Bookkeeping

Since the old Chancellor, Kwasi Kwarteng, was removed from the position last week, and the new Chancellor, Jeremy Hunt, was installed in the position, there have been several changes to the mini budget announced on Sept 23rd, 2022. Here are the changes that have now been announced. Anything in Bold highlights the announcements that have been changed.

1. The Basic rate of income tax for those in England, Wales and Northern Ireland will be being lowered to 19% from April 2023 – has now been scrapped. The basic rate will stay at 20% indefinitely at this stage.
   
   
2. The 45% higher rate of income tax, which is charged on incomes over £150,000 will be abolished for all those in England, Wales and Northern Ireland. It was announced on October 3rd, 2022 that this change has now been rescinded. There will continue to be a 45% higher rate of income tax.
   
   
3. There will be one single higher rate of income tax of 40% from April 2023 for all those in England, Wales and Northern Ireland that earn over £50,270 a year. It was announced on October 3rd, 2022 that this change has now been rescinded. There will continue to be a 45% higher rate of income tax.
   
   It is important to note that Scotland has different income tax bands, so the changes outlined in points 1 to 3 do not apply to them.
   
   
4. The National Insurance increase of 1.25 percentage points that was implemented in April 2022, will be removed from November 6th, 2022. This was applied to Class 1 NIC paid by employers and employees and Class 4 NIC paid by the self-employed. The amount of National Insurance paid by an individual is based on what their income is. For those who earn less than £12,570, they won’t see any benefit of this as National Insurance is not paid on any amounts under £12,570. As the amount of money earned increases, the benefit of the reduction in NI will increase. This also means that the planned Health and Social Care levy will also be cancelled. This change has been kept.
   
   
5. The announcement about the increase for Corporation Tax from 19% to 25% in April 2023 being scrapped, has now been reversed. The rate of Corporation Tax will now increase to 25% in April 2023.
   
   
6. The rules around IR35 will be simplified from April 2023. This will include removing the responsibility of businesses to determine a worker’s tax status. Employees will be able to determine their own tax status instead. This will now no longer be taking place and the current rules around IR35 will be retained.
   
7. The freeze on alcohol duty has been lifted and will not be kept.
   
8. New measures to help businesses with rising energy costs were announced on Wednesday, Sept 21, 2022. This includes a cap on costs per unit. All businesses, charities and public sector organisations who are on existing fixed price contracts agreed on or after April 1st, 2022, signing new fixed price contracts, are on deemed or out of contract or variable tariffs or are on flexible purchase or similar contracts will be eligible for the scheme. It will automatically be applied to your bills from October 1st, 2022 to March 31st, 2023. You can read more about this specific measure here: https://www.gov.uk/guidance/energy-bill-relief-scheme-help-for-businesses-and-other-non-domestic-customers.
   

You can read more about the changes to the mini-budget here: https://www.gov.uk/government/news/chancellor-brings-forward-further-medium-term-fiscal-plan-measures. As more information is released, I will update this blog post.

There is supposed to be a budget announced on October 31st, 2022. Once that has been announced and I have read through all of the information provided on the government website, I will share that information across my social media platforms and on the website.

During this month’s Facebook Live, I talked about VAT – specifically about when you should register for VAT.

Before I talk about when you should register for VAT, I want to start by explaining what VAT is.

VAT is a value-added tax that is charged on almost everything you buy within the UK.  When you buy something in the UK, whether it’s in a shop or online, the price displayed will likely include VAT.  If the price doesn’t include VAT, it will state that the price is excluding, or is exclusive of, VAT.  Not all products/services have the same VAT rate, and it is important that businesses know what VAT rate they should be charging on their products/services.

VAT only affects the consumer in terms of the price they pay for the products/services.  However, if you are a business, it can create additional work for you and the records you need to keep.  All VAT-registered businesses must track the VAT they charge and pay, submit their returns to HMRC on a regular basis, and then pay them the VAT that is owed.  It is very important to know that the VAT that is charged on your sales does not belong to you – it is a tax that you are collecting on behalf of HMRC.

When do I need to register for VAT?

The majority of businesses won’t need to register for VAT unless they expect their income (total sales that are not VAT exempt) to reach the VAT threshold in the next 30-day period or they met the threshold during the last 12 months.    The current threshold as of 09/09/2022 is £85,000 and it will remain at that amount until 31/03/2024.  It is calculated on a rolling 12-month period, so you need to be aware of what value your sales are at continuously so you can register if you need to.  Once you reach the threshold, you will have 30 days after the end of the month in which you reached that threshold, to register with HMRC.

