Should you’re already one of many 3.1 million sole merchants within the UK, you’ll know there’s a reasonably overwhelming you want to be taught and do as a enterprise proprietor. While you work for your self, you’re typically juggling a number of hats which is why bookkeeping is commonly a process that many a sole dealer would slightly neglect about.
Whether or not you’re a longtime sole dealer or interested by working for your self and turning into self-employed, swatting up and discovering out extra about bookkeeping for sole merchants, attending to know the terminology and getting a superb bookkeeping course of in place, is among the most helpful issues you are able to do to assist your small business.
‘Don’t simply do bookkeeping since you should – do it as a result of it is going to make it easier to and your small business’
What’s the distinction between sole merchants and self-employed?
These phrases are sometimes used interchangeably to explain people who work for themselves however there’s a distinction. Sole merchants (or sole proprietors) are one in every of three authorized types of personal enterprise within the UK. The opposite two are partnerships and corporations. Self-employed is the time period given to each sole merchants and partnerships (successfully two or extra sole merchants).
Should you’re interested by establishing by yourself and haven’t already registered as a sole dealer with HMRC, you’ll find out how one can arrange as a sole dealer right here.
>See additionally: What’s a sole dealer? A small enterprise information
What’s bookkeeping and why is it necessary?
Bookkeeping is the method of maintaining correct information of the monetary actions of your sole dealer enterprise – in easiest phrases – maintaining observe of the cash your small business makes and spends and maintaining tabs on how a lot money you’ve bought within the financial institution.
Precisely and common bookkeeping is necessary as a result of it helps a sole dealer to:
- Hold observe of general profitability in addition to understanding which components of the enterprise are much less worthwhile than others
- Guarantee they’ve correct information as proof of bills incurred and to assist help and submit their self-assessment returns
- Plan for tax liabilities and keep away from pointless penalties
- Price range for bills
- Handle cashflow
- Hold observe of income to make sure you register for VAT when you want to
- Calculate their VAT liabilities (in the event that they’re VAT registered)
Should you’re VAT registered, except you register for Flat Charge VAT, your bookkeeping will get a bit extra labour intensive as you’ll want to trace and report VAT paid on related bills.
>See additionally: Sole merchants and VAT
What’s distinction between bookkeeping and accounting?
Bookkeeping is the day-to-day processing of your monetary transactions. Accounting is the method of taking that info and both reporting or analysing it – for instance submitting your tax return in addition to guaranteeing the information adjust to conventional accounting strategies. The excellent news is that as a sole dealer, in case your earnings is lower than £150,000 per 12 months – you possibly can undertake what’s known as the money foundation, which suggests you solely should hold observe of earnings and bills as and once they acquired or paid.
What information do I have to hold and for a way lengthy?
You need to hold information of:
- Cash you make and spend (earnings and expenditure) and all of the related receipts and invoices
- Any grant earnings you obtain and any related calculations
- Some other private earnings (in your self evaluation tax return)
- All payroll information when you’re an employer
There was much more flexibility as to the format of your information, which meant you didn’t have to make use of accounting software program and will as an alternative hold observe of your information on Excel or paper, however as of April 6 2024, the implementation of Making Tax Digital for Earnings Tax Self Evaluation (extra on this under) implies that all sole merchants might want to hold digital accounting information and must begin utilizing some type of accountancy software program.
You could hold your information for at the least 5 years after January 31 following the top of your tax 12 months. So, for the 12 months ended April 5 2022, you’d have to hold these information till January 31 2028.
What do I do with my invoices and receipts?
You need to all the time guarantee you’ve gotten the related receipts and invoices to help any expenditure to help your tax returns if HMRC will get in contact. You don’t have to hold paper copies so long as you’ve bought them saved digitally (and are backed up). We additionally suggest attaching these receipts and invoices to the related report in your accounting software program. This may seem to be a trouble, however when you ever have an enquiry from HMRC or your accountant must test one thing – in case your receipts are in a shoebox or in your emails, the one one that can cope with these queries are you. Having receipts and invoices connected to the related transaction in your accounting system means you all the time have the data handy and keep away from a probably massive headache.
Making tax digital and accounting software program
You’ve most likely already heard of Making Tax Digital. It’s been round a couple of years now, however up till now it associated to VAT. The subsequent part of Making Tax Digital will apply to sole merchants. Making Tax Digital for Earnings Tax Self-Evaluation (aka MTD for ITSA) would be the new manner of reporting self-employment and property earnings to HMRC and can apply to sole merchants with enterprise earnings of greater than £10,000. From April 6 2024, as an alternative of submitting an annual self-assessment, you’ll want to make use of MTD compliant accounting software program to maintain observe of your monetary information and submit quarterly earnings tax updates to HMRC. You’ll find out extra particulars right here. Partnerships gained’t want to do that till April 2025.
What’s the greatest accounting software program for sole merchants?
You’ll by no means be in need of accounting software program suppliers to select from.
While it may be tempting to go along with the most cost effective or free one, be sure you do your analysis first so you’ll find one thing which not solely helps you retain correct information but additionally helps you save time and make higher enterprise choices. The benefit of going with one thing like Xero or Quickbooks is that you just’ll by no means be brief of people that know how one can use it. There are nevertheless a number of different suppliers to select from. Some banks like Natwest additionally help small companies by giving free entry to FreeAgent.
