Every business needs accounts. They may differ in format and
complexity, but every self-employed person must produce accounts to
complete their tax return, while limited companies must complete
accounts according to the Companies Act. Here are the answers to a few
frequently asked questions about start up account keeping.
Do I need a separate business bank account?
Some small businesses don't like to open a separate bank account
because of the charges, but if you don't have a dedicated bank account
for your business, there is much more risk of confusion and your
bookkeeping will take longer because there will be more transactions to
account for – many of which will be irrelevant to your business.
Banks often give you a good deal when you start up, change banks or
keep a minimum balance in the account. Even if there is a cost, this has
to be set against the fact it will make your bookkeeping much easier,
quicker and cheaper.
If HM Revenue & Customs investigates your business, you will be
giving them access to your personal as well as your business income when
they look at the bank statements if you mix everything up in a private
account. It also means that whoever is preparing your accounts and tax
returns will see details of your personal/private spending, of course.
If you operate as a limited company – although there is no specific
legal requirement – you are strongly advised to open a separate bank
account for the company.
I’ve put both business and private expenses through my business bank account?
Don't mix private and business expenditure. Your bookkeeping will be
quicker and easier if you only put business transactions through your
business account.
You will need to take money out for yourself – drawings for a sole
trader or partnership; normally salary, dividends and expenses for a
limited company – but once a month should be enough.
Paying private costs out of the business can create serious tax
problems for a limited company, but even for a sole trader/partnership,
you’ll only have to pay your bookkeeper or accountant to work their way
through your private transactions. And – you may not want them to see
how much you spend or what you buy.
Don't be tempted to pay for non-business things out of the business
just because that is where the money is and it is convenient.
I have paid for some expenses privately. Can I still put these through the accounts?
If you pay business expenses personally you are, of course, entitled
to reclaim them back from the business. Try to avoid this as much as
possible by using a debit card on your business account or using a petty
cash tin so all payments are made directly.
Where it is unavoidable – and this will particularly apply to limited
companies claiming mileage in lieu of motor expenses – take the same
approach as if you were claiming expenses from an employer.
Detail the claim on a sheet of paper; don't forget to attach
supporting receipts (and the mileage log if relevant); and file it in
the purchase invoice file in the month in which it is paid.
Finally, try to do it at least once every month so you don't forget
any costs or lose receipts and so miss out on claiming a legitimate
expense against tax.
What if I’ve used my personal credit card for business expenses?
It is often easier to use a debit card linked to your business
account because you should not be using a credit card as a source of
finance. If you are using a credit card for business expenses, try and
use it exclusively for the business (don't put private expenditure on
it) and pay it off in full at the end of every month.
You will need to analyse the amounts spent on the credit card across
the business expense items (eg VAT, travel, motor expenses, etc),
because credit card transactions will often fall into different
categories.
Sometimes credit card companies will summarise expenditure into
different categories, but this is not usually very helpful as their
analysis is not the same as the one suitable for the business.
Some of my costs are part business, part Private. What should I do?
This often causes confusion, but you can simply look at it as your
private expenditure and make an expense claim for the business part in
the way described above. If you run your own business as a limited
company this may be the best way, because paying private costs from the
company can cause tax problems.
You will need to have a sensible method of assessing how much the
“business part” is. A common example is the cost of running your
business from home. You will need to calculate how much your house costs
in total and then make a reasonable estimate of the proportion of
property used for the business and apply that proportion to the total
costs.
It is important to realise that this is just a method of finding out
what the business cost is, and if necessary being able to explain why it
is 10 per cent or 20 per cent of the total rather than, say 5 per cent.
For which costs can I claim?
To be allowable, costs must be incurred for the “sole purpose of the
business”. You cannot claim for personal expenses (eg suits or general
clothing). Obviously, you can claim for the cost of the goods you have
acquired to make your sales. For example, taxi drivers, minicab drivers,
etc and those in the road haulage industry should enter fuel costs in
this box rather than elsewhere unless they are claiming mileage rate;
hairdressers should enter shampoo and hair product costs here.
At the end of the year you will need to make an adjustment for the
stock you have left. So the value for cost of sales will be: the value
of opening stock brought forward from last year, plus purchases made
during the year; less value of closing stock at the end of the year.
Other direct costs might include: discounts; commissions; carriage;
and research costs. For permanent, temporary and casual employees you
should include: salaries/wages; bonuses; pension contributions;
benefits; employer's NICs (National Insurance contributions); canteen
expenses; any recruitment agency fees; any subcontract labour costs.
Allowable premises costs include rent; business rates; water rates;
light; heat, power; property insurance; security; use of home as office;
as well as repairs and renewals and general maintenance of premises and
maintenance of machinery.
You can also claim for general admin expenses, such as telephone;
broadband; postage/courier; stationery; printing costs; professional
journals and subscriptions; insurance (eg public liability, etc). Travel
and subsistence costs are also allowable, including vehicle insurance;
servicing; repairs; vehicle licence; fuel (or mileage claimed at
approved rates); rail/air tickets; taxi fares; hotel accommodation;
subsistence/similar costs.
Advertising, marketing and promotional costs can be classed as
expenses, as can fees you pay to an accountant, solicitor, surveyor,
architect, stock taker, etc. You can also claim back interest and
alternative finance payments on bank and other loans (including
overdrafts) and alternative finance arrangements, as well as bank/credit
card charges and interest charges on hire purchase agreements.
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