Some businesses may also need to register for VAT even if they are not based in the UK, but sell goods/services to the UK.  In that instance, they are classed as a non-established-taxable-person and must register for VAT.  There is more information on NETPs on the government website.

It is also possible to register for VAT voluntarily if your turnover is less than £85,000.  I would advise that you speak with an accountant or tax adviser before registering for VAT voluntarily to ensure doing so would benefit your business.

As soon as you notice that your income has gone over the VAT threshold, you must register within 30 days of the end of the month that you went over the threshold.  If you notice that your income is likely to go over the VAT threshold during the next 30 days, you need to register for VAT by the end of that 30-day period.

You may need to pay a fine if you are late registering for VAT, and you will also be liable to pay any VAT on the sales you’ve made since the date you needed to register.

What happens once I register?

When you register for VAT, you will be asked which scheme you will be using as there are several different VAT schemes.  The main ones are the Accrual scheme where you would record the VAT for all your sales and purchases as of the invoice date, the Cash VAT scheme where you would record the VAT for all of your sales and purchases as of the date they were paid, and the Flat Rate Scheme which is where the amount of VAT a business pays is a fixed rate and is only based on your sales.

You can register for VAT online through the government website.

Once you have completed the registration, you will receive your VAT registration number from HMRC which you must display on all your invoices and sales receipts that you issue to your customers.  You will also receive information about when to submit your first return and payment, as well as a VAT registration certificate which confirms your registration date and number.  This information will be accessible in your online VAT account but may be sent to you in the post depending on how you registered.

After you have received your VAT registration number, you can start to charge VAT on your sales.  There are several legal requirements you must meet as soon as you have registered:

• you must record the VAT on your sales and purchases
• add VAT to your prices
• file your VAT returns as instructed and pay any VAT due to HMRC
• keep digital VAT records and a VAT account
• ensure that you are charging the correct VAT rate on all products/services that you sell.

The amount of VAT you will pay to HMRC each time you submit your VAT return will depend on which scheme you are using and whether you charged more VAT on your sales than you reclaimed on your purchases.  If you are using accounts software like QuickBooks Online, you will be able to see how much VAT you will owe at any point in time based on the information entered into your accounts.

As the VAT portion of your sales and purchases doesn’t belong to you and is owed to HMRC, it is a good idea that you set up a business savings account so that you are holding back 10-15% of the amount you are paid for sales, and you will then be able to pay any VAT you owe to HMRC.  Normally, you would charge your customers 20% VAT which is the standard rate, but you would also have purchases that you have paid VAT on, so by setting aside 10-15% of the amount you are paid for sales, you won’t then be scrambling at the end of each quarter to find the money to pay HMRC as you will have saved at least some of what you may owe to them.

The frequency that you must file your VAT return and when by will depend upon the scheme you are using and when you registered.  Usually, it is once every quarter, and you will have 1 month plus 7 days to file and pay your return.  For example, if you had to file a VAT return that covered April to June, you would have until August 7^th to file the return and pay any amount due to HMRC.

What else do I need to know?

HMRC have many pages about the different VAT rates and how to treat items, so you can read about the different rules on there.  If you are VAT registered, it is a good idea to have an accountant who can help you to know how to deal with anything that does not follow the standard VAT rules, especially if you are dealing with importing/exporting products with the EU.

Even though I am a bookkeeper and understand the fundamentals of VAT and how it is to be dealt with, some areas like dealing with importing/exporting products with the EU are quite specialist areas, so I always work closely with a client’s accountant to make sure we are recording the information within the accounts correctly.

If you would like further information about why having a bookkeeper helps you with your business, or when you should hire one, feel free to e-mail me.

On Sept 23rd, 2022, the Chancellor, Kwasi Kwarteng, announced a mini-budget to help businesses and individuals with the increasing costs of living. I have summarised the announcements that will help businesses below.

1. Basic rate of income tax for those in England, Wales and Northern Ireland will be lowered to 19% from April 2023 – this will affect all self-employed businesses and employees who earn between £12,571 and £50,270 a year. This is the proposed tax reduction that the previous Chancellor, Rishi Sunak, promised would happen before the end of Parliament in 2024. The new Chancellor has brought this forward.
   
   
2. The 45% higher rate of income tax, which is charged on incomes over £150,000 will be abolished for all those in England, Wales and Northern Ireland. It was announced on October 3rd, 2022 that this change has now been rescinded. There will continue to be a 45% higher rate of income tax.
   
   
3. There will be one single higher rate of income tax of 40% from April 2023 for all those in England, Wales and Northern Ireland that earn over £50,270 a year. It was announced on October 3rd, 2022 that this change has now been rescinded. There will continue to be a 45% higher rate of income tax.
   
