By Richard Mannion, Head of National Tax at Smith & Williamson
Entrepreneurs, including the self-employed, recently formed businesses and people running more than one business should take extra care with record keeping for their VAT and general tax affairs. This is because they are likely to come under closer scrutiny from HM Revenue & Customs. This is because they have traditionally been seen as the groups of people at greatest risk of making mistakes on their tax returns.
The taxman can now carry out checks on individuals and businesses which relate to the current year. This makes it more important than ever before to make sure record keeping and filing are up to scratch — and then to hold on to those records. The taxman expects to see records going back for at least six years.
In light of the recently announced tax gap of £42 billion and the pressure on public finances, the taxman will be seeking to recoup funds as soon as it can from people and businesses who have underpaid their tax.
There are many ways this can happen. For example, if you use a car for both business and personal use, you will need to keep a log of mileage associated with the business and hold on to receipts for petrol and any repairs.
VAT is clearly high on the taxman’s agenda, not least since HMRC estimates that around £15 billion of VAT has been underpaid. Clearly, it will be eyeballing many businesses’ VAT returns.
Another area that frequently trips people up is the question of personal money put into a business or taken from it. Even if it’s your own business, records on this should be kept to demonstrate exactly what has happened.
In general terms, the self-employed must keep a record of all sales and takings, purchases and expenses. Any purchases or sales of assets such as a computer, tools or other equipment necessary for your work must also be noted, but separately from day-to-day purchases. Further records will be required, depending on your business. These may include details of petty cash expenses, invoices and receipts, till rolls, hire purchase and leasing arrangements and bank statements.
If you have more than one business or self-employment, you cannot lump all these together for tax purposes. Instead, you must keep separate records for each and submit entries for each when completing your tax return.
For many businesses, such as private therapists, sports trainers, plumbers, electricians etc, the taxman will expect that some of your clients pay in cash. You need to keep a careful note of this and include it in your records.
To review your current tax systems and procedures contact Richard Mannion on 020 7131 4252 or email email@example.com
Watch a video of Guy Rigby, Head of Entrepreneurs at Smith & Williamson, giving advice on how to manage cash flow.
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