Keeping the books and meeting deadlines

Stuart Hartley

Financial Records

• All businesses are required by law to maintain accurate records

• This includes

− All sales invoices

− All purchases

− Receipts and payments

− Salary and benefits in kind

• Usually a physical book or a simple Excel spreadsheet is the starting point

• There are various software packages that can provide online solutions

− Xero

− Quickbooks

− Sage

Financial Records

• Keeping accurate records will enable your business to complete correct tax returns.

• All records must be kept for a minimum of 6 years from the end of the accounting period

• It is vital for managing cashflow that you know which customers have overdue accounts and that you managed the payment of purchases.

• Also you may require a payroll system if you are employing staff

• You can be and will be fined for late and / or inaccurate returns.

• If in doubt seek the advice of an accountant or a bookkeeper

Keeping records – family tree filing

• You need one single filing and records system to ensure that people can find the information they need, when they need it. This system is usually based on a hierarchy, or family tree, of files.

• Decide the main categories for your filing system and give each a code

− For example, sales (SA), accounting (AC), human resources (HR) and general administration (GA).

− Have a Project Files category (PF) for whatever falls outside your main categories.

• Divide each category into sub-categories

− For example, divide HR into HR/recruitment, HR/pay, HR/performance appraisals, HR/training, HR/employee file.

• Further divide these into sub-sub-categories, to whatever level is necessary

− For example, if you need to file the CV of a potential secretary (for the first time), you might create a new file called HR/recruitment/candidates/secretary/potential.

• Store files where they are needed, in alphabetical order

− For example, if customers have named files, these can be stored near the sales team, in order egSA/customer/Amis.

Managing the system

• Give one person overall responsibility for your filing and records system

• Ensure that new files are only created with specific approval of the person responsible

• Good indexing and titling are essential

− A file's title must be meaningful and must accurately reflect its contents.

− Anyone who knows your system ought to be able to go straight to the right file nine times out of ten.

− If the nature of the contents shifts, the file's title should not usually be changed. It is better to open a new file.

• Develop a clear tracking system for files

− Ensure that files which are removed from their normal locations are signed out, so that they can be traced.

• Do not allow files that spring up around projects to undermine the system

− Make moving project data into the main filing system the final phase of any project.

• Discourage the growth of personal filing systems

The long term

• Remember accounts need to be stored for a minimum of 6 years after filing

• Be clear about how long you want to keep different types of file

− Take into account both your business needs and how long you are compelled by law to keep them.

− Keep long-term records in good condition by storing them in boxes. Consider scanning paper files into computer files.

− Move old records out of the main filing system and into an archive to cut costs and storage requirements. This helps keep the filing system efficient and uncluttered.

• Apply sensible disposal schedules

− Encourage people to get rid of material as soon as it is clearly not going to be needed.

• If you need access to a lot of archive files, consider using a records management company

− Each file is bar-coded and stored ready for immediate delivery to you when required.

− Legal, accounting and insurance companies use these services, as they cannot afford to mislay customer records.

How long is long term

• Accounting and tax

− Accounting and tax records for an ordinary limited company must be retained for at least six years after the end of the tax period they relate to.

− Self-employed sole traders or partnerships must keep their records for at least five years after the 31 January filing deadline.

− If you file your tax return late, or HM Revenue & Customs starts an investigation, you may need to keep your records longer.

• Pay

− Pay records must be kept for a minimum of three years after the end of the tax year the earnings relate to.

− This includes sickness and sick pay records, and records relating to maternity pay, paternity pay and adoption pay.

• VAT

− VAT records and documents must be kept for six years.

How long is long term

• Contracts

− Contracts should usually be kept for six years after the contract ends, though contracts under seal (eg deeds) should be kept for 12 years.

− Legal claims under a contract cannot usually be brought outside these limitation periods, though there are exceptions.

• Health and safety

− Health and safety records should be kept for at least three years.

− Records relating to hazardous substances may need to be kept longer. For example, asbestos records should be retained indefinitely,

• Employers' liability insurance

− The requirement to retain your compulsory employers' liability insurance certificates for 40 years ended on 1 October 2008. You should still keep records of the insurance in case a claim is made.

− Employers are still required to display their certificate of insurance at each place of business. The certificate can be made available to employees electronically providing all employees can gain access to it.

Setting up and maintaining your books

• Choosing a system

− Realise the limitations of paper-based systems

−Unless your business finances are very simple, a computer-based system will be better. Maintaining and assessing financial records in manual form will cost your business more time and money.

