Category: Tax

What’s the most tax efficient way to pay myself through my limited company?

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???? The most tax-efficient way to withdraw money from your limited company in the UK will depend on your specific circumstances. However, here are some commonly used methods:

1️⃣ Salary (????): Paying yourself a salary from the company can be tax-efficient. You’ll need to register as an employee, set up a payroll system, and deduct income tax and National Insurance contributions (NICs). However, you’ll also benefit from personal income tax allowances.

2️⃣ Dividends (????): If your company has sufficient profits and you’re a shareholder, you can take dividends. Dividends are subject to different tax rates and thresholds, and you’ll have a tax-free dividend allowance. Remember to consider any tax implications, such as the dividend tax and potential higher tax rates for larger dividend amounts.

3️⃣ Pension contributions (????): Making pension contributions can be tax-efficient, as they can be deducted as a business expense, reducing your corporation tax liability. Personal contributions may also qualify for income tax relief.

4️⃣ Director’s loan (????): You can take money out as a director’s loan, but it should be repaid within a specific timeframe (usually nine months and one day from the end of the company’s accounting period). Failure to repay the loan can result in additional taxes.

5️⃣ Capital gains (????): If you sell or transfer assets owned by the company, such as property or investments, you may trigger capital gains tax. Proper planning and advice are crucial to ensure tax efficiency.

Get in touch with us today for personalised advice based on your specific circumstances and the latest tax regulations. ????????‍????

www.sunnysideaccountancy.co.uk/contact-us

Quick Tips: Registering for Value-Added Tax (VAT)

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When first setting up your business, there are multiple decisions to make – and a key consideration will be whether to register the business for Value-Added Tax (VAT), the tax that’s added onto the price of certain goods and services.

When does VAT registration become mandatory?

When your business’s turnover reaches £85k over any rolling period of 12 months, it’s currently mandatory for you to register for VAT. Because of this, it’s important to keep an eye on your turnover and to start making plans for VAT registration as you get closer to the threshold.

Is it better to be VAT-registered?

Where your customers are VAT registered, you’ll always be better-off registering – as long as you don’t mind factoring in the minor administrative work that’s required.

As a VAT-registered business, you can add VAT to your selling prices without it actually costing your customers more – VAT registered customers just claim the VAT back from HM Revenue & Customs (HMRC). You can also reclaim VAT on your own expenses in the same way. If the administrative work is a concern, the flat-rate scheme is a more straightforward alternative.

What happens if my customers aren’t VAT registered?

If you’re a business-to-consumer (B2C) company, your consumer customer base is unlikely to be VAT registered. In this circumstance, if you charge your customers VAT, they’ll end up paying more for your goods/service – which could affect your competitiveness in the marketplace.

Think about whether this additional VAT cost is likely to have an impact on your sales. Then weigh that against the additional costs you’ll incur if you don’t register – and, as a result, can’t reclaim VAT on your costs.

Why would I register early for VAT?

Legally, you don’t have to register for VAT until you meet the £85k threshold. But some businesses operating below the registration threshold choose to register voluntarily.

Some companies believe being VAT registered makes the business look more substantial and professional. And some businesses will register to make use of the ability to claim back VAT on certain business expenses, especially if these are for significant assets.

Talk to us about registering for VAT

For a new business, even if you anticipate that your sales will go over the £85,000 registration threshold in the first year, there may be advantages in delaying registration until you have to. Equally, there may be benefits in registering even if you are trading below the threshold.

Tell us about your business plans and we’ll be happy to advise you on the best point in the business journey to register for VAT.

Startup Tips – Setting up the foundations

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To trade as a business, you need to meet the right compliance requirements. It’s certainly not the most exciting part of creating a business, but setting up the right legal, accounting and tax compliance foundations ensures that you’re doing everything by the letter of the law.

Here are the main compliance steps to think about, and why they’re so important to the smooth running of your business.

Decide on a legal structure for the business

First off, you’ll need to make a decision about the legal structure of the company. There are two key choices here – incorporated (a limited company) or unincorporated (usually either a sole trader or a partnership). The key difference here is around liability. In other words, do you want your business to be a limited company, where you and the business are treated as separate legal entities? Or do you want to be unincorporated, like a sole trader, where you and your business are seen as one single entity.

