SEARCH, INDEX, UPDATES, CONTENTS, IDEAS, GOOD RECORD KEEPING
Is it cost effective?
Managing your business
If you were in a race to row the Atlantic, would you need a compass, and
would you like to know how well you were doing?
Good records can give you management accounts which increase your profits, because they allow you to identify which activities are profitable and concentrate on them, and to make decisions about less profitable activities.
Detailed analysis of current activities is a useful starting point the predict future activity, income and costs. A well designed system will integrate your predictions with the actual results to monitor your progress, and allow you to modify your plans at an early stage if appropriate.
Independent studies have shown that a substantial number of businesses set their selling prices without knowing their costs, that some never consider the profitability of their business, and many do not compare their actual results to their predictions. If they survive, imagine how well you could do with some advance planning.
We can suggest the sort of information that you will find useful, but you will have to decide if the records that you (will) keep can provide that information.
We can also explain to you the distinction between Revenue and Capital Expenditure, and how to identify expenses which are disallowable for tax purposes.
If you records are good enough, we will spend less time preparing your accounts and charge you a lower fee in respect of work to comply with statutory requirements.
Completing your VAT returns
Whether you are completing monthly or quarterly VAT Returns, transferring a
few figures from computer or manual records should be a very quick process,
perhaps involving a few calculations, but only if the underlying records have
been consistently maintained in a manner suitable to your business.
Do not reclaim VAT without supporting documentation, or where expenses such as train, bus and air tickets which are zero rated and do not include VAT. Although taxi fares are standard rated, many taxi drivers have turnover are below the VAT registration threshold, and therefore do not charge VAT, so there is no VAT to recover.
You can recover VAT on the petrol element of a business mileage allowance - see VAT in Mileage Allowances.
We can use our knowledge of VAT to help design your system.
Dealing with an Investigation
Perhaps the most effective argument is the attitude taken by the Inland
Revenue to poor records. The case of Hitch v Stone [1999]
STC illustrates that the Revenue consider sloppy record keeping is indicative of
sham documents.
Although no-one wants to miss a claim for tax relief on any business expenses, it is wise to make a clear distinction between business and personal expenses. It is preferably to keep all personal expenses completely separate from business records, but where expenses fall into a grey area it is wise to keep detailed records explaining how an expense relates to your business or why it should be reimbursed by your employer.
Business entertaining, which is defined to include the provision of hospitality of any kind including food and drink, accommodation, tickets to sporting events or the theatre, may correctly be included in your business accounts and affect the profit to be divided between the Partners, but does not qualify as an expense for tax relief or for VAT recovery as there are specific rules which disallow it.
Traveling to and accommodation before a meeting are not entertaining, nor is the employees own meal at a meeting where business is discussed, nor the return trip, but customers and potential customers meals are. Do your expense records indicate the nature of the meeting and identify how much expenditure should be disallowed as entertaining? Detailed records indicate that you are not trying to "get away with something" and increase your chance of success in any dispute.
Records which can be challenged are of little value. An Inspector is not going to believe 3 business meals per day or business mileage 7 days per week, every week, so if that is genuine keep supporting evidence, but do not exaggerate business expenses - Inspectors can compare car maintenance records, MOT certificates and other information against mileage and expense claims.
Expect a challenge from Inspectors that some of the business income has not been recorded. Do keep till rolls. Do create a policy that all (credit) sales are invoiced on sequentially numbered invoices - and implement the policy - Inspectors do carry out test purchases for which they pay in cash and watch if the item is rung up or invoiced. Link sales to stock records if possible.
There are many Sole Proprietor businesses where the spouse (in many cases the wife) assists in the business. The National Minimum Wage regulations do not formally apply, but we suggest that the spouse, employed in the business, should be treated exactly the same as any other employee.
It is not wise to claim the spouse's wages as a deduction from trading profits where the spouse does not genuinely work. A Revenue Compliance Officer, visiting the business premises on a routine PAYE compliance visit, can casually ask any employee "What does Mrs (or Mr) .... do around here." The Revenue will take a lot of persuading that the reply given is not the truth.
So where a spouse genuinely works in the business -If a spouse is a Partner in the business then then above comments do not apply, but evidence of a genuine business Partnership is then vital. You may need to prove that the spouse is actually involved in making policy decisions.
If the business is run through a Limited Liability Partnership or a Limited Company, employees may be family members of the members / shareholders / directors but the company has no family. The National Minimum Wage regulations apply in these circumstances except for directors who do not have a contract of employment.
If that is not enough, the Inland Revenue can impose a fine of up to £3,000 for each year that you fail to keep proper records.
Is it cost effective? We believe it is vital to achieving the maximum reward for the effort put into your business.
See also Budgeting, VAT Planning, Tax Investigations
Reminder - disclaimer applies. Please feedback your comments. This page was last modified 24 December 2005.