   It is important to note that Scotland has different income tax bands, so the changes outlined in points 1 to 3 do not apply to them.
   
   
4. The National Insurance increase of 1.25 percentage points that was implemented in April 2022, will be removed from November 6th, 2022. This was applied to Class 1 NIC paid by employers and employees and Class 4 NIC paid by the self-employed. The amount of National Insurance paid by an individual is based on what their income is. For those who earn less than £12,570, they won’t see any benefit of this as National Insurance is not paid on any amounts under £12,570. As the amount of money earned increases, the benefit of the reduction in NI will increase. This also means that the planned Health and Social Care levy will also be cancelled.
   
   
5. The announced increase for Corporation Tax from 19% to 25% in April 2023 will no longer go ahead.
   
   
6. The rules around IR35 will be simplified from April 2023. This will include removing the responsibility of businesses to determine a worker’s tax status. Employees will be able to determine their own tax status instead.
   
   
7. The amount of money companies can invest tax-free in plant and machinery, known as the Annual Investment Allowance, will remain at £1m indefinitely to help promote business investment and productivity.
   
   
8. There will be a regulation change so that pension funds can increase UK investments to help stimulate growth in the economy and help with investment in science and tech companies.
   
   
9. All new and start-up companies will be able to raise up to £250,000 under a scheme giving tax relief to investors.
   
   
10. Share options for employees have doubled from £30,000 to £60,000.
    
    
11. In 38 local authorities within England, Investment Zones will be set up which will provide businesses with more targeted and time-limited tax cuts. More land will able to be released for housing and commercial development due to changing the planning rules, which will help to create new jobs and houses for the areas.
    
    
12. The hospitality sector will benefit from the freeze on alcohol duty for another year.
    
    
13. New measures to help businesses with rising energy costs were announced on Wednesday, Sept 21, 2022. This includes a cap on costs per unit. All businesses, charities and public sector organisations who are on existing fixed price contracts agreed on or after April 1st, 2022, signing new fixed price contracts, are on deemed or out of contract or variable tariffs or are on flexible purchase or similar contracts will be eligible for the scheme. It will automatically be applied to your bills from October 1st, 2022 to March 31st, 2023. You can read more about this specific measure here: https://www.gov.uk/guidance/energy-bill-relief-scheme-help-for-businesses-and-other-non-domestic-customers.
    

You can read more about the mini-budget here: https://www.gov.uk/government/news/chancellor-announces-new-growth-plan-with-biggest-package-of-tax-cuts-in-generations. As more information is released by the government, I will continue to provide updates across social media and through the blog.

During the July 2022 Facebook Live, I talked about why and when a business should appoint a bookkeeper.

Every business is different and is going to have different ways of doing things – so the answer to the questions “why should I appoint a bookkeeper?” and “when?” will depend on your specific circumstances.

Let’s look at the question of “when should I appoint a bookkeeper?”

If you have just started out with your business and your income and expenditure are relatively low, you may decide not to appoint a bookkeeper at this time.  However, six months down the line, your business has grown – you are trying to keep on top of orders, the marketing, replenishing stock, maybe even managing staff – as well as making sure the accounts are kept up to date.  You are struggling to find that work/life balance, so you decide now is the time to hire a bookkeeper.

As a qualified bookkeeper with 18 years of experience, I would actually advise that you get a bookkeeper right at the start of your business.  This doesn’t necessarily mean having them do the accounts, it could be that you have them provide you with support to ensure that you are accounting for everything correctly and over time you could then have them take on more of the bookkeeping tasks.

To help you to decide when to hire a bookkeeper, think about the following question: “do I really understand how to correctly record my financial information?”.  If you aren’t sure how to accurately record a transaction, it could end up costing you a lot of additional money in tax.  For example, I have had clients come to me where they have recorded transfers of funds from their main bank account to their savings account as income, which is incorrect.  This error, if I had not seen it and corrected it could have cost the client several thousand pounds in additional tax.

Software companies have also been quite clever in their marketing.  They have made it look like using the software is as easy as clicking a couple of buttons – but before you can click those buttons, you need to have an understanding of how to enter the information into the accounts correctly, so that the numbers appear in the right place in your accounts, which then provides you with an accurate picture of your business, allowing you to make informed business decisions.

Now, let’s look at some reasons why a business owner should hire a bookkeeper.

