How to Prepare for the End of the Tax Year…
Going it alone and starting your own business can often be a bit of a culture shock! Terms that were not part of your everyday vocabulary, such as ‘tax year’, ‘financial years’ and ‘bookkeeping’, suddenly take on a whole new significance. When it comes to the financial admin of the business, as you may have already realised, is now all your responsibility.
Your aim as a business owner is to keep on top of everything, to ensure that you’re not bogged down in paperwork and you’re not involved in any last-minute scrambles to meet tax deadlines. Headaches are easily avoidable so long as you’re prepared. Here we focus on the end of the tax year, what it means for an up-and-coming business and how you should prepare for it.
So, what does ‘end of tax year’ actually mean? When you see the phrase ‘tax year’ this refers to the personal tax year, which runs from April 6- April 5 the following year. As a director of a company, the end of the personal tax year is very relevant, as all company directors must complete a personal tax return each year. It also takes account of any dividends you have received from the company, which are liable for income tax.
Staying organised and being prepared for the financial reporting milestones throughout the year will make your life as a business owner much easier.
The end of the tax year: how should I prepare?
Think of getting prepared as an ongoing process rather than something that has to be dealt with all in one go at the end of the tax year or when the payment deadline looms on the horizon. File your paperwork as it arrives (rather than having to sort through it from scratch at the end of the tax year). Self-employed business owners are taxed on their business profits after deductions for expenses. For this to be assessed accurately you need to be able to track each and every transaction your business is involved in. In the early days, these transactions may seem few in number. It is inevitable that invoices, statements and bills will mount up and the pile of unsorted paperwork is only going to get higher.
In the early days especially, a simple spreadsheet may be all that’s required to give you an at-a-glance overview on what’s happening with transactions. Allotting an hour or so a week to review this is useful not just from a tax perspective, but also for keeping on top of unpaid customer invoices to prevent storing up cash flow problems. As activity increases and bookkeeping starts to eat into more of your valuable time this may be your cue to invest in a dedicated invoicing and accounting software solution.
Get everything in place early to avoid losing your entitlement. Travel costs, using your home as an office, phone bills, overdrafts, capital allowances on equipment and even wining and dining prospective clients: don’t leave it until the first week in April to start thinking about how much you’ve actually spent on nurturing your business over the last year.
Cash basis accounting:
If your turnover is £150,000 or less you can choose to work out your income and expenses for your Self Assessment tax return through cash basis accounting. For this, you must keep records of all business income and expenses throughout the tax year. One benefit of this is that you are only taxed on income you have actually received during the tax year and not on invoices that have been issued but not yet paid.
For business vehicle costs, working from home and living in your business premises, sole traders and partnerships can also use simplified expenses: a system of flat rates for calculating costs in these areas. Throughout the tax year record, your business miles and the hours you work at home and then at the end of the tax year apply these flat rates to work out your expenses.
Make sure you have a system in place for retaining receipts and logging transactions as they happen. Otherwise, you are at risk of under-calculating your business running costs.
As your business grows, as transactions become more complex and you consider taking on staff, expert accountancy advice can help save you money in the long run.