â€œSome sole trader accounting challenges during our work as business advisers - sometimes they're inevitable. Sometimes, however, it is possible to prevent them earlier.â€
Being self-employed offers a lot of freedom. You're the boss, and you can dictate what and how you conduct business. However, at the same time, there's plenty to do, and it can be challenging to keep on top of your finances while also managing your other business.
Specific sole traders discover the hard way and face accounting issues in the beginning and then change their practices from then on. However, if you want to save time (and cash), getting advice from experienced professional accountants for sole traders is the most effective option.
The article below will discuss the most common mistakes that sole traders make in accounting and provide suggestions and tips to help you avoid these issues.
Not Keeping Good Books
Bookkeeping doesn't mean you're a librarian; it's an expression used to describe the financial records that you keep in the course of running your business.
When general accounting describes the way of managing your account accounting, bookkeeping is the particulars that count. This is the case for all your daily expenses and income, like corporate expenses or business transactions.
It's quite a task to record every receipt, invoice, and bill; however, if it's a serious business decision, it's essential to save all of this information and classify it the correct way.
If you don't have a reliable bookkeeping procedure, It isn't easy to maintain precise financial data. This, in turn, hinders the development of efficient business plans or reporting the correct information to HMRC via tax returns. (And If the tax returns you submit aren't valid and you fail to write them correctly, hefty penalties may be imposed.)
Not sure which records to store
Many sole traders need to be made aware of the paperwork they have to keep. It can be challenging to switch between running an enterprise and managing accounts is not easy, even for the hardest-working and successful business owner.
We'd recommend employing the services of an accountant for a variety of reasons. First, the additional time you'll get will be beneficial to your business as we'll be able to use our knowledge to prepare books and accounts with the best quality.
Do I have to take care of my accounts?
If you're planning to handle your finances on your own, then you'll have to sign up with HMRC and be sure to know the rules of managing your company.
Sole traders are responsible for their company (unlike the limited company, which is an independent entity of its own). In practice, you're self-employed. However, you can hire employees should you wish to.
As a sole trader, you must: Keep track of your expenditures and sales
File annually a self-assessment return, and pay the tax due on your earnings
Classes 2 and 4 of Pay National Insurance * Register for VAT (if your revenue is greater than the threshold for VAT (although you can do this even if you're not over the point)
Control your business debts with total accountability.
"How long do I have to keep records for?"
We hear you ask. The answer is six years.
HMRC screens companies to make sure they adhere to tax laws. Therefore, ensure that your paperwork is correct and up to date.
In addition, business costs could aid in reducing the tax bill at the end of the year when taking advantage of allowable expenses. It's worthwhile keeping a record of this fact. They could include:
â€¢ Technology, stationery, and internet access
â€¢ Telephone bills
â€¢ Travel costs
Â·â€¢ Motor costs
Always have invoices and receipts. Without them, it won't be easy to prove expenses. It's not necessary to keep the entire collection physically when you're using cloud-based Accounting software, you can upload the documents and then dispose of the paper afterwards.
Always request an invoice for VAT when you purchase anything to run your business, such as a cup of coffee with a customer, since some establishments don't provide them automatically.
Paying the wrong taxes for a sole Trader
If you're a sole trader, you'll need to pay various taxes based on the way you operate. If you don't pay these taxes, it could land you in hot waters, which is why it's important to know what you're against.
It is mandatory to report your business profits along with your expenses to HMRC at the close of each tax year.
The tax return must be filed via a self-assessment tax return before 31 January. With the information provided, HMRC will give you a tax bill that must be paid within the same timeframe. There may also be a need to pay 'payments on account' based on the income you have to tax. These are advance payments payable twice per year between 31 January and 31 July.
The earlier you start this, the sooner you do it, the more efficient. It's too late to wait for the date.
We'd recommend putting an amount of at least 30 percent of your income to cover tax. This is a good business practice and helps you have the ability to deduct tax obligations.
When you first establish yourself as a sole trader, you'll have to notify HMRC that you've set up your exclusive trader account.
In the next quarter, you'll have to pay your Class 2 National Insurance bill -- it's a fundamental payment towards your state retirement.
When you finish your tax year, Your accountant will calculate any additional classes 4 National Insurance contributions.
You must register for VAT if your income is greater than the current threshold of PS85,000.
You may register on your own when you're not at the threshold. Some sole traders choose to register for this purpose, either for reasons of credibility or simply because it is financially sensible, depending on the amount they are able to claim. You should seek out assistance to determine whether voluntary VAT registration is a viable choice for your company.
When you're registered, you'll be able to get VAT rebates on a lot of things you purchase for your company. This is particularly crucial if you're buying and selling lots of stocks.
You can also choose between the VAT standard scheme or Flat-rate VAT. It was put in order to cut down on administrative costs for smaller companies.
The flat-rate scheme permits taxpayers to make VAT payments to HMRC at a fixed rate depending on the sector that they're working in.
We suggest double-checking with your accountant to make sure you are using the correct scheme.
There could be the point that you'd like to employ staff. If this happens, you'll have to register as an employer and keep Payroll as well as National Insurance details. Keep records for three years following the end of your tax year.
Records typically contain:
â€¢ The employee's pay, as well as any deductions you take, which includes pension plans
Â·â€¢ Sickness and absences
Â·â€¢ Costs or benefits that are paid by your staff
Â·â€¢ All charity match-up expenses are incorporated into pay-roll giving schemes.
As a sole trader, it can be challenging. If executed correctly, it can be gratifying. Many issues can stall your business when you're not cautious. If you take your time, you'll have a sound financial future and strategy.
Other top ideas to be mentioned prior to wrapping up:
Always make use of cloud-based accounting software. It makes keeping vital records simpler.
Talk to other business leaders. One of the best ways to gain knowledge is to listen to other business owners and their issues.
Start implementing accounting practices early. They'll prepare you to be successful and establish a foundation to build from. Contact us at Account Ease as we have professional Sole trader accountants which streamlines your financial management