We’ve already touched on the fact that having a bookkeeper can help you to ensure your financial information is being entered accurately, but having a knowledgeable bookkeeper by your side can also help you to make sure that you are meeting all of the legal requirements a business has in terms of their accounts:

• Submitting VAT returns on time
• Using the correct VAT treatment for sales and purchases
• Making sure you have accurate records of all transactions
• Making sure the accounts are ready for submitting to HMRC and Companies House – this is going to be even more important with MTD ITSA coming into effect in April 2024

Another great reason to have a bookkeeper is that they can free up your time.  By having a bookkeeper to do the accounts, you can put the time to better use by working on promoting your business, helping your customers or being able to spend time with friends and family.  You will still need to provide all the paperwork to the bookkeeper, but the time you have spent and the stress you were under will be greatly reduced.

Do you know how your business is doing?  Can you afford to hire staff?  With the bookkeeper keeping the accounts up to date and ensuring they are accurate; you will have a better idea of the financial picture of the business.  By having a more accurate picture of the financial situation of your business, you will be able to make more informed business decisions that will allow you to grow the business and achieve your goals.

There are many other reasons having a bookkeeper is a good idea, but I have touched on some of the most important ones.

Having a bookkeeper, and even an accountant, working with you on your business as a team is a great collaboration that will benefit you as a business owner.

If you would like further information about why having a bookkeeper helps you with your business, or when you should hire one, feel free to e-mail me.

During the June 2022 Facebook Live, I talked about the differences between sole traders and limited companies.

What is a sole trader (self-employed)?

A sole trader runs the business as their own and owns everything the business has – the profit of the business is their income.  As you and the business are the same legal entity, you are responsible for any debt the business has.  You are also responsible for registering with HMRC as self-employed, filing a self-assessment tax return every year, paying tax on all the profits and paying your own NI Contributions.

What is a limited company?

A limited company is owned by shareholders and run by directors.  It is a separate legal entity.  Everything relating to the limited company is separate from your personal finances and the company is responsible for its own debt. Any profit the business makes belongs to the company, and it must file a corporation tax return at the end of the financial year.  The company must also file annual accounts with Companies House each year.

What other differences are there between a sole trader and a limited company?

Business Name – The name of a self-employed business is not protected.  There can be a lot of businesses using the same name as you, and you would not be able to do anything.  However, the name of a limited company is protected and that means that in the UK, there can only be one company by that name. It is possible that if someone sets up a limited company, and you have been running a self-employed business with the same name, they could require you to change it.  It is a very good idea to check the name you want to use for the business on Companies House to make sure it isn’t registered.  Some sole traders even set up a dormant limited company to protect their name. This is the link to the Companies House website.

Responsibility – A sole trader is 100% responsible for making all the decisions about their business and for ensuring all legal requirements are met.  This can be a good thing as you don’t have to ask anyone else for permission to implement an idea, but it can also be a downside.  As you are the only person responsible, even if you have staff, you still have to spend many hours making sure everything is running as it should, and you often have to wear many hats as you try to do everything. 

As there is usually more than one person involved in a limited company, though there are many sole-director companies, the decision-making and responsibility for the day-to-day running of the company is spread across more people.  However, if you are running a sole-director company, then like a sole trader, the responsibility relies solely with you.

Admin – There is a lot less admin involved for a sole trader.  You need to keep accurate records for your accounts, but you then only need to submit a self-assessment at the end of the tax year.  However, once MTD ITSA comes into play in 2024, you will be required to submit information to HMRC on a quarterly basis, though if your accounts are up to date it should be fairly straightforward.

A limited company, on the other hand, has a lot more admin to deal with.  At the end of the year, a Corporation Tax Return must be filed with HMRC, the accounts must be submitted to Companies House, and each director may have to submit a self-assessment tax return.  The company must also submit an annual return to Companies House every year, verifying the information on file.

Taxation – When it comes to being self-employed, as long as you have no other income, the tax side is relatively straightforward.  You will be liable for paying tax on any profit over the personal annual allowance, which for this tax year is £12,570.00.  For any profit between £12,571 and £50,270 you will pay 20%, for any profit between £50,271 and £150,000, you will pay 40% and for any profit over £150,000 you will pay 45%.  You will also need to pay Class 2 NI which you pay on any profit over £6725 which is £3.15/week for this tax year.  You may also be required to pay Class 4 NI which will be 10.25% on any profits between £9,881 and £50,270.  If you have profits of over £50,270 you will pay 3.25%.

If you are a limited company, things are a bit more rigid.  There are stricter rules about what allowable expenses can be claimed and directors cannot freely take money out of the business.  For every pence of profit, a limited company makes, in the 2022/2023 tax year they will pay 19% in Corporation Tax.  This rate will be going up to 25% for companies with profits over £250,000 from April 1^st, 2023.  If the limited company pays dividends to its shareholders, each shareholder will have to pay tax on any dividends received that are over the £2000 limit.  The amount of tax paid will depend on the individual’s income.  Each director may then also have to pay tax to HMRC when they file their self-assessment, depending on how they received money from the company, whether they have any other income and whether they received any dividends.