Open a business bank account

To trade, take payments and pay your suppliers, Ltd companies need to have a business bank account that’s separate from your own personal current account, this is also highly recommended for all businesses. This helps to create a tangible divide between the money you’ve generated from the business, and your own personal cash.

Most high-street banks won’t let you use a personal current account for business purposes. Banks will offer a variety of different business accounts, with varying levels of fees, overdraft levels and additional business features. Set up the business account and then use this account for ALL transactions going in or out of the business.

Set up a bookkeeping and accounting system

It’s a legal requirement for your limited company to keep adequate records and to submit annual statutory accounts. To be able to meet these requirements, it’s essential that you have a bookkeeping process and a reliable accounting system in place.

There’s a dazzling choice of different cloud-based accounting platforms aimed at the ambitious startup owner. Xero, QuickBooks, MYOB and Sage are big names in this space, and all offer easy-to-use systems that make the accounting process relatively straightforward. It’s a good idea to engage an accountant, right from the start, to get the best possible accounting advice.

Register for the relevant business taxes

Tax is an unavoidable part of running any business. It’s mandatory for you to register for the relevant business taxes, and you’ll also need to factor in that a certain percentage of your profits will end up going to the tax authorities at the end of each financial year.

If you’ve opted for the limited company route, you must register for corporation tax. Corporation tax is paid based on a percentage of your year-end profits, once reliefs and other allowances have been taken into account. Approximately a quarter of your end profits will end up being paid over in tax, so it’s imperative that you put this money away in a separate tax accounting, or ring-fence it in your accounts, so you have the money to pay the bill at year-end.

Other taxes to register for include:

  • Self-assessment income tax – although you’ll pay corporation tax on your company’s profits, directors are also taxed on their own personal earnings too. If you’re an unincorporated sole trader, this is also the way you’ll be taxed on your business profits, as your personal and business income are treated as the same thing.
  • VAT – is an indirect value-added tax for goods and services. If your turnover is over £85,000 or you opt in, you’re responsible for collecting these taxes and paying them to the tax authority on a quarterly basis.
  • Pay-as-you-earn(PAYE)– if you have employees or CIS subcontractors, you’ll need to make income tax deductions from your employees’ wages and pay these taxes directly to the relevant tax authority. This is all done via your regular payroll or CIS run.

Get in touch to talk through your compliance needs. We’ll help you understand which taxes apply and how you register for them.

5 Myths About Making Tax Digital Busted

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The UK government’s plans to make tax digital have been shrouded in controversy since they were first announced. There has been a lot of misinformation floating around, and many people are unsure about what the changes will mean for them. In this blog post, we will dispel some of the myths about making tax digital and give you the facts.

What’s Happening?

The Making Tax Digital (MTD) scheme rolled out in 2019 for VAT-registered businesses with over £85,000 in taxable income. In April 2024, this threshold will be reduced to £10,000.

There are many benefits to MTD, but many business owners are apprehensive about the change, fearing it will mean more stress, fear and penalties. Let’s take a look at some of the incorrect assumptions about MTD and talk about what the truth is instead…

#1 – HMRC Will See All of Your Data

This is a common misconception about MTD. The scheme does require quarterly updates but the amount of data you reveal to HMRC remains the same. With your VAT return, for example, you will still fill in the same nine fields of information but you will simply do it digitally.

Quarterly updates will actually encourage business owners to stay on top of their finances and give them a better insight into their cash flow.

#2 – You Will Pay More Tax

MTD is not about creating a heftier tax bill; it’s about reducing errors and fraud.  When businesses are able to submit accurate tax returns more quickly and easily, it minimises the chances of mistakes being made. This means that you are likely to pay the right amount of tax – no more, no less.

In addition, MTD will help to reduce the administrative burden on business owners, so everyone can focus on more important things.

#3 – Tax Returns Will Take Forever to Complete

This is another common misconception about MTD. The reality is that tax returns will take the same amount of time to complete – or quite possibly less. The main difference is that you will be doing them digitally instead of on paper. You won’t have to spend hours poring over your accounts – the software does all of the hard work for you.

