AccountsSo, you’ve started your business, you’ve set up your website, you’re attending fairs and you’re selling.  Fantastic news!  You’ve decided to register your business now you’re self-employed - with this comes the joy of keeping Accounts.  You will need to ensure that you’re keeping records so you can declare you’re income to the HMRC.  I am writing this article for non VAT registered businesses (VAT turnover threshold being £79,000 for 2013-14) as it’s highly likely that VAT registered businesses will have a professional carrying out their accounts.


Where do you start?  You can employ an Accountant to do it all for you, you can employ someone just to do part of it or do it all yourself.  Whatever you decide, you’ll need to maintain records or you’ll risk being fined by HMRC if they inspect you.  Every single business can face an inspection as not only do they choose specific businesses, they’ll also choose some at random.
So it could be you!

Throughout this article I will copy parts of HMRC website guidance in blue.

If you are employed as well as running your business you may not wish to pay NI contributions. You can do this by applying for a small earnings exception certificate.

Class 2 National Insurance - how much you pay
You pay Class 2 National Insurance contributions at a flat rate of £2.70 a week. However, if your earnings are below £5,725 per year (2013-14) you might not need to pay
 
A.  First of all decide when your tax year is  
I have chosen my tax year to start from 6th April as this is easy for me filing the tax return (interest certificates from the bank and investment companies/ employed people – their P60).   Although my business began operating in October, I filed a part year initially to enable my tax year to be as I wished.  

B.  Decide how you will keep your records  
Will you write everything in a ledger or maintain it on a computer based program - spread sheets on your computer which you’ve set up or a professional program?   You will need to keep receipts / have records of everything for your business.  So, for instance, although I use Sage Accounts I do have a paper based file for receipts and printed records.  

Record keeping penalties
If you do not keep adequate records or you do not keep your records for the required period of time; you may have to pay a penalty.
How to keep your records
HMRC asks you to keep the original documents which show you've had tax deducted.  For example if you're an employee your P60 form from your employer (which shows your pay and tax information for the tax year).
HMRC recommend you keep all the original documents you receive.  This does not mean you need to keep them on paper.  Most records can be scanned and kept electronically on a computer or a storage device such as a CD or memory stick.  Make sure that whatever you use to keep records you:
-have both the front and back of documents
-can easily access them so you can pass them to HMRC

What records to keep
Anything to do with your business such as:

-cashbooks
-invoices
-mileage records
-bank statements
-receipts for purchases
-your P60s if you are also employed

Basic records you must keep
You must keep records so that you can fill in the return fully and accurately.
Your basic business records must include:
a record of all your sales and takings
a record of all your purchases and expenses
You or your accountant can, if you wish, use these records to create a profit and loss account. It shows the sales income you've received and the expenses you've paid, and what profit/loss you've actually made. The more detailed records you keep, the easier it will be to answer any questions that HMRC have about your tax.

If you feel you want more help, the HMRC offer courses for anyone starting a new business free of charge and although I’ve not attended one, I have heard they come highly recommended.  Google -“HMRC courses for new businesses” and it will take you to the overview and where the courses are held.



C.  STOCK
One of the biggest mistakes that self- employed crafts people seem to make is stock accounting.  I have seen so many comments on forums of people stating that they’ll never make a profit in the first year because they’ve spent so much money on stock.  Not true.    Consider why big businesses do stock takes and why they slash their prices to sometimes even less than they’ve initially paid for their stock.  The reason – if they carry stock to their next tax year, they could face a tax liability on it.  Probably the best way to explain this is by an example:

Year one:      Stock B/F from previous year           nil            sales     say £600
                     Materials purchased during year    £3000
                     Stock left over at end of year say  £2800
                     Therefore value of stock sold is       £200                           £200
                     Your profit for the year is                                                   £400

Year two:     Stock B/F from previous year          £2800          sales           £750    
                    materials purchased during year       £500                                
                                                              total   £3300
                    Stock left over at end of year         £2950
                    Value of stock sold is                       £350                           £350
                    Your profit for the year is                                                   £400 ......and so on

How the stock is valued at the end of the year is important because if you put a higher figure on it than it actually cost then effectively you will increase your profit.....for example:

Year two:   Stock B/F  and materials purchased                 £3300       sales  £750
                  COST of stock left over 2950 but VALUED at   £3250
                   Value of goods sold                                             £50                    £50
                   Profit therefore                                           £650  instead of £400

Value your stock at its cost price, rather than the price you will sell it.  So, using bullion as an example – if you purchased 10gm of 9ct gold at £18 per gram and make a necklace from it which would sell for £500, the price to use for your accounts is the 10 x £18 if it hasn’t sold by the time your tax year ends.  Therefore, throughout the year if you are purchasing stock at different prices, you will need to ensure you keep records to work out an average price paid for the stock
Your stock take should take place on the last day of your tax year and you must naturally keep accurate records for HMRC.

 

 

 

 

 



D.  Tools and Equipment aren’t classed as stock as they are a means by which you carry out your trade and are therefore an expense.  Depending on the value of the equipment will depend whether you want to account for it in the current tax year or depreciate it over a number of years.

E. Overhead Expenses
This is not an exhaustive list, but gives a good idea of what you can include:
-Accountant / Professional Fees
-Bank  Charges
-Books / Magazines
-Event Fees
-Liability Insurance
-Marketing
-Repairs/Wastage
-Rent of premises
-Stationery
-Subcontractors
-Subscriptions
-Telephone
-Website
-Miscellaneous – a great category if you can’t figure out where to account for something!!!

If you work from home you can account for a portion of your costs at home depending on the square metres used for business purposes (excluding kitchens and bathrooms). So for instance, if you had 6 rooms which were all the same size and you used 2 of the 6 rooms in their entirety for your business then 33% of your household expenses could be attributed to your business (Mortgage/ Rent, Council Tax/Power/Buildings and Contents insurance)
In this case, it would be wise to consult your local council office and mortgage/ home insurance provider to verify that there are no unwanted implications associated with this change.

 

 

 

 

 

 

F. Distribution Costs
* Postage and Packing
* Mileage (or cost of lease vehicle – proportioned if used personally)

Mileage is currently 45p per mile (2013-2014) up to 10,000 miles.  

Do consider that if for instance, you’re visiting a fair as research because you’re considering whether to participate next time it is taking place, and then the mileage and even the entrance fee can be attributed to your business.  Just because you’ve enjoyed it, doesn’t mean it’s not a business expense!  The lunch you buy during the day is NOT a business expense though as you have to have something to eat if you weren’t there.

At the end of the year all these records can be shown on a Profit and Loss Account / Balance Sheet for your business.  Together with your personal income, the profit or loss for your business is submitted to HMRC on your tax return.  

If you have made a loss and are employed, you may well get a tax refund!  Not bad is it?  You could actually get some tax back for doing something that you love whilst you’re starting out!

Lesley H Phillips

44 Hockley Street

Hockley

Birmingham

B18 6BH

Tel: +44 (0)121 507 0994

Company number 07258309

ICO Registration No: ZA460029