This is just a brief overview of some of the differences between a sole trader and a limited company.

If you would like further information about the differences between a sole trader and a limited company, feel free to e-mail me.

During the May 2022 Facebook Live, I talked about how to register as self-employed.

A lot of people start businesses at home for many reasons – to generate a second income, to fit around childcare or health issues and some people don’t even realise that they are running a business – they think they are just enjoying a hobby.

It is important to note that if you are running a self-employed business, you will need to register with HMRC by October 5^th after the end of the first tax year to avoid any penalties, though it is a good idea to register asap.

How do I know if I am running a business or if it is a hobby?

There are a few indicators set out by HMRC to help you to figure out if you are running a business or if it is a hobby.

1. Are you buying/making goods with the intention of selling them for a profit?
2. What frequency are you making and selling the items? For example, if you are making cakes and selling them every week/month – it is not a hobby.
3. What are you charging for the item?  Have you provided a fixed cost for the item and the buyer has agreed to that price? If so, this is a contract.
4. Are you responsible for fixing errors with the item in your own time?
5. Are you able to hire people at your own expense to help you do the work?

While these are indicators that you are indeed running a business, if you decide you are just doing a hobby – HMRC will contact you and potentially fine you, if they think you are running a business. There is another blog post I have written about whether you are running a hobby or a business and you can read it here.

When do I need to register?

Now that you’ve determined that you are running a business, you need to ensure that you are keeping accurate records for your accounts.

If your self-employed business makes less than £1,000 in the tax year, you do not need to register as self-employed.  You still need to keep your accounts though so that you can prove your income. However, as soon as your income goes over £1,000, you do need to register – even if the next year your income is lower.

You will also need to register if you need to prove you are self-employed or want to make voluntary Class 2 NI contributions to help you qualify for benefits.

How do I register?

To register as self-employed visit www.gov.uk/register-for-self-assessment and click on the link “Register if you’re self-employed”.  Follow the steps outlined. 

If you have never filed a self-assessment before, you will need to register through your business tax account.  Don’t worry if you don’t have one as you can create one at the time.

Once you have registered, HMRC will post out your Unique Taxpayer Reference (UTR) and login details for your Government Gateway account along with any additional instructions.  Make sure you keep these details safe as you will need them.

There are different instructions for how to register if you have filed a return before and these are provided on the page.

What else should I think about?

Once you have registered as self-employed, there may be other tax services you need to register for.

1. VAT – if your turnover goes above the VAT threshold of £85,000, you will need to register for VAT, so it is very important that you keep on top of your accounts and monitor your income.
2. If you are working as a contractor or a subcontractor in the construction industry, you will need to register for the Construction Industry Scheme.
3. If you start to employ staff, you will need to register as an employer.

There are also other items you need to take into consideration like business insurance and whether your product needs any sort of safety testing.

You want to ensure that you are not only meeting your legal requirements in terms of taxes and accounts but also all responsibilities of a business owner.

Make sure you start to record all your income and expenses correctly from the start and even start out using a separate bank account for the business.  These two things can really help you to keep on top of your accounts and grow your business.

If you would like further information about how to register as self-employed, feel free to e-mail me.

On March 23rd, 2022, Rishi Sunak, Chancellor for the UK, announced the Spring Budget.

There were some unexpected announcements during the Spring Budget in relation to businesses,

1. Change to National Insurance Contributions Threshold
   
   From July 2022, the threshold for paying National Insurance Contributions will increase to £12,570. This means that NI Contributions will not be deducted from employee wages until they have met the threshold. It is important to note, that this new rate only applies from July 2022. From April 2022 to July 2022, the threshold is £9,880 before NI Contributions need to be paid.
   
   
2. Increase to Employment NI Allowance
   
   Small businesses that employ at least two people who are paid above the Class 1 NIC Secondary Threshold are allowed to claim Employment Allowance. This has allowed them to claim the first £4,000 towards Employer NI Contributions, reducing how much they pay to the government per year. The government has announced that this will be increasing to £5,000 from April 6th, 2022.
   
   
3. Health and Social Care Levy
   
   The new tax announced in September 2021 – the Health and Social Care Levy. From April 6th, 2022, Class 1 NIC paid by employers and employees, and Class 4 NIC paid by those who are self-employed, will increase by 1.25 percentage points. From April 6, 2023, this tax will be split away from National Insurance and be calculated separately, meaning that the NI contributions will return to their previous levels, with the Health and Social Care Levy being calculated separately.
   