−Think about the growth of your business. Changing to a computer-based system later on will be disruptive.

−Computer-based systems offer increased speed and flexibility. They can take the boredom out of repetitive tasks, but you do need to make sure your financial data is kept safe and secure.

− Find out about accounting software packages

−Ask other businesses or your accountant which packages they recommend.

−You can choose to download software to your own network, or use an online (cloud-based) package.

−Well-known options include Intuit QuickBooks, Sage, KashFlow, Simply Books, Clear Books and MamutOne.

Setting up and maintaining your books

• Create files for keeping sales records

− Non-cash businesses issue invoices for each sale and keep them in two files: Sales Paid and Sales Unpaid.

− Cash businesses use till rolls and point-of-sale systems to record their sales. Records of these also need to be kept.

• Create files for keeping purchase records

− Keep two files for purchase invoices: Purchases Paid and Purchases Unpaid.

− Keep a separate box file labelled Petty Cash for receipts for business purchases made using cash.

• Open a separate business bank account

− A separate business bank account makes it easier to keep track of your business income and expenses. Do not write personal cheques from this account.

− If possible, try to make all business purchases from this account rather than from your own pocket. For small amounts (eg travel expenses) this might not always be possible.

Setting up and maintaining your books

• Setting up your system

− Set up a manual or computerised Cash Book to summarise financial information

−The Cash Book records all money coming into and going out of your business bank account (including cheques and electronic payments).

−Accounting software will automatically include the same functions as a Cash Book. If you opt for a manual system, you can buy an analysis book to use as your Cash Book.

−You need to choose which headings to use to record different kinds of expenses. Ask your accountant for advice.

− If necessary, set up a separate book for cash sales

−This record will be similar to your Cash Book, but it will be used for recording the actual cash going into and out of your till.

Setting up and maintaining your books

• Set up a manual or computerised Cash Book to summarise financial information

−The Cash Book records all money coming into and going out of your business bank account (including cheques and electronic payments).

− Accounting software will automatically include the same functions as a Cash Book. If you opt for a manual system, you can buy an analysis book to use as your Cash Book.

− You need to choose which headings to use to record different kinds of expenses.

• If necessary, set up a separate book for cash sales

− This record will be similar to your Cash Book, but it will be used for recording the actual cash going into and out of your till.

Setting up and maintaining your books

• Recording sales

− Issue an invoice every time you make a sale

−Give each invoice an original number (001, 002 and so on) and keep a copy.

− If you are registered for VAT, you must issue VAT invoices.

−File the copy invoice in Sales Unpaid. Put the most recent invoice on top so that the invoices are automatically in order of date.

− Note whenever an invoice is paid

−Pay the customer's cheque into your business bank account if the payment is not made electronically.

−Take the relevant invoice from Sales Unpaid and file it in Sales Paid.

−Put the most recently paid invoice on top, so that the invoices are automatically in the order they were paid.

• Update your Cash Book once a week

− Look through your paying-in book stubs. Enter into the Cash Book details of all the invoices paid.

− If you are registered for VAT, record separate figures for the value of the invoice excluding VAT and for the VAT amount.

− Check the entries against the invoices in the Sales Paid file. Put a tick against the invoice number on each invoice to show that the details have been entered in your Cash Book.

• Deal with any irregular situations

− If an invoice is amended, issue a new invoice. Write 'Cancelled: see invoice no. xxx' on the original invoice and file it in Sales Paid.

− If partial payment is received, write 'part paid', the date and the amount on the invoice.

• Check through your unpaid invoices once a week

− Chase any that are falling due or are overdue.

− The longer a customer has owed you money, the further back in the Sales Unpaid file the invoice will be.

• Purchases

− Get an invoice or receipt each time you make a purchase

−File all your bills in Purchases Unpaid in date order, with the most recent on the top.

− If you are registered for VAT, you must have a VAT invoice for all purchases. For small purchases of standard-rated goods, you can calculate the VAT paid by dividing the total cost by 6.

−Keep a note of any purchase for which you do not have a receipt.

− When you pay a bill by cheque, write the details on your cheque stub

−Write the date, supplier and amount.

− If you pay several invoices with one cheque, write down each amount and the total.

− If you make the payment electronically, keep full details of this in a similar way.

−File the invoice in Purchases Paid in date-of-payment order, with the most recently paid invoice on top.

• Reconcile your bank account

− Review and check all payments shown and reconcile them against payments recorded in your accounts

− Do the same for costs – money spent

− Check for errors or inaccuracies and amend as required.

