Book-keeping and tax

At the risk of stating the obvious, in order to comply with taxation laws it is necessary to record all the financial intromissions of your business to enable your liability to tax to be assessed. Not only that but financial records must be retained for around six years. It follows that book-keeping is an important part of any business. You should have a good, user friendly system in place before you start. The really important thing thereafter is to get into the habit of entering information in your records on a regular basis.

A good book-keeping system should provide you with a clear and easy-to-follow analysis of the money you earn and where it goes. Systems are based on spreadsheets with columns for the various ways money comes in and goes out. This means, for instance, that you will have a column for motor expenses, another for bank repayments and another for VAT and so on.

Apart from the legal obligation to record such information it is very helpful for you to be able to see at a glance what you are spending on particular items each month. In addition, you should be able to make comparisons with previous years. It is also necessary to carry out reconciliations between the money which is recorded coming into the business and your bank account.

You can buy book-keeping systems from stationers’ shops in which you hand-write your entries. Many such systems will be adequate for the needs of the small business. However, very serious consideration should be given to using a PC with a book-keeping programme. Apart from book-keeping, a PC can carry out a huge range of invaluable functions for your business which will save you money in numerous ways. I detailed many of these in Chapter Seven. Consider these additional advantages:

• When entering data, you don’t need to worry about making mistakes which you have to messily rub out – just press the delete key and do it again.
• Once the information is entered you can play around with it and analyse it.
• Whilst you do have to create some space in the house for the computer, monitor, printer and scanner, you will not have to keep so many paper records.
• Becoming familiar with a PC will equip you with what nowadays has become a basic skill in the workplace. A PC will also be a valuable resource for the whole family which can open them up to the astonishing world of the Internet.
• It is possible to enable your till to ‘talk’ to your PC. This means that the information keyed in by you and your staff when serving customers during the day is available to you on your PC. The effect is to cut down considerably the amount of feeding in of data you have to do.
• Communication by e-mail is becoming more common, making a PC even more desirable. It will be possible for customers to place orders by e-mail.
• Assuming you buy your computer at the outset the cost can be included in your initial loan. It is a good idea to include as many big items as possible at this stage. Once you’re up and running you want to keep extra loan commitments to a minimum.
• If you have any queries regarding tax, employment law, health and safety, etc. you can visit the web site of the appropriate government department for information.

Let’s take a look at the taxes which are likely to be of relevance to you as a self-employed person.

Income tax

This is the main tax. Self-employed people are responsible for paying their own tax (’schedule D’). Calculations are made for tax years which run from 6th April. Broadly speaking your tax calculation for any year will be based on your trading profits for the accounting year which ends in the same tax year. Adjustments have to be made to reflect the fact that your trading year will not coincide exactly with the tax year.

A tax return will be issued in April. You can calculate your tax liability yourself, get the Inland Revenue to do it or pay an accountant to do it for you. Trading accounts provide the basis of your tax liability. They are usually, though not necessarily, prepared by accountants and are generally in two parts:

• the trading profit and loss account – effectively a summary of the financial transactions of the business
• the balance sheet – this shows the assets and liabilities of the business.

The way the system now works you make payments on account of tax on 31st January and 31st July. Any balance outstanding has to be paid in the following January together with the first payment on account for the following tax year. If you employ accountants there shouldn’t be any shortfall of any significance. If there is they will have some questions to answer, assuming, of course, that you provided them with all necessary information.

You can prepare your own profit and loss accounts and complete your own tax returns. You will certainly save some money on accountants’ fees if you do this. There are various publications available which will give you guidance.

However, do you feel confident about working out what allowances you can claim, the most tax-efficient way of splitting up the share of profit between yourself and your spouse and what steps to take to keep your capital gains tax liability to a minimum?

And what if you are unlucky enough to be singled out for a tax inspection? Wouldn’t you rather have an expert on your side able to deal with the points raised? There is in my view a very strong argument in favour of letting an expert attend to this side of things on your behalf.