This also means that there is less opportunity for human error, meaning your tax return will be more accurate.

#4 – MTD Means No More Tax Returns

MTD involves quarterly updates but this doesn’t mean that you won’t have to complete tax returns anymore.

The quarterly updates are in addition to your annual tax return – they are not a replacement for it. The SA100 form will be replaced with a final declaration, which HMRC will then review.

#5 – Small Businesses Don’t Need to Worry About MTD

Currently, businesses with a taxable income of under £85,000 per year are not required to participate in MTD, but this will change as the 2024-2025 tax year commences. This may seem far off now, but it’s best to take steps to prepare for the change now.

The truth is that all businesses need to be prepared for MTD, even if they don’t have to start complying with it until later on.

The sooner you start getting ready, the smoother the transition will be. This means it’s a good idea to begin digitising your accounting process and using MTD-compliant software so that you’re ahead of the game when 2024 rolls around.

Summary

There are a lot of misconceptions about Making Tax Digital, but the truth is that the scheme has many benefits. It reduces the chances of mistakes and fraud, and it makes tax returns easier to complete.

All businesses need to be prepared for MTD, even if they don’t have to start complying for another few years. The sooner you start getting ready, the smoother the transition will be.

What business taxes will your new company need to pay?

Posted on | by Jessica Weston | Leave a Comment on What business taxes will your new company need to pay?

As the founder of a company, there’s a long list of compliance tasks to get your head around – and one of the key tasks will be registering your company for business taxes.

Once you’ve registered as a limited company, you become liable for paying taxes on the profits you make. These taxes are collected by HM Revenue & Customs (HMRC) and provide the funds used by HM Treasury to pay for the running of the country. Paying your taxes isn’t just a compliance task – it’s part of your social and community responsibility as a business.

But what business taxes are there? And how do you know which of these taxes to pay? 

Understanding the main business taxes

Despite HMRC’s motto of ‘tax doesn’t have to be taxing’, the UK tax code can be a complex thing. 

If you’re not a trained accountant and have limited experience in financial management, understanding the rules around business taxes can be confusing. So, to start with, let’s look at the main business taxes you’re likely to register for.

Key business taxes include:

  • Corporation tax (CT) – corporation tax is a tax that’s levied on your profits as a limited company. At the end of your accounting period, you must submit a corporation tax return, and pay the CT that’s due. At present the CT rate is 19% but it’s worth noting that the UK CT rate will rise to 25% in 2023.
  • Value-added tax (VAT) – VAT is a consumption tax that’s levied on goods that have had value added at each stage of the supply chain. When you buy these goods, you’ll pay VAT. And when you sell these goods, you will collect VAT. At the end of each quarter, the VAT funds that you’ve collected must be paid to HMRC. You can also claim back the VAT you’ve spent on certain qualifying goods and services too. The standard rate of VAT is 20%, the reduced rate is 5% and certain goods can also be zero-rated.
  • Pay-as-you-earn (PAYE) – PAYE is a way to collect income tax and National Insurance Contributions (NICs) from your employees. If you have employees and run a payroll, then you’ll need to collect the required amounts of income tax and NICs from your employees’ wages as part of your payroll process. Then you must report on these deductions and pay the tax and NICs to HMRC, either monthly or quarterly after the pay period, depending on the amount involved. In addition to the income tax and NICs you deduct from your employees, the company may also have to pay Employer’s NICs as a business expense.

Get in touch if you have any questions about tax.

Back to Tax Basics: How does Corporation Tax work?

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Corporation tax is a tax that’s levied on your company’s profits. 

When you operate your business through a limited company, that company is considered to be a separate entity from you as an individual. Among other things, this means you have to pay corporation tax (CT) on your company’s profits

But how does CT work? And what do you have to pay?

1. The basics of corporation tax

Paying your taxes is one of your key responsibilities as a new company, but it’s important to understand what’s required and how the CT process works. 

