Ultimate guide to accounting for small businesses

“’Tis impossible to be sure of anything but Death and Taxes.”

Quote from The Cobbler of Preston by Christopher Bullock, 1716

Starting your own business is both exciting and daunting. Although it’s hard to know what the future may hold, you can be sure of one thing – you’ll have to balance the books.

But where do you start? How can you tell your PAYE from your NICs? What about VAT? What’s the best way to manage your accounts when there’s so much other work to be done?

Well, as luck would have it, you’ve got Mazuma on your side. We’ve been sorting out small businesses’ accounts for years, so we’ve learnt plenty in that time. And we’re happy to share.

So whether you’re forming a limited company, or are a sole trader going it alone, take a deep breath and dive into our complete guide to keeping accounts for your small business.

How does the type of company affect bookkeeping?

All companies operating in the UK need to make contributions such as tax, which are in the main paid to Her Majesty’s Revenue and Customs (HMRC). But these can take different forms depending on how the business is set up. In essence, the more complex the company structure, the more complicated it is to keep accounts.

• All sole traders have to pay income tax on taxable profits, and national insurance contributions (NICs), assuming they’ve earned enough in the year to warrant doing so.
• If you run a limited company, you’ll have to pay corporation tax.
• If you have staff on the payroll, you may have to make income tax and NICs deductions from their monthly salaries. In addition, you may have to pay employer’s NICs for each member of staff earning over a certain threshold.
• If you make £85,000+ from certain goods and services, you’ll have to register your company for VAT.
• And you’re likely to have to pay business rates if your company operates out of an office or retail premises.

This may sound like a lot to think about… And it is! That’s why keeping accurate accounts is essential for businesses of all stripes, as there’s plenty to stay on top of.

If you’re only just starting out, and are wondering how your company should be organised, check out our guide to which business structure is best.

So… How do I keep accurate accounts?

Thanks for asking. Well, first things first, make sure you keep all your business receipts and records of all your payments. That might sound obvious, but it really is the foundation upon which you build your accounts: incomings versus outgoings.

Next, how do you keep your records? Analogue or digital*? Do you install accounting software, or use cloud accounting? Do you just say ‘fudge it’ and get someone in to do everything for you?

If you’re weighing up the pros and cons of hiring professionals or going DIY, you can read about using bookkeeping software vs online accountants here. But, if you want to skip to the end, we can thoroughly recommend using an experienced accounting service. Of course, we would say that – but it’s likely to be the most cost-effective option, and will doubtless save you a huge amount of time. Also, you can guarantee that your accounts will be accurate.

It’s a lot of work to process invoices, record expenses (and categorise them correctly for tax purposes), tally overheads… And there’s a huge amount more to do if you employ staff, as you’ll have to tax them at source (pay as you earn, or PAYE), generate payslips and so on. These are really time-consuming tasks, and you really will thank yourself if you just get someone else to do it. That way, you can apply your time to what you do best – the nuts and bolts of your business!

*It’s worth keeping in mind that HMRC is working towards phasing out old-fashioned paper accounts in certain areas. Its Making Tax Digital (MTD) drive means it’s already mandatory for companies registered for VAT to keep digital accounts, and file digital returns with MTD-compliant software.

How are my accounts presented?

Accounts are presented as an annual summary of your business performance. They have to follow a specific format, detailing your sales, costs and assets. From this report, the amount you owe in taxes and contributions will be calculated.

If you’re self-employed, a company director, or collect any other non-taxed income (for example, freelance work on top of your regular earnings), you need to submit a self assessment tax return. Taxable income is calculated from 6 April to 5 April the following year.

The deadline for submitting this return is the 31 January the following year. For example, if you were self-employed between April last year and the beginning of April this year, then you’ll have to get your return in by the end of January 2021.

It’s slightly different if you run a limited company. For most of these businesses, year end is at the end of the month in which the company was incorporated. In some instances, companies may choose to do their accounts over the calendar year, or in line with the corporation tax year – which ends 31 March. In any case, you still need to complete your accounts each year, and file them with Companies House.

As mentioned, limited companies in the UK have to pay corporation tax. The current rate is a flat charge of 19% of any taxable profit generated. In this instance, salaries and other business expenses are deducted from the profit, but any dividends payable are not.

You need to complete an annual company tax return (a CT600 form), and your tax payment should be made to HMRC within nine months and a day of the accounting period you’ve specified.

A big difference with the company tax return is that – unlike with a self assessment tax return – HMRC won’t instruct you on how much corporation tax you owe. This means that not only should your accounts be accurate, but your calculations too. If you intend to form a limited company, this is where having your own accountant will really come into its own.

What happens if I file or pay my taxes late?

If you’re a sole trader and you file or pay your taxes late, you may well be penalised by HMRC. You definitely don’t want this. Although there are some extenuating circumstances, it’s always best to keep your nose clean. Read our guide to HMRC penalties, and how to avoid them.

This is another good reason to outsource your accounts to a professional accounting service. That way you’ll have the peace of mind that your accounts are filed accurately, and on time.

Do I need to charge VAT?

Regardless of whether you’re a sole trader or limited company, if your annual turnover tips the £85,000 mark, you’ll need to register for VAT. Don’t fret though – this is a tax payable by customers, rather than an extra chunk you have to pay yourself.

In short, this means you’ll charge your customers an additional 20% VAT, which you’ll add to your sales invoices. You then keep this amount separate from the rest of what your customers pay you. Congratulations – you’ve become a tax collector!

It’s a bit more work though, as VAT returns and payments are due quarterly. You can, however, reclaim the VAT you’ve paid on any purchases and expenses you’ve made for your business.

You can read more about VAT returns and the services we offer here.

What other considerations are there?

There are a few more things you’ll have to consider when keeping accounts for your business:

• PAYE: If you employ staff, you’ll be responsible for calculating their income tax and national insurance. This is deduced from their gross salaries, and paid to HMRC monthly on their behalf. Find out what PAYE underpayments or refunds could mean for you.
• Business rates: As mentioned, if you operate out of an office or retail premises, you’re likely to pay business rates. This is a bit like council tax, but for businesses. Certain premises are exempt, such as farm buildings. And you run a business from home, you’re unlikely to have to pay business rates on top of your council tax.

That is a lot to think about!

You’re not wrong. But keeping accurate accounts needn’t be overwhelming. We’ve got loads of guides and useful tips for staying on top of your businesses’ finances.

And, of course, we’re happy to do all this stuff for you. For sound advice on keeping your accounts in order, feel free to drop us a line today.