Your accountant will also give you valuable advice when setting up your business in the first place. In my view these services justify the fees, which are, of course, all tax deductible.

But remember – even though you engage accountants there is still scope for saving money. By keeping neat, detailed and readily comprehensible records and associated documents (receipts, till rolls, etc.) and giving them to your accountants on time, you will be doing work which is within your capability, and which it would be wasteful to pay an accountant to do on your behalf. Your accountant should charge you less if you provide them with spreadsheets, etc.

National Insurance

It may be called insurance but to all intents and purposes it is a tax. Self-employed people are liable to pay two classes of contribution:

• Class 2: a flat rate contribution which for the year 2004/2005 is £2.10 per week. It provides money for things like Incapacity Benefit, Maternity Allowance and the Retirement Pension. The obligation to pay Class 2 contributions is personal. It is not a business liability.
• Class 4: based on a percentage of annual profits between a lower and upper profit level. The levels are set each year by the Chancellor. For the year 2000–2001 the levels are:

percentage rate – 8%
lower profit level – £4,895
upper profit level – £32,760.

Payments are collected along with your schedule D income tax. According to the official blurb Class 4 contributions do not entitle you to any benefit, but they do help to share the cost of funding the benefits to all self-employed people in the fairest way. Now you know.

Value Added Tax (VAT)

If you are in business and your taxable supplies to customers exceed or are likely to exceed a set limit in a year then you have to register with Customs and Excise. The limit is currently £60,000 but the figure is reviewed annually. Once you register you then have to charge your customers VAT on vatable items. The standard rate of VAT is currently 17.5%.

For sandwich bars the situation is not totally straightforward since some of the things you will sell are zero-rated – so you have to know which things to charge VAT on and which not to.

• Convenience pre-packed foods such as crisps, confectionery and drinks are subject to VAT at the standard rate. So are hot food items such as toasted sandwiches, teas and coffees.
• Cold sandwiches, cakes and fruit are zero-rated. However, if people sit in then VAT at the standard rate becomes chargeable. Accordingly, although it is rather tedious, you do have to ask people if they will be sitting in or taking away if they are buying zero-rated items. Given that you are providing seating, paying for the heating, lighting, etc. you may want to consider charging people who sit in an extra premium on top of VAT to reflect this.

You charge VAT on the relevant items you have sold (output tax) and then have to account for it to Customs and Excise. You can, however, set off any VAT you have incurred buying things for the business (input tax) in your quarterly returns.

One of the questions for a new business is when to register. Clearly you will not reach a figure of £60,000 for some time. However, you do want to be able to reclaim the large amounts of VAT you will have spent on your start-up costs. And it is quite permissible to register even if your turnover is below the limit. My view is that it is to your advantage to register at the earliest opportunity. The rules state that, while you can register before you make taxable supplies – i.e. sell sandwiches – you do have to have ‘started a business’. This is clearly open to interpretation but at the very least I think there is an argument that this should include the period when you are doing all the initial research. Opening a bank account and having some headed paper printed will help to bolster this argument.

It may even be possible to reclaim the VAT spent on research costs – i.e. visiting lots of sandwich bars to try them out, perhaps travelling to London to check out the scene there. I understand this is a grey area. Keep all receipts and include the VAT in the section for VAT spent on supplies – input tax – and do a covering letter to Customs and Excise arguing your case.

Tax contingency

As a self-employed person you will be responsible for paying schedule D tax twice a year on 31st January and 31st July. You will probably also have to make quarterly VAT returns. To begin with, the latter can be rather a pleasant experience since your heavy start-up costs will almost certainly mean that you will be due a substantial amount of VAT back. However, VAT will soon become just another regular payment. As will the tax and National Insurance you have to account for on behalf of your employees.

