Starting up in business is an exciting and life-changing time and there are many decisions to make. One of the most important of these is your choice of a financial reporting, or accounting, system.
In the beginning
You’ve made the decision, perhaps following months of deliberation, to set up your own business. You’ve chosen a name, perhaps done some market research and designed your website. You may have ordered some equipment or stock. It’s now time to press the ‘pause’ button. How are you going to record all the transactions you have made or are planning and how are you going to keep on the right side of HMRC?
Keep it legal
You are required by law to register as self-employed by 5 October in your business’s second tax year. Failure to do so may lead to your being fined. Please note that if you decide to trade through a limited company different rules apply. Your responsibilities as a sole trader, according to HMRC, are to:
- keep records of your business’s sales and expenses
- send a Self-Assessment tax return every year
- pay Income Tax on your profits and Class 2 and Class 4 National Insurance
The way in which you keep records will probably depend on your VAT status. If your vatable supplies exceed £85,000 per year you will be obliged to register for VAT. Please note that from 1 April 2022, all VAT-registered businesses, regardless of taxable turnover, have been required to follow Making Tax Digital rules for their first return starting on or after April 2022. Please see our Making Tax Digital Hub for more information.
If you have employees, you will have to use approved software to record wages and submit monthly information to HMRC.
Options for the small business
If your business is not obliged to register for VAT you have more options as to how to record your transactions, and much depends on the complexity of your activities. If you only make a small number of transactions, a manual bookkeeping or spreadsheet-based system may be sufficient. However, please bear in mind that as well as being time-consuming this will only be acceptable to HMRC in the short term as they look to transition every business to digital reporting. More on this can be found in our Making Tax Digital Hub.
Options for growing businesses
The obvious progression for the spreadsheet user is to an off-the-shelf computer accounting package. Such a package must come with HMRC approval and, when required, the facility to file VAT returns and monthly accounts online. Many start-up businesses now omit the manual bookkeeping and spreadsheet stages and use a computer accounting package from day one.
Management information and controls
In addition to requiring financial reporting systems for tax compliance all but the smallest businesses need systems to gather information to enable accurate billing, debt collection, ordering and paying for supplies, monitoring cash flow, and making business decisions. Some businesses also need stock-control or time-recording systems. In addition, a good financial reporting system gives the benefit of minimising losses caused by fraud and error.
Saving you time and making you money
Bookkeeping is a chore. It takes up time that could be better spent on other aspects of your business. A cloud-based accounting system gives you the ability to access and update your accounting records anywhere that you have an internet connection. This could be on your PC, tablet, or smartphone. There is no need to make backups for security, and it can be available to several users, including your accountant. It is cost-effective, paid for by a modest monthly subscription which covers the cost of upgrades as they become necessary. It will provide real-time information and can be adapted to provide up-to-date data on all your key performance indicators, enabling timely and effective management decisions.
Further help
If you would like advice or further information on what might be the best financial reporting system for your business, drop me a line at paul.newbold@torgersens.com or call me on 0191 567 8611.
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