As a childminder you are classed as self-employed and as such it is important for you to know about the financial side of running a small business. Many people are worried about the paperwork involved in running a business and it is vital that you organise your accounts in a professional way. In this chapter we will look at the important issues surrounding accounts for small businesses.

YOUR RESPONSIBILITIES

Working as a ‘self-employed’ childminder means that you are not actually employed by the parents of the children you care for, and as such you are responsible for your own income tax and national insurance payments. You are contracted to the parents at a rate agreed by both parties. As you do not actually work for anyone you have sole responsibility for the following:

• Maintaining accurate, up-to-date, financial records which show your income and expenditure.
• Paying for insurance to cover yourself, your home and your car.
• Obtaining legal and public liability insurance.
• Paying income tax and national insurance contributions for yourself.

Keeping the tax office informed

It is important that you inform your local tax office that you are a registered childminder and that you are earning an income working from home. You must provide this information regardless of whether you are earning sufficient money to pay tax or not. If you are not liable to pay tax, you must still keep accurate records to ensure that you are in a position to prove your income and expenditure should this be necessary.

Small businesses, including childminders, with a turnover of less than £ 15,000 per annum are not required by law to employ the services of an accountant. However, the Inland Revenue will require you to supply details of your:

• total income for the year;
• total expenditure for the year;
• net profit for the year.

Self-assessment

The rules for self-assessment require you to:

• Inform the Inland Revenue that you are working.
• Ensure that you have an organised system for keeping accurate records.
• Keep these records up to date.
• Retain these records for six years.

Your records must include details of any money you have received for your work as a childminder, together with any money you have spent in relation to your business. It is, of course, entirely up to you how you decide to keep your accounts. There is no set way, and it is very much a matter of personal preference.

KEEPING ON TOP OF THINGS

However, what you must make sure is that your records are accurate and up to date. I can not stress enough how important it is to do your accounts on a weekly or monthly basis. This avoids a backlog in accounts and ensures that income and expenditure is logged when it is still fresh in your mind and receipts are to hand.

Many people choose to set up their accounts on a personal computer and there are many suitable computer software programs available. However, if you prefer to have handwritten accounts these too are perfectly acceptable and an accounts book with pre-printed columns can be bought from many high street stores. Accounts books can also be purchased from the National Childminding Association and these are straightforward and easy to understand.

HOW TO KEEP YOUR ACCOUNTS

The example shown on page 98 is one way of setting out income and expenditure. The trick is to find a method that works for you and to be disciplined when completing your accounts. Set aside some time, say once a week or once a month, when you can devote yourself to getting your accounts up to date. By being organised you will save yourself a lot of hassle in the long run.

Make sure you keep all your receipts and number these. You can then write the number of the receipt next to the item it relates to on your account sheet so that you can see easily which receipt matches which expense. It is a good idea to either staple the receipts to the appropriate page of your accounts or keep them in numerical order in a separate folder.

As I have mentioned before the way you set out your accounts is entirely up to you. Look for a method of recording your earnings and expenses which works for you and which you find easy to use.

Here is an example of what your income and expenditure sheets might look like:

By adding up the figures in each of the columns headed amount you will be able to see, at a glance, how much money you have received for the month and how much money you have spent.

If you choose to set up your own accounts system, it is important that you are accurate and that you are aware of the items which the Inland Revenue will allow you to set against your tax liability.

START-UP COSTS

These costs vary from one childminder to another and will depend on factors such as the age and number of children you are registered to care for. Start-up costs might include items such as:

• toys, books and games;
• safety equipment such as safety gates, smoke alarms, fire guards, fire extinguishers and fire blankets;
• insurance;
• advertising.

If you are eligible for a start-up grant you will not be expected to pay tax on it. However, it is important that you are aware that you will not be able to offset the items you have purchased from your grant against your personal tax.

EXPENSES

Any reasonable expenses are allowed in full. You will not be required to produce a receipt for items under £ 10 but if you purchase one or several items together costing more than £ 10 then you must keep your receipts.

Below is a list of items which are widely regarded as reasonable general expenses for which you are allowed to deduct the full cost:

• food and drinks including milk, fruit, biscuits, crisps etc;
• toys and equipment for play provision such as paper, paint, crayons, collage materials etc;
• baby requisites such as nappies, baby wipes, cotton wool, nappy liners, bibs etc;
• towels, face cloths and soap;
• toilet paper and tissues;
• kitchen roll and paper towels;
• soap powder;
• washing up liquid;
• cleaning equipment such as disinfectant, air freshener, toilet cleaner;
• bin liners;
• dish cloths, floor cloths and mops;
• disposable gloves and aprons;
• first aid kit and the contents including: bandages, micropore, dressings, scissors, thermometer etc;

• equipment (the provision, maintenance and replacement costs) of items such as cot, pushchair, high chair, booster seat and car seat, bed linen and sterilising equipment;
• safety equipment (the provision, maintenance and replacement costs) of items such as fireguard, cupboard locks, fences and gates, glass protection etc.
• telephone calls and postage – you may need to write to or telephone the parents of the children you care for or perhaps organisations such as the National Childminding Association or Ofsted.