If you don’t make some contingency for these payments then you aren’t living in the real world. You will be at risk of labouring under the misapprehension that your income is at a higher level than it really is.

Make a virtue out of a necessity. Open a tax efficient savings account such as an ISA which may only require one week’s notice for withdrawals. Pay in a little regularly. I know it’s a counsel of perfection but it really does make sense.

If you do not have a private pension you should also give serious consideration to this. The state pension will never provide more than the most basic and frankly inadequate level of support. The sooner you take out a private pension the lower will be the premiums and the greater the eventual benefits. However, in recent years pension funds have performed poorly and their future is not as rosily reassuring as once appeared to be the case. It may be a good idea to consider another way of investing for the future as well. The obvious choice here is property.

Business rates

Business rates constitute a local property-based tax applicable to commercial properties. This tax is entirely separate from the council tax payable in respect of your house. Rateable values are based on market rents and are revalued every five years. Most people pay their rates by instalments over the course of a year.

PAYE

Assuming you employ staff you will be legally responsible for deducting income tax and Class 1 National Insurance contributions from their pay under the Pay As You Earn Scheme (PAYE). The main points about your responsibilities are:

• The money has to be sent to the Inland Revenue Accounts Office. Payment can be made quarterly if your average monthly payments of tax and National Insurance are less than £1,500.
• You must tell your tax office at the end of the year how much each employee has earned and how much tax and National Insurance you have deducted.
• You must provide your staff with payslips showing their earnings, tax and National Insurance contributions, deductions made for the year and any benefits provided.
• You have to pay tax credits through the payroll unless a couple has opted for a non-working or self-employed partner to receive the credit. You do not, however, have to calculate an individual’s tax credit entitlement – the Inland Revenue will do this.

Some businesses pay their accountants to work out PAYE, National Insurance and VAT for them – they will no doubt arrive at the correct figures. But do you really want to pay them to do the easy stuff as well as the more complicated things? VAT returns are straightforward and Customs and Excise will be happy to assist you in the early stages. The situation is similar in the case of PAYE and National Insurance. Indeed, there are computer programs which you can subscribe to which effectively do the work for you. For an annual payment of approximately £80 you are sent up-to-date software when the figures change and you also have access to a helpline.

There is quite a lot to take in, especially if you have never been in business for yourself before. But the good news is that there is a great deal of help on hand from the relevant government bodies. After all, it is not just in your interests to get things right – it will also save them a lot of trouble too. As part of your initial research, get hold of an extremely useful publication from the Inland Revenue called ‘Starting In Business?’ It covers all the things you will need to know about and gives you phone numbers and web sites to enable you to obtain more detailed responses to queries on particular matters. To obtain a copy contact the Employers’ Orderline on 08457 646 646. Calls are charged at local rates and lines are open Monday to Friday 8 am to 8 pm and 10 am to 1 pm Saturdays. Web site: www.inlandrevenue.aov.uk. Or contact your local HM Customs & Excise Advice Centre (under HM Customs & Excise in your local phone book).

Registering with the authorities

When you start a business in a self-employed capacity you must register with the authorities within three months. You need to inform:

• the Inland Revenue National Insurance Contributions Office
• your local Tax Office
• Customs & Excise – if your turnover reaches or is likely to reach the appropriate level.

The good news is that all of this has been made very easy. There is one form, which is part of the publication ‘Starting Your Own Business?’ which you complete and send off.

In addition, assuming you are going to employ staff, you must contact the New Employers’ Helpline on 0845 60 70 143. Lines are open Monday to Friday 8 am to 8 pm and Saturday and Sunday 8 am to 5 pm. You will be asked for basic details and will then be sent a starter pack containing information on the payment of tax and National Insurance contributions through the PAYE system.

There are local Business Support Teams up and down the country which provide support on all aspects of the payroll to new and small employers. They run half-day workshops on a wide variety of topics relevant to the small business. You will be put in touch with your local team after you phone the New Employers’ Helpline.