  • When you form a company, HM Revenue & Customs (HMRC) will issue you with a 10-digit Unique Taxpayer Reference (UTR). Within three months of you starting to trade, you’ll also need to advise HMRC that you have begun trading, the date you started and the date up to which you intend to produce your company accounts.
  • HMRC will send you a notice to complete a tax return. If your first accounting period is longer than 12 months, two returns will be required – no single return can cover more than 12 months. Unless you change your period end, after the first one, each accounting period is generally exactly 12 months long.
  • Each year, the company has to prepare a CT return, giving details of your profits and calculating the tax that’s payable.
  • The starting point is generally the profit shown in the company’s annual accounts. This is adjusted by adding back expenses which aren’t allowable for tax, and deducting costs which are allowable against tax but are not treated as an expense in the accounts.
  • Although there can be numerous adjustments between ‘accounting profit’ and ‘taxable profit’ the most common ones are to do with:
    • Fixed asset depreciation
    • Business entertaining
    • Research and development (R&D) expenditure

2. Fixed assets depreciation

When you buy things like plant and machinery, vehicles and computer equipment, these are shown in the company accounts as ‘fixed assets’, and the cost charged against profits over a number of years, equal to their anticipated life. The charge against profits is called depreciation.

  • Although depreciation appears as a line item in the company’s profit and loss account, it isn’t allowed when calculating tax, so the depreciation charge is added back. In its place, capital allowances, writing-down allowances and annual investment allowances may be claimed. The rates of these depend on the type of asset and can vary from year to year.
  • In many cases, this means that in the year when you purchase fixed assets, even though they may be depreciated over a number of years, the whole of the cost can be deducted from profits. Currently, there’s an additional ‘super-deduction’ scheme available where 130% of actual costs are deducted, which can greatly aid cash flow.
  • As an example of how this works, if you buy a van costing £20,000 for work purposes that you expect to last for 5 years before being scrapped, each year you will make a depreciation provision against profits of £4,000. For tax purposes the £4,000 charges aren’t allowed but, with super-deduction, you can take £26,000 off your taxable profits in the first year instead. And you can do that even if you’re buying the van on hire purchase, where you haven’t yet paid for the van in full!

3. Business entertaining

Although, in most cases, entertaining customers or prospective customers is a perfectly reasonable business expense, for tax purposes the cost incurred is added back to your profits. 

Because of this, it’s not allowed as a deduction when calculating your tax charge. It doesn’t mean you shouldn’t do it, or that it’s considered to be illegitimate in some way, it’s just not permitted as a cost when calculating corporation tax.

5. R&D allowances

When your company spends money on R&D activities, the cost that is deducted for calculating taxable profits can be up to £230 for every £100 actually spent.

To qualify for this enhanced deduction, the R&D activities have to be aimed at resolving ‘scientific or technological uncertainties’ that couldn’t be easily resolved by a professional working in the field. Even if your activity failed to resolve the issue, it still counts for the purposes of the scheme. So, if you’re in the process of carrying out R&D work, it makes great sense to claim any available R&D allowance.

  • To qualify, your project has to be related to an existing or proposed company trade, and can revolve around developing new or improving existing products, processes and services. The costs include staff costs, subcontractors, agency workers, utility costs, software costs and consumable materials.
  • R&D isn’t always the obvious things such as software development or inventions; it can be working out how to age construction materials so they can be used to repair listed buildings, or the development of eco-friendly packaging materials.
  • Claims can be made in respect of costs up to two accounting periods ago. So, if your company has a 31 December year-end, claims in respect of costs incurred in the year ended 31/12/2019 can still be submitted up to the end of 2021.
  • Unlike many tax benefits, R&D claims can be converted into cash by loss-making companies, with HMRC making payment of 14.5% of any losses surrendered. 
  • Theoretically, making a claim for R&D relief can be made by by simply completing the appropriate boxes on the CT600 tax return and the supplementary pages. In practice, unless a report is also attached describing the projects, explaining why they fall within the scheme and breaking down the costs, it is likely to be delayed while HMRC seeks further clarification.

6. Should I try compiling my own CT return?

Given the complexity of tax legislation, completing even a straightforward company tax return isn’t advisable as a ‘DIY’ job. If you want to minimise your tax bill, and maximise the available reliefs, that’s going to mean completing your CT accurately and in detail.