In addition to the expenses incurred directly through your work as a childminder you are also entitled to certain other ‘allowable’ expenses such as heating and lighting, water rates, council tax and wear and tear on your home and contents. The percentage you can claim will depend on the number of hours you work as a childminder and the table below shows this in more detail.

The expenses are calculated according to the number of hours you actually work and not the number of hours you are being paid for by each parent. For example, if you care for one child for eight hours per day for five days per week you will be working a 40-hour week entitling you to the full-time deduction in allowable expenses. However if you are caring for two children for four hours per day for five days per week you will be working 20 hours per week but getting paid for 40 hours. However you will only be entitled to claim the part-time deduction of allowable expenses.

We will now look at each of the following categories in the above chart in closer detail.

Wear and tear

You will be allowed to claim one tenth of your childminding income to cover ‘wear and tear’ on items in your home which are not classed as being for the exclusive use of your childminding business, such as carpets and furniture. However, this deduction means you will not be able to claim tax relief for the actual cost of these items as and when they need replacing. You can, however, claim the cost of cleaning household items, such as carpets and loose covers separately, providing these costs are deemed reasonable and the need for cleaning is actually down to your childminding activities.

Council tax

Council tax can be claimed as a work-related expense. The amount of council tax you can claim depends on the number of hours you work -from 10 per cent for full-time childminding hours to 5 per cent for part-time hours.

Heat and light

To claim a proportion of your heating and lighting costs you must remember to keep your fuel bills. It is possible for you to claim a third of your total household fuel bills if you work as a childminder on a full-time basis. Scaled down proportions are allowed for childminders working fewer than 40 hours per week.

Water rates

If you are working 40 hours or more per week you are entitled to claim one tenth of the cost of your water rates or water meter charges. Once again a proportionate amount, as shown in the previous chart, can be claimed for part-time childminding hours.

In addition to the above four categories it is possible to claim for further expenses such as:

Rent

Although you will not be able to deduct a percentage of your mortgage repayments it is possible for rent payers to deduct one tenth of the amount they pay in rent.

Free milk

As mentioned in Chapter 1, you are entitled to claim the cost of one third of a pint of milk for each child, under the age of five years, that you care for. You can request the appropriate form from the Welfare Food Reimbursement Unit by contacting them on 020 7887 1212.

TAX FOR THE SELF EMPLOYED

As a self-employed person you are responsible for keeping accurate accounts and business records and for paying any income tax that you may owe. You will be expected to complete your own tax records and will be known as being ‘self-assessed’. We looked at ways of keeping accounts earlier in this chapter and it is important to remember that the figures you enter on your tax return must coincide with the figures entered in your accounts. This is the way in which you can prove to your tax office whether or not you will be liable to pay tax.

Personal tax allowance

You will be entitled to earn a certain amount of money, known as your personal tax allowance, before you will be expected to pay tax. Your personal tax allowance will be calculated depending on your own personal circumstances. If your income is higher than your personal allowance then you have a legal obligation to complete and submit a self-assessment form to the Inland Revenue. If you receive a self-assessment form it does not necessarily mean that you will have to pay tax. However, failure to submit the form, when requested, could result in a fine from the Inland Revenue.

Many childminders find that they do not earn sufficient money from their childminding business alone to make them liable to pay tax. The amount of tax you will have to pay will depend on the amount of money you have earned, after expenses have been deducted. Expenses can be high for a childminder who has a number of children to care for. In addition to everyday expenses you will also be regularly buying consumables such as paper, paints and play equipment. The cost of all these items can be offset against your tax resulting in your net income being reduced. If you have other sources of income, however, such as a second job, savings or a pension then the income on these must also be taken into account and will of course increase your net income making it possible that you may need to pay income tax.

MAKING A PROFIT OR A LOSS?

Although the amount you charge has to be competitive it must also reflect the service you provide and cover the costs that you incur. There is no doubt that if you substantially undercut all your competitors your business may be full, but working for a minimum amount of money is not what you should be aiming for. No childminder who has three full-time vacancies will be happy limping along caring for one child part time.

If you have had your premises rigorously inspected, gone through the registration process and gained the necessary training and qualifications to become a childminder, you obviously want your business to be a success and your places to be full. However, you must still look at the business side of childminding and put things into perspective. Drastically reducing your fees, to secure custom, will not make your business a success. In fact quite the reverse may be true. If you are not covering your overheads you may be looking after three full-time children but, after feeding them and providing resources and equipment, it is possible that you could end up with your business making a loss!

The fees you set and the number of children you are registered to care for will have a significant impact on the amount of money you earn. The fees you collect, less all your costs, will result in one of the following three outcomes.