Begin by asking fellow sole merchants and discover out what they use and what they like about it – keep in mind thought that what is correct for one sole dealer won’t be proper for one more.
Does it have the performance you want or need?
- The power to add receipts or invoices simply or combine with one thing like Dext or Hubdoc. To avoid wasting time it’s best to searching for uploads that embrace OCR (which suggests it reads the invoices and pre-populates a number of fields
- Integration capabilities – in your small business you may use different software program in your gross sales or inventory administration so it would be best to discover software program that may combine with this
- Computerized financial institution feeds along with your financial institution
- Budgeting – when you can put a price range in your accounting software program, you’re extra prone to hold tabs on how nicely your small business is doing so you possibly can adapt as and when wanted
- Studies – are you able to report on the data you want in your small business or does it have the pliability to adapt stories to do that?
- Most significantly, is it MTD compliant?
Strive a free trial – how does it really feel? Is it intuitive? What’s the help like?
Do I have to arrange as separate checking account for my enterprise?
Though you don’t should, having a separate checking account in your self-employment will make your bookkeeping quite a bit easier and means you don’t should filter out all of your private bills. Some sole merchants even arrange two accounts to allow them to put aside financial savings for his or her tax liabilities as and once they fall due.
What bills can I declare?
The foundations for sole merchants are totally different to restricted firms but when the bills are “allowable” per HMRC, you possibly can offset them towards your self-employed earnings to work out your taxable revenue. Full particulars might be discovered on the HMRC web site.
Tip: Beware of recommendation from a fellow enterprise proprietor – they is perhaps nicely that means, however you might find yourself being misinformed unintentionally and claiming stuff you shouldn’t.
What taxes do I have to pay and when?
- As a sole dealer, you pay earnings tax in your taxable revenue. That is at present reported on a self-assessment tax return for every tax 12 months (ending April 5) however will quickly be submitted digitally beneath MTD ITSA. Cost is due by January 31 following the top of the tax 12 months.
- In case your self-assessment tax invoice (together with Class 4 Nationwide insurance coverage) is greater than £1,000 additionally, you will should make cost on account for the subsequent tax 12 months (January 31 within the tax 12 months it relates and by July 31 after the tax 12 months it pertains to)
Nationwide Insurance coverage
- Should you’re self-employed – you’ll often pay two varieties of Nationwide insurance coverage – Class 2 and Class 4, topic to the quantity of taxable revenue you make. The quantity you want to pay will change yearly so all the time greatest to take a look at the GOV.UK web site for up-to-date charges
- This will likely be payable concurrently your earnings tax
- In case your taxable earnings exceeds the £85,000 threshold in any 12-month rolling interval, you’ll additionally have to register for VAT. Numerous sole merchants get caught out as a result of they assume it’s their tax 12 months. You could register for VAT when you exceeded the brink within the final 12 months or know you’re going to exceed it within the subsequent 30 days
- VAT returns are often completed on a quarterly foundation and are due (along with cost) one calendar month and 7 days after the related VAT quarter
PAYE and Nationwide Insurance coverage
- Should you rent employees, you’ll have to register as an employer and can then want to gather PAYE tax and worker insurance coverage out of your workers and pay this along with employer Nationwide Insurance coverage to HMRC on both a month-to-month or quarterly foundation. For many self-employed companies, their employer Nationwide Insurance coverage is commonly diminished due to one thing known as Employment Allowance which helps eligible companies to scale back their annual employer nationwide insurance coverage legal responsibility by as much as £5,000.
As a sole dealer, do I want an accountant or bookkeeper?
Not essentially. Should you’ve bought the time, inclination and mind capability, there’s no motive why you possibly can’t do it your self nevertheless it’s price getting some preliminary coaching upfront or discovering somebody who can overview what you’re doing to make sure you’re heading in the right direction and doing issues appropriately.
Should you resolve you need to get a bookkeeper or accountant to assist, be sure you don’t simply go for the most cost effective possibility. Do a little analysis, be certain that they’re certified, have a look at opinions, ask for suggestions and converse to them in particular person. You could really feel snug working with them and know they’re going to help you and your small business in a manner that fits you.
Bookkeeping suggestions when you’re a sole dealer
- Don’t go away your bookkeeping till the final minute
- Hold cash put aside in your earnings tax and Nationwide Insurance coverage – placing apart 30 per cent of taxable revenue ought to cowl this with a bit left over
- Know your tax deadlines when it comes to submitting and cost
- Try the GOV.UK web site for movies, dwell webinars, different help or to obtain e mail updates
- Regulate your cashflow. It doesn’t matter how a lot cash you make when you run out of money to pay money owed once they’re due.
- Don’t simply do bookkeeping since you should – do it as a result of it is going to make it easier to and your small business. Should you actually don’t get it/don’t have the inclination or time – discover a bookkeeper
- Be sure to have acceptable insurance coverage
- If unsure, all the time search skilled recommendation from an accountant or bookkeeper
Kate Gloudemans is co-founder of Sprout Consulting, which supplies accountancy help providers and strategic enterprise recommendation to moral, sustainable and purpose-led companies