Record Keeping for Self-Employed
As a self-employed individual, you know the importance of keeping your records in order and up to date. From payments and invoices to tax filings and deductions, it’s vital that everything is recorded accurately for both yourself – so you can plan ahead – and compliance with government regulations.
In this blog post, we’ll explore just why record keeping is essential for self-employed people, explain how exactly to do it effectively, and discuss some handy tips when filing taxes. So if you’re overwhelmed by seemingly endless paperwork or want advice on accounting processes, read on!
Do I need a Separate Business Bank Account?
One of the biggest questions that sole traders and business partnerships ask is whether I need a separate bank account.
The answer is legally, you do not need to open a separate business bank account, but it is recommended. The reason for recommending it is that it keeps the business and personal records separate, making it easier to complete bookkeeping and helping to ensure that all the transactions are included in the self-assessment tax return.
One of the most significant advantages of having a separate account is saving time when you complete your accounts by knowing that all the transactions relate to the business. This process is made even quicker by using accounting software with bank feeds.
Can I Complete Accounting Myself or do I Need an Accounting Firm?
This is a big question and one that is up to individual preference. Some people find it helpful to use an accountancy firm as they can provide advice and assistance with the accounting process, ensuring that all the records are kept accurately and making sure you don’t miss any potential deductions.
On the other hand, some self-employed individuals like to complete their accounting themselves. This is perfectly acceptable and can be done with the help of various accounting software. If you decide to go down this route, ensure you understand all the regulations and filing requirements for self-employed people in the UK.
Record Keeping for Self-Employed – What Business Records should I Keep?
As a self-employed, you will have lots of paperwork, some of which you must keep to back up the accounting records for all the business income and expenses. These records include the following:
Bank Statements
These provide an accurate overview of all the transactions relating to your business for both income and expenditure. You will also need any credit card statements, paying in book and chequebook stubs.
Business Income
As self-employed, keeping all records relating to the business income is essential. You may have several different income sources, such as clients, online sales, cash sales and affiliate income. Keep all the invoices and records of all payments or deposits in your business bank account; this includes paying in slips, sales invoices, till rolls and all paperwork.
Business Expenses
These records should include all the business expenses you need to keep all the receipts for goods, stock and other expenses. They will help to ensure you are claiming all potential deductions.
Any expenses must be used solely for the business or claim the appropriate proportions, or HMRC will not accept them in a self-assessment tax return.
VAT Records
If you earn over the VAT threshold of £90,000, you must register for VAT unless you are exempt. You are then required to keep all VAT transactions and report them through the tax return software for making tax digital.
There are specific details that you must include in the sales invoice if you are VAT registered; this includes:
- a sequential number
- the time of the supply
- the date of issue of the document (if different to the time of supply)
- the name, address and VAT registration number
- the name and address of the customer
- a description of the goods or services supplied
- The amount of goods, the level of services, the sales tax, and the amount you need to pay, excluding sales tax.
- the total gross amount payable, excluding VAT
- the total amount of VAT chargeable
- the unit price
PAYE Records
If you are an employer and pay wages, you must keep records of all the payments made. You must remember to send a P60 for each employee at the end of each tax year and submit an annual return to HMRC detailing all PAYE amounts paid during the tax year. All this paperwork must be kept.
Personal Income Records
If you have any additional personal income, such as investments or other sources of income, keep all the relevant paperwork to prove how much was received and where it came from. This could include payslips, dividends, bank statements, interest income and P60s etc.
Any Business Grants
If you have taken any business grants, you must keep records of all the paperwork about this income. You may be liable for tax on these grants, so keep accurate records.
These are just some examples of business records that should be kept. Always ensure that your accounting system is up-to-date and in line with the latest HMRC regulations. This will ensure that your business complies with the law and that all records are in order. For more advice, seek professional help from an accountant or financial advisor.
Self-Assessment Tax Return
If you are self-employed and earning more than £1000 per year, you must complete a self-assessment tax return for each tax year. The tax year runs from 6th April to 5th April. The latest date to submit a tax return is 31st January the following year.
When you complete a tax return with HM Revenue and Customs, a calculation is made to let you know how much income tax and national insurance are due.
What is the best way to Keeping Business Records?
There are several options for keeping business records. The size of the business will depend on the system that you choose. We look at the best options for a self-employed business.
Paper-Based Business Records
Keeping accounting records paper-based can seem daunting, but with a little organisation and attention to detail, it’s not as complicated as it looks. By using filing systems such as folders and binders, you can easily stay on top of your records. Label each folder, so you know where to find the information when needed.
One of the biggest problems of paper-based is having storage space.
Cloud Storage
Cloud storage is becoming increasingly popular for accounting and finance departments. Storing documents in the cloud usually means that all your files are stored in one location, making them easily accessible from any device or computer. This also makes it easier to back up and share information with other people.
The advantage of cloud storage is that you don’t need physical storage space and can access your documents anywhere with an internet connection.
Accounting Software
Accounting software is one of the best ways to save time and money when keeping business records. It enables you to manage invoices, expenses, payments and more all in one place.
Sales invoices are issued within the software and emailed to clients. Paperwork for business expenses can either email to the software or use an additional package to scan them in and extract the information.
One of the most significant disadvantages of only using accounting software is that if you decide to change software and stop the subscription, you may lose access to the documents and have to continue to pay for two sets of software. An example is Xero. The business is archived, and you can only see the information by paying a monthly subscription.
How Long do I Need to Keep Business Records For?
You will need to keep all the tax records for 5 years after the tax return deadline for the relevant tax year. For example, if you complete the 21-22 tax year, the return is due 31st January 2023. You will therefore need to keep the records at least until the end of January 2028.
Are there Penalties for inadequate record-keeping?
HMRC might decide to review your records; if they find you have inadequate business records, they can reassess the business and fine you. The fines range from £250 for a new business in the first year of trading to £3000 for a company that has deliberately destroyed records.
Record Keeping Conclusion
Record keeping is an essential part of running a business, and it’s vital to ensure that you keep records for the correct period as set out by HMRC. Not only will this help your business comply with regulations, but it also ensures that all financial information is kept up-to-date and accurate.
Cloud storage, accounting software or paper filing systems can all be used to store documents securely; however, each option has its advantages and disadvantages depending on how much data needs to be stored and accessed.
Lastly, inadequate record keeping could result in hefty fines from HMRC, so make sure you are aware of their requirements when setting up your system. If you are unsure, seek the help of a bookkeeper or accountant.
