As a small business owner, you already have a lot to keep track of before factoring in taxes or accounting. However, these are crucial elements to SMEs, so it's important to streamline your accounting and maximise your profits by running a tax-efficient business.
As contractor accountants, Gorilla Accounting knows exactly how to achieve this. Below, you can find some tips they've put together designed to help you navigate the small business accounting world successfully.
Having a separate business account
After registering your business, you need to open a business account for your income. There are several advantages to doing this, the main one being that having an account separate from your personal one allows you to keep business records distinct. This will help you when you have to submit your returns.
Other benefits of a business account include:
Keeping personal assets safe in case of bankruptcy
Easier to get funding or investors
Increased business credibility
Meeting a bank's terms and conditions
Keeping track of all business transactions
Being able to accept credit card payments
If you're a sole trader, you don't have to have a business bank account, even though it can make keeping on top of your accounts easier. Limited company owners, on the other hand, as well as LLPs and partnerships, are required by law to create a separate account for their business.
Tracking and managing expenses
As a self-employed individual, you can claim back some expenses, which means you'll have less tax to pay. This is why it's so important to keep track of your expenses, whether you're a sole trader or your own a limited company.
Staying on top of your expenses allows you to always know the financial status of your business. So, by tracking them, you can easily and accurately prepare financial statements and tax returns, stay on top of deductible expenses and grow your business.
You also avoid running into cash flow problems — this is just as important for new businesses as it is for well-established companies.
Manage your expenses from the start and pay close attention to things like meals, business travel, insurance costs, training courses related yo your business, and clothing expenses as they all fit the bill of allowable expenses.
According to HMRC, if you work from home, you may be able to claim a part of your bills such as heating, electricity and internet. However, you must reasonably divide these costs by the number of rooms you use for business and how much time you spend actually working from home.
Set up invoicing systems
In order to get paid, you have to send out invoices to your clients. The sooner you do it, the faster you receive payment. Having a good system in place ensures you're not spending too much time on this.
Automating your invoicing system will save you both time and effort — and will help you get paid on time. This is especially convenient if you're working on a long project and getting paid per task, for example.
Online invoices can be sent directly to your client with the necessary payments information ion them and, if you opt for a good invoicing app or software, you can even send invoices from your phone, no matter where you are in the world.
Personalise your invoices with your company logo and don't forget to include critical information like:
Date of the invoice
When the services were provided
A unique identifications number (this helps you to stay organised)
Your customer's name, email and address
Your name or business name
Your business address
Your contact details
Payment information (including the several ways your clients can send payment, such as PayPal or direct to your account)
A detailed list of what you provided to the client
How much is owed
Outline the payment terms ahead of time so that your client isn't surprised by a bill. You may want to put a system in place that allows you to deal with late payments, as not all customers will pay you on time. For instance, you can add penalty fees to your contract if you don't receive payment by a certain date.
What about VAT registration?
It doesn't matter if you're a sole trader or a limited company owner and provide taxable services or goods; if your business has an annual turnover of £85,000 or more, you have to register for VAT. If your turnover is below that amount, you don't have to register, although HMRC recommends that you do.
If your business is VAT-registered, you'll charge your clients the 20% rate, so add that figure to your invoices. You may be able to reclaim VAT on business-related expenses.
Consider Making Tax Digital
Another thing small business owners should take into account is Making Tax Digital, which aims to make the UK tax system more effective and efficient, as well as making it easier for taxpayers to the right amount of tax.
Making Tax Digital was first announced in the 2015 spring budget and, from April 2019, businesses had to start reporting their taxes quarterly instead of once a year. Other changes the initiative introduces included recording every transaction digitally on accounting software that is Making Tax Digital-compliant. VAT-registered businesses with a taxable turnover above £85,000 have had to comply with Making Tax Digital since 2019.
Since April 2020, businesses had to use software to submit income and corporation tax as well, not just VAT.
At the moment, other Making Tax Digital deadlines include:
April 2022 — The initiative will be mandatory for businesses with a turnover below the VAT threshold
April 2023 — Individuals that file income Tax Self Assessments for business and property of over £10,000 a year will have to comply with Making Tax Digital too
Under Making Tax Digital, certain information, like your business name and VAT registration number, will have to be kept as digital records for at least 6 years.
Complete your self-assessment
Not all business structures will require the submission of a self-assessment return, although sole traders and partners in a business partnership will usually have to do this. However, if you have income other than your salary or pension, you may have to complete and submit a self-assessment return as well.
This includes money from renting out a property, income from dividends, income from a trust or estate, if you have capital gains, and cases where you and your partner receive child benefits, and your income is over £50,000.
You may have to pay penalties that start at £100 if you submit a late return, so make sure to stay on top of all important dates and deadlines.
For the tax year of 2020/21:
You had to register for self-assessment by 5 October 2020
You had to submit a paper return by 31 October 2020
You can submit the online return by 31 January 2021
You must pay what you owe to HMRC by 31 January 2021
If you're an employer (for example, you have staff or you're an employee of your company), you must operate PAYE as part of your payroll, which allows HMRC to collect income tax and national insurance. So, your company has to report all employee payments and deductions either on or before each payday.
With payroll software, this is an easy task and you don't have to stress about figuring out the exact amount of tax and national insurance that needs to be paid.
If you own shares in a company, you can take money out as dividends if the company has made a profit. Most people prefer to draw a small salary and receive the rest in dividends, as this is more tax-efficient and a big reason to set up a limited company instead of remaining a sole trader.
However, if you receive dividends above £2,000 and have income above your personal allowance for 2020/21, you have to pay dividend tax.
File accounts and company tax returns
Are you aware of the requirements to file accounts and company tax returns? At the end of your company's financial year, the business must prepare statutory annual accounts and a company tax return and use these to figure out how much corporation tax you need to pay.
You have to file them with both HMRC and Companies House, and you can do it together or separately.
Do you need an accountant?
It can be challenging to stay on top of so many things, especially when you're already busy running your day-to-day activities. Hiring an accountant helps you to save time and focus on your business. It also helps you to minimise tax liability and have the peace of mind of knowing that your returns are submitted correctly and on time, as they're done by professionals who know UK tax law by heart.