Business Law & Compliance

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Accounting and taxes guide: As simple as ABC

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However, once the initial excitement of entrepreneurship wears off, it becomes apparent that it’s no walk in the park. The basics must be set up right, as this will set the bar for the future of the business and can determine success or failure.

You must get the financials right – when businesses fail to manage their numbers, they will face issues. The truth is, though, you don’t need to be a genius, you just have to understand the fundamentals of accounting and bookkeeping.

Annual accounts

As you’d expect, there is a due date for submitting annual accounts – the date depends on how you operate, as a sole trader or a limited company. Accounts are a formal and prescribed format of your sales, costs, assets (things like stock or machinery/equipment) and amounts owed will show the yearly financial performance of your business.

When your accounting year ends is ultimately up to you, but since taxable income for sole traders is calculated on a 6 April to 5 April basis, it makes sense for these businesses (and partnerships) to have an accounting year that runs from 1st April to 31st March. Annual accounts are needed to back up your tax return and therefore must be completed before the 31st January following your year-end – which is the due date for self-assessment tax returns.As for limited companies, you can choose which accounting year suits you and your business best, but you still need to complete and file accounts every year with Companies House.

Bookkeeping

Bookkeeping is basically recording all the financial transactions your business makes and it can be time consuming, but it’s crucial and if done correctly, your company will run smoothly. Without bookkeeping, you have no way of knowing how your business is doing, planning for the future, or of keeping on top of your accounts and taxes. There are various methods of keeping records; from keeping written records, to spreadsheets, accounting packages, or by using efficient, modern, online accounting software.

Tasks like invoicing customers, processing expenses, recording outgoings and paying employees, can take up a significant amount of time. If you feel like you don’t have enough time to do it all yourself, it’s easy to find someone, or a service, that can do it for you.

Corporation tax

Paid by all limited companies, CT is currently charged at 20% on any profit generated within the year up to £300k – it is slightly higher for companies with profits above this mark. A corporation tax return must be completed, with tax due for payment to HMRC within nine months of the accounting period.

Income tax rates

Everyone is entitled to a tax-free allowance of £9,440 (until April 2014) and following that, roughly the next £32,000 of ‘basic rate’ income above this personal allowance is taxed at 20 per cent. If income is any higher it falls into the ‘higher rate’ band and is currently taxed at 40 per cent, which then increases to 45 per cent for earnings above £150,000. For earnings above £100,000 you start to lose your personal allowance. National Insurance comes out of employment income (salary and wages), which is payable at various rates and thresholds. For limited companies, dividend income is taxed at lower rates and there is no national insurance to be paid.

PAYE

You need to calculate Income tax and national insurance, deduct that amount from the gross wages and salaries of your staff and pay it over to HMRC on their behalf monthly – this is at no cost to your business.Employer’s national insurance is charged at a rate of 13.8 per cent on the gross salary, within certain thresholds – this is not deducted from employee salaries and so it represents a real, additional tax cost to your business. For employees, National Insurance is deducted at a rate of 12 per cent – although both income tax and NI only kick in once a certain earnings limit is reached.

Self-assessment income tax

To calculate your personal income tax on all your income for the year (6 April to 5 April) you must also fill out a self-assessment form which must be completed, filed and any tax paid no later than the 31 January following the previous 5 April tax-year end. This will include all of your personal income, such as salary, dividends, interest and rent.

VAT

Irrespective of your business structure, if your annual turnover (sales) is £79,000 or more you must register for VAT – registration is optional if turnover is lower. Your customers will be charged at the standard 20 per cent rate VAT, meaning that you must add that amount to your sales invoice values and keep this aside from what customers actually pay, to pay over to HMRC. You can reclaim any VAT you have paid on business related purchases and expenses and you must pay the net amount of the two – VAT collected from sales minus VAT paid on purchases – over to HMRC.VAT returns and payments are due on a quarterly basis.

What next?

Hopefully by now you will have decided on what course of action suits you best when it comes to bookkeeping and basic accounting. The choice is simple: you can either manage it yourself or get a professional to do the work for you.

It’s completely your decision, but it’s important to stick to your decision – and get on with it. Don’t waste time trying to do it yourself if you think that you will give up at some point and want to hand it over to someone that will do a better job.

As your business grows and generates more profits, both the money in your bank account and the complexity of the business will increase, and you will find that you are no longer in the place you started. You’ll need to have control and visibility over your finances and make sure that they’re set up in a way that is as tax-efficient as possible. If you’ve mastered all the right stuff, you will then be able to make logical and accurate management decisions about all aspects of your business.

John Hoskin is a director of CleverAccounts.com, an online accountancy firm that seeks to simplify the task of business accountancy. 

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