Talk to us about your corporation tax needs

We can help you become more tax-efficient by advising you on discretionary expenditures, such as company pension contributions, fringe benefits and so on. Often, it’s necessary to include a trade off between your company’s tax position and your personal tax outcomes.

In specialist areas, like R&D allowances, we can guide you through the claim process and even highlight eligible expenditure you may not have realised you were incurring. Most R&D projects aren’t carried out by people in lab coats, so this is a relief that’s open to many businesses.

Get in touch to talk through your corporation tax.

Posted in Tax

Could you be eligible for the Self-Employment Income Support Scheme?

Posted on | by Jessica Weston | Leave a Comment on Could you be eligible for the Self-Employment Income Support Scheme?

The pandemic has proved to be a tough time for the UK’s freelancers. But there is help at hand still in the form of the Self-Employment Income Support Scheme (SEISS).

The fifth tranche of the SEISS is now available to freelancers, contractors and people running self-employed businesses. If you meet the eligibility criteria, you may be able to claim a grant payment up to the maximum cap of £7,500.

This could be an extremely helpful cash injection for any self-employed workers who have been negatively impacted by the Covid crisis.

How do you know if you’re eligible for SEISS?

The criteria for making a SEISS claim are similar (but not exactly the same) as for the preceding four tranches of the scheme. So it’s important to read the small print and make sure you definitely ARE eligible before you submit a claim.

To be eligible to claim the fifth SEISS grant, you must:

  • Have submitted your 2019/20 self-assessment return by 02/03/2021
  • Have traded in both the 2019/20 and 2020/21 tax years
  • Intend to continue to trade in 2021/22
  • Have trading profits that don’t exceed £50,000 and are more than 50% of total income for either:
    • the 2019/20 tax year
    • an average of 4 years, 2016/17 to 2019/20.

In addition, to be eligible for the fifth tranche, you must reasonably believe there will be a significant reduction in your trading profits due to the impact of COVID-19 between 1 May 2021 and 30 September 2021. Trading profit excludes SEISS and other Covid-19 support grants.

What evidence do you need to submit?

There are a few other conditions which it’s important to note, particularly around the impact that the Covid pandemic has had on your business and profits.

  • Unlike previous tranches, you need to submit details of turnover (sales). This will normally be the actual amount included on your 2019/20 tax return, and either an estimated or actual amount that has been/will be included on your 2020/21 return.
  • The grant you receive will be based on your profits from self-employment, calculated over the four years from 2016/17 to 2019/20.
  • If your turnover has fallen by 30% or more between 2019/20 and 2020/21, the grant is 80% of your average quarterly profits, capped at £7,500. Otherwise it is 30% of average quarterly profits, capped at £2,850.
  • The latest date for submitting a claim is 30 September 2021.

NOTE: If you need help working out your turnover, HMRC has included a handy step-by-step walk-through of the process in this guidance.

Talk to us about getting your SEISS information together

If you meet all of the SEISS requirements, it’s a no-brainer to make a claim. Over what’s been a very difficult period, this free cash injection will be a real boost for your cashflow position.

Talk to us if you need help calculating the turnover figures to include in your claim, or deciding whether or not there will be a significant reduction in trading profits for the May-September 2021 period. As with the previous SEISS grants, we’re not allowed to submit the claim on your behalf – you must complete the application and make the claim yourself, as per the SEISS rules.

Get in touch if you need help with your calculations.

Posted in Tax

How an Accountant Can Help Your Small Business to Succeed

Posted on | by Jessica Weston | Leave a Comment on How an Accountant Can Help Your Small Business to Succeed

They say that behind every good business is a great accountant, and it’s true! A great accountant does far more than save you money on your tax return – although that certainly is an attractive benefit. Hiring a great accountant isn’t just about remaining compliant; it’s a big step towards improving the financial health of your business and can really help with planning for the future. Here’s how an accountant can help your small business to succeed.

Save Time

One of the most attractive benefits of hiring an accountant is the relief of not having to do it all yourself. Accounting is notoriously difficult and time-consuming – there’s a good reason why qualified accountants undergo so many years of training. A great accountant will save you many man hours and allow you to get back to growing your small business.