Operating budget

Sales forecasting

• Your sales forecast should be based upon any historical sales, your marketing strategic and your market research.

• It is a month-by-month prediction of the level of sales you expect to achieve.

• Every year is different, so you need to consider any changing circumstances that could significantly affect your sales

• These factors - known as the sales forecast assumptions - form the basis of your forecast.

• You may wish to do two

1. A best guess – what you really expect

2. A worst case – your lowest estimate no matter what

Typical examples of assumptions:

− The market you sell into will grow by 2 per cent.

− Your market share will shrink by 2 per cent, due to the success of a competitor.

− Seasonality – how sales will change depending on the time of year

− You will spend 50 per cent less on advertising, which will reduce the number of enquiries from potential customers.

− You are launching a range of new products. Sales will be small this year and costs will outweigh profits, but in future years you will reap the benefits.

− You have new products that have the potential to increase sales rapidly.

Sales Forecast

MONTH SALES a SALES

b

SALES

c

TOTAL

MONTH

MONTH CUMULATIVE

MONTHLY

1

2

3

4

5

6

7

8

9

10

11

12

YEAR

Breakeven Analysis

Step 1Sales £4000Less variable costs £2000Gross profit = £2000

Step 2Gross Profit £1600

÷ X 100 = 40% % GPSales £4000

Step 3Fixed Costs

÷ x 100 = Breakeven Point% GP

Step 4Fixed Costs £1200

÷ x 100 = £3000 % GP 40 Breakeven Point

Cashflow

−Cashflow forecasting enables you to predict peaks and troughs in your cash balance.

Month 1 Month 2 Month 3 Month 4 Month 5 Month 6 Month 7 Month 8 Month 9 Month 10 Month 11 Month 12

Income

Sales a

Sales b

Total Income £0.00 £0.00 £0.00 £0.00 £0.00 £0.00 £0.00 £0.00 £0.00 £0.00 £0.00 £0.00

Expenditure

Materials

Subcontract Charges

Packaging and Carriage

Wages

Business Rent

Business Rates

Water Rates

Light / Heat / Power

Repairs and Renewals

Business Insurance

Travel and Vehicle costs

Printing and Stationery

Marketing

Professional Fees

General Expenditure

Total Expenditure £0.00 £0.00 £0.00 £0.00 £0.00 £0.00 £0.00 £0.00 £0.00 £0.00 £0.00 £0.00

Monthly net inflow / outflow £0.00 £0.00 £0.00 £0.00 £0.00 £0.00 £0.00 £0.00 £0.00 £0.00 £0.00 £0.00

Cumulative monthly flow £0.00 £0.00 £0.00 £0.00 £0.00 £0.00 £0.00 £0.00 £0.00 £0.00 £0.00 £0.00

Invoices and what to include in them

• Limited company – must have

− The full company name as it appears on the certificate of incorporation

− Any business name used in your business

− An address where legal documents can be delivered to you

• Limited company – should have

− Value of the work

− Description of the work

− Invoice number

− Date of the invoice

− Date the invoice is due

− How you wish to be paid

Tax and your business

• Income tax

• National Insurance

• Value Added Tax

• Corporation Tax – if a Limited Company

Sole Traders and Tax

• All self employed people (sole traders and partners in a partnerships) are taxed via the self assessment system each year, and pay tax and National Insurance Contributions on their business profits after deductions for expenses.

• Online self assessment deadline end of Jan

• For the 2017/18 tax year, the personal allowance has been increased to £11,500. This is the amount you can earn before paying any income tax at all.

• For income in 2017/18 above this threshold, you will be taxed at the following levels;

− Basic Income Tax rate of 20% on income up to £45,000

− Higher Income Tax rate of 40% on income between £45,001 and £150,000

− Additional Income Tax rate of 45% on income over £150,000.

National Insurance

• Class 1

− Paid by employees and employers. These are calculated as a percentage of your wages, up to an upper earnings limit. This is the most common NIC type. The primary contribution is paid by the employee, the secondary by the employer.

• Class 1A or 1B

− A ‘special rate’ paid by your employer if you get certain benefits with your job, such as a company car. The amount you need to pay is worked out on the value of taxable benefits you have received during the tax year. It is payable in the July after the end of the tax year.

• Class 2

− A compulsory rate paid by the self-employed. You are exempt if your earnings are below a certain limit.

• Class 3

− Voluntary Contributions. You can pay these to help fill gaps in your national insurance contribution record. HMRC may get in touch with you to suggest to top up your contributions.