Making a profit

This is obviously the best position to be in. Any money you make, after all costs and wages have been deducted, is seen as a profit and this money can be reinvested in your business. You may like to use the money to purchase further toys and equipment, replace old items or extend your own knowledge through a training course. It is healthy for your business to make a profit, and you should be aiming for this at all times. If you choose to use your profit for personal use you must remember that this will be subject to income tax and national insurance, like your wage.

Breaking even

This means that the fees you receive will match exactly the expenses you have incurred, including wages. You will not have made any surplus money nor will your accounts show a loss. Providing you are happy with the amount of wages you are earning this is not a bad position to be in. However you must remember that if you are not making a profit, you will be unable to make improvements to your business or invest in new toys and equipment unless you do so with your own money. This will result in your business effectively making a loss.

Making a loss

This means that the amount of fees you receive are less than the costs you have incurred. If your overheads exceed your income and your business is making a loss you will need to find extra money from elsewhere in order for your business to keep afloat. This is not a good position to be in and if you find yourself making a loss you will need to reassess your situation immediately and work out a plan to get your business back on track.

WHAT CAN I DO IF MY BUSINESS IS MAKING A LOSS?

There may be several reasons why a business is making a loss. Perhaps to begin with, when you have just set up your business and have incorporated costs for equipment, toys, insurance and registration fees, you may find yourself out of pocket for some time until you have built up a reputation and successfully filled your vacancies. This is to be expected. You can not realistically expect all your vacancies to be filled within a couple of days of having your registration granted. However there are several ways in which you can drum up business and we looked at these in Chapter 5.

In addition to waiting for your business to take off and word to get around you may find yourself making a loss through one of a number of reasons.

• A child may leave your setting suddenly and you have not had a chance to advertise the vacancy.
• A child may leave your setting having moved house or school and you are unable to fill the vacancy despite having a notice period.
• A parent may be on maternity leave and, although you agreed to a reduction in fees during this period, you find that this is not working for you, from a business point of view.
• You may have agreed to a reduction in fees because of caring for a school teacher’s child or a child whose parents are separated and take their child away from your setting for a large number of weeks per annum.

There are a great many reasons why your vacancies may not be full, and therefore your earning potential is reduced, and you must look at each one separately.

Extended absence

If your business is in trouble due to something that you have agreed with the parents beforehand, for example, a large number of weeks absent from the setting due to holidays or maternity leave then you must assess the situation and discuss your concerns with the parents.

You may genuinely want to help the parents out and not wish to risk losing their custom but, if the arrangement results in your business making a loss, you will not be helping anyone if you go out of business and they and the other children you care for will have to find alternative childcare.

I have found that, although discussing money matters is something that not many people relish, when it comes down to it most parents are very reasonable and, if you explain your predicament, a compromise can usually be found. Perhaps they may agree to pay a higher retainer fee or bring their child for some of the weeks. No one should reasonably expect you to work long hours and end up making a loss. Point out to parents that you are only allowed to care for a certain number of children under the conditions of your registration, and if one or more of the children on your books are away from the setting for a lengthy period of time this can have a devastating effect on your finances.

Maternity leave

In the case of a parent taking maternity leave this can, depending on the amount of money you are losing, often be managed. The maternity leave is usually only for a six-month period and when the child returns it is to be expected that their sibling will also be in attendance and the money you have lost during the maternity period can be quickly recuperated when caring for two children.

Whatever the situation, you should not be expected to subsidise your business, on a regular basis, with your own savings or at the expense of your weekly wage.

If you find yourself having agreed to lengthy absences, and your business can not withstand this reduction in fees, then you must speak to the parents as soon as possible and come to an agreement. Unlike maternity leave, if you have allowed parents to only bring their children to you during school term time – and they pay for this service during those weeks only – then you will need to be able to bear the loss amounting to approximately thirteen weeks’ fees every year. In my experience this can only work if you have other children who require your services during these weeks and the places can therefore be kept filled.

Turning things round

If you find that your business is making a loss it is important that you acknowledge your finances and act upon them quickly in order to avoid going out of business.

There are three things you can do to change the position.

• 1.Increase the number of children you are currently caring for. You could employ an assistant so that the number of children you are registered to care for can be increased. Remember, though, that you will have staff wages to pay along with additional tax and national insurance contributions and this may well mean that the profit you actually earn from looking after more children will not necessarily be very much.

If you are happy with the number of children you are registered to care for, and the loss you are making is simply because you have vacancies, you must think about ways of advertising your business. It does not cost very much to produce and display posters and by speaking to your local school, nursery and playgroup you may be able to generate business. Always let people know about your work.

• 2.Increase your fees. Make sure that you are complying with your contract before introducing any increases in fees. You must give plenty of notice of your intention to increase the charges you make; ideally a price increase should take place on the review date of the contract. Explain to the parents why you need to charge more for your service.
• 3.Reduce your costs. Some of the costs incurred by childminders are essential, such as public liability insurance, and therefore these must be paid. However, you may be able to decrease the amount of money you spend in other areas. It is essential however that any reductions you make in the amount of money you spend does not affect the quality of service you provide.