When you're self-employed, the most important thing you need to do is prepare accounts correctly and there are many business benefits to be gained from keeping records.
It saves you money, and time, whenever you need your accounting figures to back you up. Keeping records ensures that you only pay the tax you have to pay and it helps you to keep up to date with how much you owe and how much you're owed.
If you're slapdash at keeping records and fail to pay the right amount of tax, then you'll face huge fines from HM Revenue & Customs and you'll lose financial control of your business.
Here's an outline of what records you must keep, and give to your accountant, to make sure that you don't fall foul of the taxman and so you can evaluate your profit and loss effectively.
You must keep a record for every single transaction - whether it's income or expenditure. If you don't keep records, then how will you remember, or your accountant even know, that the transaction took place?
Some people who are self-employed hope to dodge tax by failing, on purpose, to keep a proper and complete record of their income, but this kind of behaviour is wrong, dishonest and illegal. HM Revenue & Customs nearly always find out that it's been going on and in revenge (as it were) collect all the unpaid tax going back for as many years as necessary. They will also charge interest on the late payment and you’ll have to pay penalties (i.e. fines), as well, by way of punishment.
Here's a list of what records your accountant needs to prepare accounts properly and to comply with the law:
At the end of the accounting period, they'll also need:
As long as you've methodically kept all of these items, then you'll have prepared accounts correctly.
Remember, also, to keep records of your business transactions for six years.
Six steps to financial control
Result: the finances will then look after themselves.
More expert guidance on the day-to-day practicalities of self-employment, as well as advice on how to prepare accounts and put together cash flows, can be found in Lawpack's Self-Employment Kit. Written by award-winning accountants, the Self-Employment Kit tells you how to get started in working for yourself, how to put together budgets, and how to offset costs and expenses against your tax bill.
Published on: September 3, 2012