   
4. Working from Home
   
   During the pandemic, the government allowed employees to claim for various expenses for working from home – either from their employer or directly from HMRC. This has now been stopped for the 2022/2023 tax year.
   
   
5. Decrease of Basic Rate of Income Tax
   
   The Chancellor announced that by the end of the current government in 2024, he is aiming to cut the basic rate of income tax from 20% to 19%.
   
   
6. Dividend Income
   
   The tax rates on dividend income over £2,000 will increase for the 2022/2023 tax year. The new rates are as follows:
   Basic Rate: 8.75%
   Upper Rate: 33.75%
   Additional Rate: 39.35%
   
   The rates of tax paid are based on your income tax rate.
   
   
7. Reform of Tax Basis Period
   
   The government has announced the basis period for businesses and how their taxable profits will be calculated differently. This will only affect businesses who have a different year-end to March 31st or April 5th. From April 6th, 2024, all businesses will need to submit their tax returns following the same timeframe as the tax year. You can read more about it here.
   
   
8. Corporation Tax
   
   The current rate of corporation tax – 19% – will remain in effect until March 31st, 2023. At that point, it will increase to 25% for all companies with profits over £250,000.

You can read more about the Spring Budget here.

During the March 2022 Facebook Live, I talked about what expenses businesses can claim on their accounts and tax return.

Every business, whether they are self-employed, a partnership or a limited company, will have expenses – some of these might be related directly to sales so stock you’ve purchased for resale or perhaps a template for a client’s website if you are a website designer – and some of these will be regular overheads for running the business – stationery, advertising, software, utilities, payroll expenses, insurance etc.  Some of the expenses that businesses encounter are legitimately able to be entered into the accounts, but when it comes time to file the self-assessment or corporation tax return, they aren’t allowed for tax purposes (like depreciation, entertainment of clients, charity donations).  There are also expenses that require special treatment before you even enter them into the accounts.  I won’t be covering every type of expense as there are quite a lot, but I will touch on some of the most common ones.

Before you enter an expense into your accounts, the first thing you need to think about is whether it is “wholly and exclusively” for business use.  If it isn’t, you may not be able to claim it in the accounts, or you may only be able to claim a portion of it.

There are other transactions that aren’t as straightforward to deal with.

HMRC have very strict rules regarding what you are allowed to claim when it comes to clothing, and this is where the “wholly and exclusively” rule comes in.  A business can claim for uniforms, protective clothing needed for work and actors, or entertainers can claim for costumes.  However, if the clothes could be worn outside of work or they don’t have your logo on them – you cannot claim for them in your accounts or on your tax return.  For example, if you worked in a bank and you needed to wear a suit – you could not claim on your accounts or tax return for a suit you bought from M&S as that suit could be worn outside of work.  If you were a delivery driver for Domino’s and you had to buy a jacket or t-shirt in the business colours with their logo on it – you could claim it on your business accounts and tax return.

One of the expenses that can cause a lot of issues for businesses is utilities.  A lot of self-employed businesses, and small limited companies, are run from home which means they are using electricity, gas, water etc.  HMRC do allow businesses to claim for a portion of these costs – you can either work out a percentage of use for each item or use one of the simplified expenses methods. For self-employed businesses, the easiest way to do this is by using the simplified expenses method that HMRC has developed.  This is based on the number of hours you work from home each week and you are then able to claim a set amount for each month.  It is only able to be used by those who work more than 25 hours per month from home.  This set amount only covers things like gas, electricity, mortgage, and council tax.  If you work from home for less than 25 hours per month, you will need to calculate the proportion of business use for your home.  For a limited company, the amount you can claim for “Use of Home” is currently £6.00/week. 

The two methods mentioned above don’t include claiming for the phone or internet – HMRC has very strict rules about what you are allowed to claim for these expenses when you work from home.  The only way to ensure that you can claim for telephone and internet use 100% is to have a separate phone line, mobile phone, and internet connection for the business If you can’t do this, you will need to calculate out a reasonable percentage of business use that can be claimed – for the phones you cannot claim for the rental of the line, just for the business-related calls. 

Another type of expense where there is a lot of confusion is related to travel.  You are not able to claim mileage for travelling to your business premises, or your regular place of work, from home.  You are only able to claim for travel to meetings, events, to deliver goods and other situations.  If your journey includes personal reasons, you can only claim for the mileage related to the business portion.  If the car is in your name, and not the business, it can be difficult to accurately calculate the business portion of all car/van related expenses, so using the flat rate per mile that HMRC set, is the easiest way to claim for these expenses.  HMRC allow you to claim a flat rate per mile which covers the costs of fuel, repairs, insurance etc.  The current rate as of 01/03/2022 is 45p per mile for cars and goods vehicles.  You do need to ensure that you keep proper records that show the starting and ending mileage and location, date, and the reason for your journey.  You can check the rates that can be claimed here.

