How to manage your records for Tax purpose Self Employed ?

There are different rules to keep record for self employed/sole traders and limited companies. As a self employed individual you must keep a record of your income and expenditures related to your business activities.

There are different ways to record your business income and expenditure. You can use software's such as Sage, Xero, Quickbooks etc.
 
 If your transactions quantity is less than 100 a month. You can also use excel which is cheaper than buying software subscriptions.
 
 You can also consult an accountant such as S K Punia Accountants who will be able to set up a excel spreadsheet with formulas and layout.
 
 Whichever the system you chose it is important to set it up in beginning of your financial year. It will allow you to manage your accounting record in timely manners.
 
 Try to update your records weekly or monthly. With my experience, I have seen many self employed leave it to the end and unable to provide the information to their accountant before the year end filling date and panic.
 
 Updating your record weekly will not only help to see your expenditure and income status, It will also save you money as accountant will charge you less money for doing your bookkeeping.

There are two ways to record your income and expenditure.

In Traditional accounting, you record your income and expenditure on date when the invoices or receipts were issued. For example 'S K Punia Accountants' issued an invoice for VAT return service on 20th March 2020 and payment was received on 25th May 2020.

Under traditional accounting, the income will be reported in accounting period ending 05th April 2020 as the invoice was issued on 20th March 2020
 
 Under cash basis accounting any income and expenditure is recorded when it is actually paid or received. in above example of VAT return service was paid on 25th May 2020. Under cash basis accounting method, the income will be reported in 05th April 2021 return.
 
 Most self employed who are struggling with cash flow use cash basis accounting scheme.

However, to use cash basis accounting your turnover need to be less than or equal to £150,000.
 

 If your turnover is less than £85,000 you do not need to register for VAT. However, some self employed individuals do register their business for VAT on voluntary basis. There are different reasons for voluntary registration and depend on individual circumstances.

It is not necessary for self employed whose turnover is under £85,000 to keep record digitally. HMRC has introduced making tax digital policy which require VAT registered business to submit VAT return by using software from April 2019.

By April 2022 MTD will be compulsory for business under VAT threshold and by April 2023, it will be compulsory for individuals who file tax return for business or property income of more than £10,000.
 
 It is clear from HMRC MTD policy , by 2023 all the self employed going to be switch onto MTD platform.
 
 It is good practice to start thinking about keeping your record digitally

It is not necessary at this stage to keep the receipt or invoices digitally but it is good practice to move forward the digital age.

HMRC require you to keep copies of all your expenditures and receipts up to 6 years. Six years of your business accounting record can take a lot of space in your premises. To save space you can take picture of your bill/receipt or scan the front and back page.
 
 It will allow you to store your data electronically.

You should keep original copies of P45, P60 & certificate of tax deductions.

It is normal for self employed to use their own vehicles for their business use. There are two ways you can claim the expenses. You can claim on actual costs basis or flat rate basis. HMRC allow 10000 miles @ 45 pence to be claimed on mileage which is flat rate method.
 
 You can also use the actual costs basis such as fuel cost, cleaning cost etc. If you use your home as your office you can claim expenses incurred such as heating and electricity cost.

Just make sure you can split and able to prove to HMRC the expenses claimed do belong to business use.

You should provide bank statements It is good practice to use separate bank account for your business use.

Any receipts you issued to your customers.
 
 customers invoices and supplier invoices.

Any BACS or bank transfer details.

Any credit and debit card statements.

Cheque book stubs and mileage records.
 

Any software you used to enter the transactions or excel sheet.
 
 I hope the above tips are helpful. It is good idea to get in touch with your accountant earlier as they can provide you valuable advice. If you can afford try to get management accounts on monthly basis it will assist you to understand your business performance better.