Record keeping for the self-employed business person is one of the more tedious aspects of working for themselves. It is however essential, according to HMRC, to keep records for 5 years and 10 months after the tax year the tax return applies to.
To fill in your tax return or provide your accountants with the relevant information you’ll need to maintain a balance sheet and profit and loss statement. While most businesses find it straightforward to track and record income, expenses are usually less organised. However, systematic costing of expenses and their recording is an essential part of making sure you don’t pay too much tax.
Some small businesses find specialist software is helpful in managing their records throughout the year, but others prefer a cash book or spreadsheet. If using electronic recording it’s important to make sure your system is backed-up.
Well organised record keeping has other advantages. If HMRC decide to launch a tax investigation or enquiry, you’ll need sound records to support your financial position. Having good information at your fingertips is also the basis for any income or expenses analysis. Knowing where you make or lose money helps you improve your business.
You should also consider what would happen if you were ill. If someone holds the fort for you or helps you keep up with expenses will they understand the system you use?
Some aspects of running your business have specific information requirements in relation to tax. These include vehicles, plant and machinery, working from home and any business assets used for personal use. However your business accounts for these you must be able to show where your figures come from.
Sole traders can take advantage of the new simplified expenses system for the 2013/4 tax year. There’s a free checker available online to assess whether this is suitable for your business but your accountant can also provide advice. While it may simplify your accounting it’s no substitute for having accurate and up to date business records.