If you travel somewhere for work on a plane, train or using public transport and part of the reason for the journey is for personal reasons, you can only claim for the part of the journey that relates directly to the business.  Again, this is where the “wholly and exclusively” rule comes in.  It’s also important to note that you cannot claim for travel between your home and your main place of work.

This is only a brief overview of what expenses a business can claim on their accounts and tax returns.  The majority of expenses a business incurs are going to be allowed to be claimed without any issues on both the accounts and tax returns, other items can only be claimed on the accounts but must be removed, or added back, when it comes to the tax returns, and some items are simply not allowed to be claimed at all.

If you would like further information on what expenses are allowable for a business to claim, feel free to e-mail me.

During the February 2022 Facebook Live, I talked about why you should have a separate business bank account for your business.

When someone first sets up their business, they may start to use their own personal bank account for the business, and not even consider getting a separate bank account for the business.  It might be easy enough to keep track of the business transactions at the start, but once your business grows, it can become quite difficult. 

While there is no actual rule that says a self-employed business must have a separate bank account, it is good practice to do so as that way you can ensure you know exactly what funds the business has and it makes it easier to prepare your accounts.  If your business is a limited company, you are legally required to open a business bank account as the business is a separate legal entity.

Why should I have a separate bank account for my business?

1. It makes it easier to see exactly how much money the business has.
   
   One of the main reasons to have a separate bank account for the business, is so that you can see straight away which transactions relate to the business.  You can check the balance on the account and know straight away how much money the business has – you won’t need to try and figure out which transactions are relating to the business or which transactions are personal.
   
   
2. It reduces the admin time required for getting the accounts completed.
   
   It makes it much easier for your bookkeeper or accountant to ensure the accounts are fully correct, as they won’t need to try and figure out which transactions are personal, and which are business related.  By having a separate bank account for the business, you will be saving a lot of time in terms of admin, and a lot of stress in trying to remember whether a transaction was a personal one or not.
   
   
3. It makes it possible to reconcile the account.
   
   Another reason is that at the end of the month, you will be able to properly reconcile the account, and easily track customer payments you’ve received so you can make sure your debtors list is up to date.  This means that your accounts will accurately reflect how much money the business has.
   
   
4. It helps to build up the business’ credit rating.
   
   Having a separate bank account for the business, can help your business to build up its own credit rating – it can be very useful if you need to apply for a loan in the future.
   
   
5. It helps to build trust with your customers and suppliers.
   
   Having a separate bank account for the business can give your business a more professional appearance as the business name would appear on your cheques and debit card, this in turn can help customers and suppliers to have more trust in your business.
   
   
6. You can connect the bank account to your accounts software.
   
   A lot of the accounts software now allows bank accounts to be connected to a bank feed, meaning that the transactions can be automatically downloaded into the accounts software, ready for categorising.  This can make getting your accounts completed more efficient, as you, or your bookkeeper/accountant, won’t have to manually enter every single transaction.
   
   
7. It makes HMRC inspections go a lot easier.
   
   If you are using a bank account for both the business and your personal items, if HMRC ever do an inspection on your business, they will go through every transaction on the bank statements and could ask to see proof that each transaction is for the business or for personal use.  It can make things very complicated and more time consuming.

All the reasons I’ve stated about why it’s a good idea to have a separate bank account, also apply to having a separate PayPal Account or credit card for the business.

What else do I need to know?

It is important that when you are looking at bank accounts for the business if you are a sole trader, you check the terms and conditions if you are going to use a personal bank account as opposed to a business bank account, as not all personal accounts are allowed to be used for businesses.

Before you choose a bank account for your business, have a think about what types of payments you will need to receive and make – will you need to accept/send foreign amounts?  If so, will you be charged for doing that?  Do you need to be able to access a branch on a regular basis, or are you able to deal with all your banking needs online or through the post?  There are so many different types of bank accounts out there, so it is very important that you research the different options that are available and choose the right one for your business.

If you would like further information on why having a separate bank account for your business is a good idea, feel free to e-mail me.

During the January 2022 Facebook Live, I talked about how to deal with late payment of customer invoices.

All businesses, unless they are taking payment for a product/service right then and there, are likely to have to deal with customers paying their invoices late at some point.  When customer invoices are paid late, this can have an impact on your cash flow, and impact on your ability to pay your invoices.  There are things you can do to help mitigate this though.

