6. Records and Tax
Keeping your business and personal financial records apart
One way of ensuring you know what’s going on in your business is to keep your personal and business financial records separate, particularly if you are a sole trader. Put sufficient funds aside in a high interest account to cover your tax liability, remembering that this is collected several months after you make the sales.
The business records you need to keep
There are now a wide range of paper or computer based bookkeeping systems to help you, specially designed for small business.
To begin with, you may be able to mange with a handful of files. For example, these could include:
Sales invoices to your customers, purchase invoices from your suppliers, records of cash book & petty cash expenditure, tax & VAT returns, bank statements and even if you decide to also set up a bookkeeping system, you should keep files of the original paperwork.
The above records will help you to manage your finances effectively. It is a good idea to seek guidance from an accountant, as the records you keep could have an impact on how much you pay both the accountant and the tax man.
Easy access to your bank account
Most branches of high street banks offer 24-hour automated facilities for cash withdrawals, deposits and balance enquires. Use of the latest communications technology also means that you can access your account directly from home or the office.
It is important that you properly record all business income and expenses to ensure that you pay the correct level of tax. If you are a sole trader or a partnership you will pay income tax. If you form a limited company, the company must pay corporation tax on the company’s profits and you must also pay income tax on your wages.
You accountant can advise you on the most tax efficient structure for your business.
Value added tax (VAT)
VAT is a tax on sales of goods and services. You must register if your taxable turnover is over the threshold (currently £54,000) Certain business products and services are liable for VAT but not all goods and services are subject to the to the maximum rate of 17.5%. You will need to register with HM Customs and Excise should your taxable turnover exceed the threshold .This is required by law, regardless of whether you are a sole trader, a partnership or a limited company.
After you have registered, you will need to keep VAT records in accordance with the regulations. You will need to account for any VAT on your goods and services, and to claim any VAT deduction to which you are entitled, on the goods and services received by your business, by submitting returns of the net amount you are due to pay or recover from HM customs and excise on either a monthly, quarterly or annual basis. Ask your accountant or HM customs and excise office for more advice on VAT and tax matters. Your local vat office has leaflets detailing sales, which are zero rated and exempt.
PAYE and national insurance
All employees must have National Insurance contributions and income tax deducted from their earnings under the PAYE scheme, regardless of whether they are employed on a full time or part time basis. Whenever you employ someone you should inform the Inland Revenue immediately & they will advise you how much you need to deduct from their earnings and will provide the necessary forms. Your accountant can advise you and some will process your payroll for you. Also you, as an employer, must pay employers national insurance contributions and the amounts you will be required to pay will depend upon your circumstances.
Income tax
If you operate as a sole trader you will pay normal rates of income tax on the whole of your profits, whatever sum you actually draw out from your business. If you operate as a partnership the amount of income tax charged on your profits will depend on the income tax rates paid by the individual partners on their income. If you are employed by your company, you will pay income tax on your salary.
National insurance (NI)
Unless your earnings are very low (currently less than £3,995 a year) you are liable to pay class 2 national insurance contributions if you are self-employed. Class 4 contributions may also be due on your profits (currently 7% of profits between £4.535 and £29,900). If you employ staff, both you and your employees will pay national insurance, unless earnings are very low. You can get full details from your local contributions agency.