receipts – keeping tabs on your expenses will benefit you immensely. Any work-related expenditure should be recorded, including receipts for travel, supplies and even lunches with clients.
For businesses paying corporation tax, you will also need to keep clear accounting records of your company’s transactions. Amongst these should be a record of your company’s assets and a record of your overall income and expenditure. You might be asked to present further business records, including bank statements, cash books and sales ledgers. Make sure these are complete and up to date when you file your tax return.
Keep Business and Personal Accounts Separate
Whether you’re the CEO of Google or simply making a trade as a freelancer, you need to view your business as a separate entity to your personal finances. Combining personal and professional assets is rarely a good idea, as it can make it very difficult to keep track of where everything is coming from.
If you are spending money from a single account on both office and household supplies you can expect to pay tax on both. By setting up a separate account for your business income and expenditure you will have a firmer understanding of which expenses genuinely relate to your work. In the long run, this can help you stay clear of any tax avoidance accusations.
Get To Grips With Accounting
Once you’ve set up your new account you need to make sure you’re aware of everything that’s coming and going. Recording and filing each invoice and receipt in real-time will mean that nothing gets overlooked.
In the movies, a business owner will open his cabinet to a flood of unorganised bank statements, receipts and other assorted paperwork. To avoid this cliche, you need to stay on top of your filing system and keep everything in an orderly sequence. Alternatively, you could use an online record keeping app to maintain order and dispense with the cabinet altogether.
If you are struggling to juggle several kinds of tax then, it could be worth investing in professional help. A good accountancy firm will handle your record keeping for you and could even point out areas where you qualify for a tax relief. Whatever you decide, as long as you remain tax compliant, you won’t be dealt any nasty surprises.
About the author Chris Weston is the director of Aston Black Accountants in Milton Keynes. Chris has over 25 years experience in accounting and taxation, working with his small team of staff to provide quality advice for small businesses up and down the country.