Basics of accounting for entrepreneurs

What are the basics of accounting for entrepreneurs? Lauren Harvey explains how to pay VAT, when to file company accounts and business expenses you can claim for

Accounting is a necessary practice for entrepreneurs. Not only does it give them a clear picture over the financial health of the company, but it allows entrepreneurs to understand what is driving revenue so they can adapt the business model accordingly.

From keeping records, to managing accounts, and registering for and paying tax, accounting can be quite overwhelming but with the right information and support it doesn’t have to be. Read on to see the answers to some frequently asked questions, which will help you understand the basics of accounting.

How do I pay my VAT bill?

There are several ways to do it and you can choose the one that best suits you.

You can pay your quarterly VAT payments via direct debit when you register for the VAT online service. HMRC only debits the amount on your VAT return, so you won’t be charged for any other money you owe them. You can change an existing payment method to a direct debit online, but only if you’re the authorised signatory. If not, you can complete a paper application to set up a direct debit and post it to HMRC. They’ll send you a letter once it’s set up, confirming when the first payment will take place.

If you have a UK debit or corporate credit card, you can pay your VAT bill online. It’s important to note that HMRC doesn’t allow taxpayers to pay their VAT bill with a personal credit card.

Additionally, you can pay your VAT bill by transferring the money directly into HMRC’s account. Just remember to include your VAT registration number as a reference. Normally, it takes around three working days for the money to reach HMRC’s account, however it could take longer so make sure you authorise the payment in plenty of time.

It’s also possible to pay your VAT bill via CHAPS. This is an automatic payment that HMRC receive the same day you authorise it, you just need to include your VAT Registration number for reference. You can also set up a standing order, it’s possible to do this with your bank or by completing a standing order authority request form with HMRC.

Are there deadlines and penalties for failing to file my accounts?

If you’re a sole trader, it’s your responsibility to ensure that you understand the reporting deadlines and obligations for filing accounts. The financial year usually runs from 6April to 5April in any year, and it’s good practice to produce a set of accounts at the end of every financial year, which will include things such as income, profit, assets, and liabilities.

Annual accounts aren’t a legal obligation for sole traders, but completing them will make it a lot easier to complete your self-assessment, and it’s important to keep an eye on what’s happening in your business too.

The self-assessment deadline is on 31 January every year, and failure to submit by this deadline will result in a fixed £100 penalty from HMRC. After three months additional daily penalties of £10 per day will be charged, up to a maximum of £900. After six months, these charges increase again, with 5 per cent interest being charged on the tax due.

If you are VAT registered or employ staff, you may also need to submit additional returns to HMRC as well as file your Real Time Information (RTI) return each time you pay your employees. The VAT return deadlines are usually produced quarterly, and the deadline follows one month and seven days after the quarter ends.

If you run your own limited company, you’ll also be responsible for submitting a company tax return on time, within 12 months of the financial year it relates to ending. The deadline to pay any corporation tax you owe is nine months and a day following the end of the accounting period that it relates to, and you might also need to submit a self-assessment tax return if you take any personal income from the business that doesn’t go through payroll.

>See also: What is corporation tax?

Am I entitled to tax relief for R&D?

If your business carries out research and development (R&D) work, you might be able to claim tax relief on the costs. Also known as R&D Tax Credits, the government scheme offers companies an incentive for innovation. The tax relief money can used on anything, from settling debts, hiring staff, to more R&D work and ultimately, growing the business.

How do I claim business expenses?

Businesses can usually claim tax relief on their expenses, as long as they directly relate to the running of the business. You’ll include the total amount of expenses in your tax return, and this will be deducted from your total income, leaving your profits (which is the bit that you pay tax on). There are also different types of allowances available which companies can use to claim tax relief on longer-term assets they spend money on for the business, such as equipment.

The Annual Investment Allowance (AIA) is a type of capital allowance that enables businesses to claim tax relief on the assets they buy for business use. These could include company cars, computers, machinery, or software development. AIA can be used to deduct the full cost of an asset’s value from your profits in the year that you bought it, rather than spreading it out over several years. Unlike most types of capital allowances, this one is available for unincorporated businesses too.

The maximum amount that you can claim in a year is £1m. You may wish to use it on one asset, or across several. You can’t use the annual investment allowance for cars, or for assets which you already used for something else before you started using it for your business, such as being able to claim on a previously bought laptop.

>See also: Accounting 101: a guide for business growth

What is a full expensing tax break?

Full expensing (FE) allows businesses to deduct 100 per cent of qualifying expenditure from their taxable profits in the year that it occurs. Rather than spreading the tax relief out over a several years, you can claim it all in one go. In terms of the assets that you can use it for, it’s very similar to the Annual AIA but it’s not capped £1m.

Unlike first-year allowances that typically focus on eco-friendly items, the new full expensing rules are similar to AIA, in that you can claim for assets which fall into the more general “plant and machinery” category. Assets that businesses can claim on can include office items, tools and machinery, vans and lorries, warehouse equipment or fixtures and fittings.

It’s important to highlight that only brand-new, unused items are eligible and they can’t be something that were gifted to the company, or that you bought so you can lease them to someone else. Businesses can claim FE on qualifying expenditure on or after 1 April 2023 and before 31 March 2026.

These are just two examples of capital allowances that are available. It’s a complicated area of the tax rules, so definitely worth speaking to an accountant about this.

Lauren Harvey is assistant accounts manager at The Accountancy Partnership

Further reading

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Lauren Harvey

Lauren Harvey is an accounts manager at The Accountancy Partnership.

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