What records do you need to keep if you're self-employed?

BusinessChloe AdlingtonComment

A couple of weeks ago I wrote a blog post about how to properly set up and register your small business with HMRC (applicable in the UK only). The second part, as promised, today is about keeping tidy business records so that when the time comes to submit your tax return you’re in good shape.

Once again I’ve asked my fiancé who is an accountant to help me write this, however please do take this as guidance only, you should always seek professional advice as each individual circumstance can be different!

So let’s assume that you are self-employed (a sole trader or a partnership as limited companies have different rules) and that you’ve already registered your business with HMRC as detailed HERE

The first thing you need to decide is which is the best accounting method for your business (to do this speak to your accountant). There are two main options:

1)    Traditional accruals – you record income and expenses by the date on your invoices or bills. For example you sent an invoice to a client on 26th March 2015 so you record the invoice for the 2014 to 2015 tax year despite not actually receiving the money until the next tax year (i.e. on or after 6th April 2016).

2)    Cash basis – you only record income or expenses when you receive money or pay a bill so that you don’t pay income tax on money you haven’t actually received in your accounting period. For example you send an invoice to a customer on 21st March 2015 but don’t receive the money until 17th April 2015 so you record this income in the 2015/2016 tax year.

The second thing you need to do is keep thorough records for each period (plus proof e.g. invoices, receipts, bank statements, etc) so that you will be able to submit your tax return by 31st January each year and work out your profit (or loss). The records you need to keep include;

A)    Summaries of your income, business and personal (plus proof)
B)    Expenses summaries (plus proof)
C)    PAYE records if you employ any staff
D)    VAT records, if you are registered for VAT
E)    All bank statements

In order to work out your taxable profit you’ll need to know which of your expenses are ‘allowable’ to be deducted from your income. The general rule is that costs you pay for the sole purpose of earning business profits are allowable however this can be a little tricky so for more information take a look at:

So, moving onto how to keep your records tidy throughout the year to make your life so much easier when it comes to tax return time!

Here are our top 10 tips for keeping good business records:

1)    Set a routine of updating your records on a weekly or monthly basis to keep on top of it throughout the year, put the appointments in your diary now to make sure you have time set aside for doing this rather than leaving it all to the last minute!

2)    Set up simple systems (e.g. dedicated email folders or a box on your desk for receipts) for logging / filing income and expenses in between updating your records on a spread sheet (or in a notebook if you want to do it the old fashioned way!) And if you are keeping your information electronically remember to take backups regularly just in case.

3)    As I mentioned in part 1, you do not have to set up a dedicated business bank account if you’re self-employed, however it can be extremely useful from a record keeping perspective as you will be able to separate business and personal transactions much more easily

4)    If your turnover is likely to be anywhere near the VAT limit (currently £82,000 per year) make sure you keep an eye on it so you don’t risk missing the registration deadline

5)    File your bank statements, receipts and invoices in date order as soon as they are received as it will make life much easier when you need to look back at something

6)    Record any business mileage at the beginning and end of each trip you make and at the start and end of each accounting period

7)    Use reference numbers on your invoices to make tracking easier and include the references on your spreadsheets

8)    If you are using the traditional accruals accounting method don’t forget to also keep records of any money you’re owed but haven’t received yet, any invoices you’ve received but haven’t paid yet, the value of stock and work in progress at the end of your accounting period

9)    Although you can still submit your tax return via paper it’s easier to submit your tax return electronically if you can

10)     You need to keep records and any bank, statements, receipts, invoices, etc for at least 5 years after the 31st January submission deadline of the relevant tax year in case HMRC ask to check anything so don’t throw anything relevant away once you’ve submitted your tax return!
I hope you’ve found this post useful, it can be a complex area and every individual and business will be different so I’m afraid it’s difficult to give any tailored advice in detail without covering a million different scenarios ;-)

Hopefully though it’s given you a basic understanding of what you need to do. If you have any good tips or systems to suggest that might help other small business owners we’d also love to hear them in the comments below…

Chloe x