• Class 4

− You may have to pay Class 4 contributions if you are self-employed and your profits are over a certain amount each year.

National Insurance

• There are currently two types of NICs sole traders have to pay. There are Class 2 NICs – which are £2.85 per week (2017/18 Tax Year) – and Class 4 NICs.

• HMRC will work out the amount of Class 4 NICs you are liable for during the annual self assessment process. It is based on the amount of profit you make, essentially 9% on your earnings between £8,164 and £45,000, and 2% on any profits above this.

• Class 2 National Insurance Contributions for the self employed are to be abolished from April 2018.

Limited Companies and Tax

• All limited companies must pay Corporation Tax on their profits, and one of the first things you will do as a new company owner is to register your new company to pay Corporation Tax.

• Each year, your company must complete its company corporation tax return (CT600).

• You must also pay any Corporation Tax owed within 9 months and 1 day of your company’s ‘normal due day’, which is typically the anniversary of when the company was formed.

• For smaller companies, the current ‘small companies rate’ is 20% on profits up to £300,000. For larger companies with profits of £1.5m or more, the main rate has also now fallen to 20% (2015/16). Between these two thresholds, a system of ‘marginal relief’ is applied.

Tax Calendar

8 tips for saving tax

1. Know your industry

− Keep engaged with your trade body or association, attend their events, and read the newsletters. Most industries have special dispensations and allowances approved by HMRC, such as uniform allowances.

2. Spend more time on your business

− Are you really the best person to do your bookkeeping or VAT returns?

− Your business will benefit from you spending time working on it, whilst letting the bookkeepers and accountants do what they do best. For what you may think you are saving in fees you are probably losing out by not claiming for everything you are entitled to.

3. Know your VAT

− VAT is a common area where business owners are losing out. Are you paying the right amount? Have you looked at the Flat Rate Scheme?

− Many businesses are unaware of the Flat Rate VAT scheme, but for the right business it can be an unexpected source of profit.

− In a nutshell, under the flat rate scheme you pay a single, flat rate of VAT on your turnover. HMRC have a list of the flat VAT rates available for different industries. For example, for Estate agents and property managers it is 12%, while it is 14.5% for computer and IT consultants.

8 tips for saving tax

4. Talk to your accountant

− Business owners often complain about their accountant and how they have too much tax to pay.

− The truth is that the business owners who regard their accountant as trusted advisors and someone who can help them save tax are often the ones who are paying as little tax as possible. If you don’t talk to your accountant; change accountant.

5. Keep it in the family

− The personal allowance is currently £11,000 of tax free income. By looking at your family situation it may be possible to utilise the personal allowances of family members who are able to carry out duties within your business.

6. Treat your staff

− There are several tax free benefits that can be paid to staff to save both you and them tax.

7. Be organised

− Even if you don’t want to spend time doing bookkeeping yourself, you can help make sure you are claiming for everything you are entitled to by keeping copies of everything.

− A common reason for HMRC to disallow expense claims or input VAT amounts is a failure of the business to keep proper supporting records. Don’t fall into that trap.

8 tips for saving tax

8. Work from home

− HMRC allow generous tax savings for self-employed businesses that spend time working from home. Make sure you are aware of them.

− Most businesses claim a modest use of home charge of just £2 per week but HMRC actually allows you more than that. For sole traders who work from home, HMRC allows a much more scientific method for calculating what expenses you can deduct for the use of your home.

− If you are a self-employed business owner, you can claim for a proportion of the following home costs;

−Council Tax,

−Mortgage Interest,

− Insurance,

−Heat and light,

−Water,

−Landline and phone costs

−General household repairs & maintenance

VAT – Getting it right

• If you are likely to turnover £82,000 or more during any 12 month period (this is the 2015/16 threshold), you must also register your company for Value Added Tax (VAT).

• Essentially, you collect VAT on behalf of HMRC, but adding the prevailing rate to your invoices (the standard rate is 20%). Once you deduct any VAT your company may have spent during a VAT quarter, you pay the balance to HMRC.

• There are several types of VAT scheme available: the ‘cash’ scheme enables you to only repay VAT to HMRC once payment has been received by you, and the Flat Rate VAT scheme provides a simpler way of calculating tax, by allowing you to apply a flat VAT percentage when calculating your liabilities.

• Your accountant will be able to work out which scheme is most likely to suit your business.

5 top tips

• Start keeping financial records from the off

• Get a system

• Budget for tax

• Claim for all business expenses

• Go on a HMRC course