How can I prevent invoices from being paid late?

These tips aren’t a guarantee that invoices you send to your customers won’t be paid late, but they can help to ensure that it doesn’t occur as frequently.

The first thing is to work out what your payment terms will be, how you will accept payment, whether you will be applying any interest to late payments and work out your procedures for chasing for late payments.  Once you have that figured out, make sure this information is clear and concise and is stated in your terms and conditions as well as in any contracts you issue.  You will also want to include your payment terms on any invoices.   The key is to make sure that this information is communicated to all your customers before they enter into a contract with you so that they know ahead of time what your payment terms are, how they can pay you, and what happens if the payment is late.

The next thing is that once you have your policies all figured out and ensure that they are communicated effectively to your customers, is to make sure you stick to those policies.  Set up a regular reminder to check that all invoices are being paid on time, and if any are overdue, act quickly to contact the customer about the overdue invoice.  Some invoicing software will allow you to set up automatic reminders for invoices once they go past their due date while other accounting software is a more manual task – but you will still be able to send reminders to your customers about the overdue amounts.

Look at whether you could start using Direct Debits to collect regular monthly/weekly amounts from your customers if you are invoicing them on a regular basis.  You could look at something like GoCardless (https://gocardless.com/) to collect the regular payments from your customers.  You want to make it as easy as possible for customers to pay your invoices.  Some accounting software will allow you to take payment directly from customers when they receive your invoice via e-mail – they may be partnered with different payment providers like GoCardless, PayPal, Stripe, or there might be 3^rd party payment providers like Crezco (https://www.crezco.com/) that will integrate with your accounts software to put a payment link on the invoice that customers can click on and initiate payment that way.  You will need to look at the various payment providers that are out there as there may be additional charges you will need to pay to use them, and you want to find the one that works best for you and your business.

Ensure that you are sending out your invoices regularly, promptly, and that they are correct.  Part of doing this will be making sure that you have the correct contact details for your customer so that the invoices are going to the right e-mail or address.  By sticking to a regular routine for issuing your invoices, customers will know when to expect the invoice.  Not only will it help you to have a better handle on your cash flow, but it will also help your customers to be able to plan when they need to make payments.

You also want to ensure that you are sending out late payment reminders promptly and in accordance with the policies you will have set out to the customer.  There might be a simple explanation for why the payment is late – sometimes all it takes is a single professional and polite reminder e-mail for the customer to realise they missed paying your invoice.

Can I charge interest on late payments?

If you are invoicing another business or the public sector, you are legally entitled to charge statutory interest, which is 8% plus the Bank of England Base Rate, on all late payments.  You may decide to charge a much lower interest rate though and will need to charge the interest rate that is in your contracts – but as long as you communicate this effectively to all of your customers before you invoice them – you can charge them interest.  You can find the Bank of England Base Rate here. You are also entitled to claim back compensation for any debt recovery costs if you go down that route.  The government has set out the rates you can claim back on their website.

The rules and regulations about what you are entitled to charge on late payments and what you can claim back are all outlined in the Late Payment Legislation.

If you do charge a customer interest on any late payments, you will need to issue them with a new invoice for the late payment charges.  If you are a VAT registered business, there is no VAT charged on the interest.

It is important to note that you are not able to charge interest on late payments until the invoices are late according to your payment terms, or 30 days have passed since the customer received the invoice or you have delivered the goods/service.

What do I do if the customer doesn’t pay on time?

Your first step will be to send the initial payment reminder and see if that gives your customer a gentle nudge to pay the invoice.   If that doesn’t work, you need to follow the procedures that you set out in your terms and conditions – so this might be that you will issue 3 statement reminders and then start charging them interest.

If despite your best efforts and following your procedures, the invoice remains unpaid, you could look at going to a Debt Recovery Service, getting a solicitor’s letter, or even using the Money Online Service. (https://www.gov.uk/make-court-claim-for-money) You will need a government gateway account to use the Money Online Service.  Once you’ve filled out the forms, the courts will send a letter to the customer asking for payment, and if payment isn’t made within the time frame stated, a CCJ will be issued.  Just bear in mind that going down the formal route, is likely to sever any relationship you have with your customer.

Every situation is going to be different, and you will need to deal with each one on a case-by-case basis.  Proper communication with the client is the key.  It may be that the customer has had issues getting paid by customers themselves, or they have lost a big contract – contact the client, preferably by phone, and talk to them.  You might be able to sort a payment plan with them or resolve the situation without any bad feeling.  If that doesn’t work, follow your procedures, and then take it further if necessary.

If you would like further information on how to handle customers paying late invoices, feel free to e-mail me.