A Smaller Tax Bill

A great accountant won’t see you pay a penny more in tax than is strictly necessary. Many small business owners, despite their best efforts, end up missing out on tax deductions or incentives. The rules and regulations surrounding taxation are complex and ever-changing, so it’s best to have a qualified professional on your side who can help you to save you as much as possible.

Accurate Records

It’s important to maintain accurate financial records to ensure that mistakes don’t compound and spiral out of control. A great accountant will ensure that your records are impeccable so that you don’t end up with a tangled web of errors on your hands or worse, mistakes on your tax return that could come back to bite you.

Financial Planning and Stability

Cash flow can be very tricky to handle and it’s often difficult for business owners to get a clear picture of how much money is entering and leaving each month. An accountant will help you to manage your cash flow and ensure that there’s always enough in the bank to continue operations, even when times are tough. This helps to keep your business stable and running smoothly. You’ll be able to offer both your staff and your clients a consistent and positive experience, maintain high levels of trust and loyalty with both.

Furthermore, a great accountant helps you to plan for the future and make sage investments at the right time. They will use their financial acumen to help you to identify areas of improvement and plot for growth, so you’re not taking a shot in the dark.

Marketing

It may not seem obvious at first that an accountant would be able to help with marketing, but they may in fact be able to advise you on where to spend your money and which practices aren’t generating a worthwhile return on investment. This allows you to focus on the marketing activities that truly drive the needle for your business and cut back on areas that aren’t serving you. Furthermore, cash flow analysis can help you decide when to launch a new campaign and get a clear picture of the results.

Financing

Your accountant can help you to understand your financing options and weigh up the pros and cons of each. On top of this, they can help you to prepare the best possible case for potential lenders so that you get the best rates possible. All of this can be enormously helpful in terms of business growth. Furthermore, if you have existing debt, your accountant can help you to handle it in the most beneficial way possible for your business.

Summary

A great accountant is so much more than a number cruncher – they function as a partner and guide to help you make the best possible financial decisions for your business. Whether you’re in the startup phase or looking to grow your business, hiring a quality accountant is a decision you won’t regret.

4 Reasons Not to DIY Your Tax Return For Your Small Business

Posted on | by Jessica Weston | Leave a Comment on 4 Reasons Not to DIY Your Tax Return For Your Small Business

As a small business owner, you may be used to taking the DIY approach. After all, you’re most likely a marketer, financial director, HR manager and payroll administrator, to name but a few of your many responsibilities. However, although your business may be small, there’s one area that really does call for professional help – and that’s filing your tax return. Let’s take a look at four of the main reasons you shouldn’t do your taxes yourself this season. 

1. You’re Not a Numbers Person 

We’d all like to believe that we’re good at absolutely everything, but the truth is that not everyone is good with numbers. If you don’t have an affinity for mathematics then doing your taxes yourself is probably not the best idea. 

Even if you’re competent enough at everyday calculations, taxes are a whole different ball game. Calculating your taxes is a very complex process; there’s a reason that accountants have to spend so many years in training. 

A simple mistake on your tax return can cause you to pay the wrong amount of tax and even result in harsh penalties that can seriously threaten your small business. It really isn’t worth the risk. 

2. It’s a Waste of Your Time

Taxes are notoriously time-consuming and as a busy business owner, your time is a precious resource that you can ill-afford to waste. After all, the time that you spend doing your taxes is time you can’t spend growing your business. It’s important to sit down and think about how much your time is actually worth before you squander it all trying to figure out your taxes. Think of time in the same way as you think of money, and learn to invest it wisely. 

3. Tax Laws Change Constantly 

Tax laws change all the time and it can be incredibly difficult to stay on top of all the latest rules and regulations – especially when you already have a business to run. When tax season rolls around, the chances are you won’t know about all of the latest changes which could lead to you making mistakes on your tax return or missing out on new opportunities to save money. 

It’s an accountant’s job to keep up to date on any changes and then take advantage of these opportunities to save you money, so that you pocket as much of your income as possible. Remember that a quality accountant will always save you more than their wages. 

