Emily Coltman FCA, Chief Accountant to FreeAgent – who provide an award-winning online accounting system for freelancers and small business owners – gives her five top do’s and don’ts to stop your accounts frightening you.
1. Have a separate bank account for your business
HMRC say that you have to be able to keep your business transactions separate from your personal transactions. The easiest way by far to do that is to have a bank account that you use just for business. Otherwise it can be hard to remember whether a cost – or a sum of money coming in – was for the business or not, and that means that you might end up not paying the correct amount of tax, and your accounts will be much less useful.
If your business is a limited company and you try to run the company’s books through a personal bank account, you may also lay yourself open to extra tax bills.
2. Track all your costs
If you leave costs out of your accounts, you may risk paying more tax than you should – so consider tracking your costs on the move by using a tool such as FreeAgent on your mobile phone. Photograph your receipts, such as train tickets, so that you have proof of the cost to show HMRC.
And remember to keep business costs that you’ve paid for yourself, separate from those the business paid for directly through its bank account. This is because in some cases these costs are treated differently for tax, and also, the first check a HMRC inspector will carry out is to see if what your accounts say is in the bank matches your bank statement.
3. Don’t run out of cash
Like Count Dracula, your business needs a regular supply of blood to keep functioning smoothly, and a business’s lifeblood is cash.
Invoice your customers promptly. If you don’t ask them for payment, they can’t pay you!
Make sure you aren’t setting your prices too low. Don’t fall into the trap of assuming that potential customers will be frightened off by any but rock-bottom prices. Charging what your product or service is worth will reassure customers that you believe in it and that its quality is good.
Track all your costs, and watch out for any which are increasing too fast. Has your bank put up its fees? Should you switch accounts? What about rent, rates, electricity?
If you think your business may need a cash injection in the future, to expand or to cover a potentially quiet season, then arrange finance before you need it, not when you need it. Think of it like buying an umbrella – the ideal time to buy an umbrella is when you see a weather forecast for rain, not in the middle of a shower, by which time your clothes are already soaking wet.
4. Don’t fall foul of HMRC
HMRC can be a frightening spectre in a business owner’s mind. But remember – HMRC is not staffed by demons and goblins, but by humans!
Keep to the rules to avoid falling foul of HMRC. Register for taxes when you need to, and file your forms and pay your taxes on time.
And remember to only claim what you’re entitled to; no more, no less. It’s not always easy to know where that line lies, but do take advice from a friendly accountant if you’re not sure.
And while we’re on the subject of accountants…
5. Talk to an accountant
The UK’s tax and accounts system is a complicated wilderness, and accountants are trained to deal with it. So if you don’t have specialist accounting knowledge yourself, it’s possible you could risk falling into a tax trap that you didn’t know existed. For example, did you know that if you are claiming tax relief on your business journeys at the HMRC-approved rate of 45p per mile, you can’t also claim capital allowances on the cost of the car?
Regular checks by a skilled accountant, and advance warnings of potential risks, can help you avoid tax pitfalls. It’s much better to steer round these than to fall into them!
Accounts and tax are an unavoidable part of running a business, but if you seek guidance from an accountant and keep your books in good order, they can become far less of a nightmare.
Emily Coltman FCA is Chief Accountant to FreeAgent, who provide an award-winning online accounting system designed to meet the needs of small businesses and freelancers. Try it for free at www.freeagent.com