4. The Internet is Full of Misinformation 

In this day and age, the DIY approach to any task usually involves several Google searches. The problem is that although the internet is a wonderful resource, it’s full of incorrect or outdated information. As discussed, tax laws and deductions change all the time, so the article you’re reading may no longer be accurate. Furthermore, tax rules vary hugely from country to country, so you might end up making a mistake because you read advice that doesn’t apply to your business. 

Sifting through all of this information and checking for veracity is a hugely time-consuming task, so you’re far better off working with a tax professional who has relevant experience within your specific industry. That way, you can have your questions immediately answered by someone who knows what they’re talking about and won’t have to waste time falling down Google rabbit holes. 

Summary 

The needs of every business are different, but if the above issues resonate with you then you should consider hiring an accountant when tax season rolls around. A great accountant is an investment in the financial health of your business, and will undoubtedly save you a significant amount of time, money and stress in the long run. 

Book a call with us today if you’d like to arrange for us to do your return…. https://calendly.com/sunnysideaccountancy/phone-meeting

The Most Dangerous Accounting Mistakes For Your Small Business

Posted on | by Jessica Weston | Leave a Comment on The Most Dangerous Accounting Mistakes For Your Small Business

Starting your own business is an amazing thing to do but it’s also notoriously risky. There’s a lot to think about when you first start out on your own and it can be tempting to put accounting on the back burner, but that would be a huge mistake. Good accounting is crucial to the financial health of your business and mistakes can be devastating, especially in the early days. It’s important to know which mistakes to avoid to ensure that your small business is around for years to come.

1. Bad Bookkeeping

New business owners are often overwhelmed and tend to neglect bookkeeping. However, it’s essential that you keep the books up to date and record all of your earnings and expenses. Without this data, you won’t have a clear picture of how you’re faring financially, which can lead to a myriad of nasty problems.

Meticulous bookkeeping allows you to spot trends, understand your spending and examine which practices generate the largest ROI. You can then leverage this data to improve the financial health of your business, maximise your profits and manage your cash flow. Staying on top of the books allows you to stay one step ahead and put out fires before they start.

2. Confusing Cash Flow and Income

The money you take isn’t the money you make.

£100,000 in revenue sounds great, but if you had to spend £30,000 on equipment, insurance and employees to make that money, you’re actually left with £70,000 profit. You’ll then have to pay tax on your gross profit, so the net amount will be smaller again.

It’s vital to know not only how much money is coming into your business, but how much is going out. Getting carried away with gross numbers is a common mistake that new business owners make, and it quickly lands them in hot water. It’s important to stay grounded in reality and know how much you’re really making so that you don’t overspend.

3. Using Outdated Practices

You’re a 21st century business and your accounting practices should reflect that. Online accounting and bookkeeping softwares are faster, easier and dramatically more efficient than ledgers and Excel spreadsheets.

Online accounting software is easy to learn and significantly reduces the margin of human error by automating processes and calculations for you. This means that you’re much less likely to make mistakes on your tax return. It also reduces the risk of making the wrong financial decisions due to inaccurate information.

With this type of software, you won’t have to spend hours updating and organising your financial information. Another benefit is that it allows you to locate and cross-reference information quickly and easily, without having to spend hours searching for the right files. It may be more expensive than the DIY approach initially, but using online software will save you many man hours.

4. DIY Accounting

Accounting is complicated; there’s a reason it takes accountants years to fully qualify. Trying to manage your accounts all by yourself is a surefire way to waste time and stress yourself out. Besides, without extensive financial knowledge it’s unlikely that you’ll be able to save a significant amount of money on your tax return. Furthermore, you’ll be heavily penalised for making even a minor mistake on your return which could cause financial problems for your business.

Trying to manage on your own is a drain on your resources so the sooner you seek professional help, the better. Investing in the services of an accountant is one of the best decisions you can make regarding the financial health of your small business.

Summary

It’s important to avoid the above accounting mistakes in order to set your business up for success. Neglecting or mismanaging your accounts can have serious consequences, so it’s best not to take any risks. Whilst it’s tempting to put accounting off until later, you need to make it a priority right from the very start. Good businesses and bad accounting just don’t go together.