Keeping proper business records
1. Keeping business records – the full story
1.1. This system is designed to help you keep things as simple as possible.
1.2. At the same time, it is designed so that it works with almost every bookkeeping system and every accounting system there is. You can generate your prime records (invoices etc) using Word or Excel or similar applications, and you can store your records on DropBox. That way, we can both find what we need, when we need it.
1.3. We use specialist software which only accountants would want to buy. We do not recommend that you buy bookkeeping software unless you employ an in-house bookkeeper or unless you yourself are a trained bookkeeper. We do not recommend any of the online accounting software solutions unless you’re a trained accountant. We want a proper set of prime records from our clients and that enables us to do the books and the accounts professionally, using professional software and professional staff.
1.4. You’ve heard of GIGO haven’t you? Well if you follow our system exactly as it is set out below you should always get sound results.
1.5. This system relies on all records being stored as PDF documents. This ensures that the data is readable by all users on all systems. It is easier to print files to PDF than it is to work with a multitude of .XLS .XLSX .numbers .ODS .CSV etc files. If your business computers do not already have PDF printers installed, visit www.cutepdf.com and download their basic package called CutePDF Writer (Freeware).
1.6. More info
1.6.2. Why don’t you recommend bookkeeping software? (link TBA)
2. Invoicing and Sales
2.1. All businesses want to make sales and so we use a “Sales” folder on Dropbox to keep track of your trading income.
2.2. You need to generate an invoice for every sale you make. The only exception to this rule is for businesses that operate retail shops and use cash registers, and we don’t look after any businesses like that! So, you will need a system which generates an invoice every time you want a customer to pay for something. That includes:
2.2.1. Fees for services
2.2.2. Fees for goods sold
2.2.3. Commissions received
2.2.4. Expenses which you want to recover from your customer
2.3. You must prepare an invoice each time you make a sale, and you must give each invoice a unique and consecutive number. Even if your customer doesn’t want an invoice, you do! Even if your customer gives you a self billing invoice, you still need to prepare a proper invoice which will stand up to scrutiny from HMRC! Use a simple number system for invoices numbers. Choose any number to start with and then just keeping adding 1 to it! Don’t skip numbers, nor use them out of sequence, and never use the same number twice.
2.4. Never use alphanumeric numbers. Invoice numbers must always be purely numeric. If you want to show a customer reference on your documents you can, but show it as a completely separate entity and not as part of the invoice number. If you want to include the year of issue within your invoice number, don’t! You already have the date on the invoice!
2.5. Simple, unique and consecutive invoice numbers rule the day.
2.6. Make sure that the invoice date and the invoice number stand out clearly by keeping them near the top right of your document, and by keeping them clear of any surrounding clutter. If you are not VAT registered, then your invoice should make no mention of VAT whatsoever.
2.7. As you generate them, add a copy of each of your invoice PDFs to the pending/ sales folder on DropBox.
2.8. More info
2.8.4. Amending an Invoice
2.8.5. Issuing a Credit Note
2.8.6. Issuing Statements (link TBA)
3. Purchases from Suppliers
3.1. We use the word “Purchases” to describe all the things that your business buys via the business bank account, the business credit card account, and the business PayPal account, etc. Get all of your suppliers to bill your business in the name of your business, and then pay for all of your supplies from any of the business bank accounts. If you could do that for every single purchase then Step 5 below would never be needed!
3.2. The “Purchases” folder on DropBox is for all the things, and only for the things, which you bought for the business using any of the business bank accounts. You must not use the business bank accounts to pay for private purchases, and that includes putting fuel into a privately owned car, or eating out too often at the business’s expense. If you do, then you’ll end up paying more tax and more National Insurance on these benefits in kind. Keep the business bank accounts strictly “business only”.
3.3. Add all of your supplier invoice PDFs to the pending/purchases folder on DropBox, things like hardware and software purchases, advertising costs and phone bills (assuming that all these things are bought in the name of the company and not in your own name).
3.4. You may find that as you work through your business purchases, that you pick out a few personal purchases for the business (for example, cash paid to taxi drivers). Put these “Expenses Receipts” to one side for the moment. They are not “Purchases” and they will be dealt with later at Step 5 below.
3.5. Furthermore, if you are VAT registered, you must have a VAT receipt for any “Purchases” that included VAT. You cannot claim back VAT without them. You are likely to get a VAT records inspection once every six years so you should conscientiously start keeping all of your VAT receipts now.
3.6. Although the inspection system averages out at about one records inspection every six years, that does not necessarily mean that the first inspection will come in year 6. For example, you could get one in year 2 and then another in year 7, and then a big gap until the next one in year 18.
3.7. Whether your business is VAT registered or not, you are still required by law to keep all of you business records for six years, and you may still get a records inspection from HMRC at any time.
3.8. More info
3.8.1. What is a business expense?
3.8.2. VAT receipts – the fine details (link TBA)
4. Bank Accounts
4.1. The most critical part of your records system is your business bank account, and that is always our starting point.
4.2. You will need to maintain accurate records of every business account, whether a current account, savings account, credit card account, loan account, commercial card account or a business PayPal account or a WorldPay account or a StreamLine account or a NetBanx account, or any other account which you hold in the name of your business in any type of “Finance House” whatsoever. If that seems a bit onerous, then maybe now is the time to slim down the number of “bank accounts” that your business really needs.
4.3. If an account is not in the business name, then it is not a business account. We know of some cases where a private credit card is used as though it were a business credit card. We do not adopt that treatment and we do not record these things as business transactions. If you need to use your private credit card to make business purchases then you will need to follow the “Expense Receipts” process at Step 5 below. Or, maybe now is the time to sort out that business credit card that you’ve always wanted? Anyway, keep private things private and keep business things business.
4.4. Monthly bank statements. When preparing your records, you must ensure that your bank statements cover the whole period in question. If your statements are issued on paper on (say) the 25th of every month, you may want to get that changed. Statements which are issued in the first week of the month allow you to build up a clear picture of the whole of last month, whereas statements which are issued in the last week of the month do not.
4.5. Statements which are issued in the first week of the month allow you enough time to get the records to us before any VAT return is due in. Consider this example covering the 1 Jan to 31 Mar VAT quarter:
4.6. In this illustration, the last few days of March are missing form the paper bank statement dated 25 Mar. If a VAT return were to be prepared using the known data (26 Dec to 25 Mar) then the figures are not “true” and worse still, your declaration on the VAT return would be false and your year end accounts would not comply with the Companies Acts.
4.7. You could of course wait for the 25 Apr bank statement to arrive, as that will include all of the transactions from 26 to 31 Mar. However, a 25 Apr bank statement may take a couple of days to get to you and then (if you’re quick) another couple of days to get to us, arriving on 29 Apr. And, as the 31 Mar VAT return is due in on 30 Apr there is no practical time left to get things done. We are unable to accept cases which require us to work to such tight deadlines.
4.8. It’s much easier to use internet banking, and to take a summary from the web once per month. Follow this process and it won’t matter when the paper statements are issued. We recommend that you use this process on the first business day of every calendar month. Log in to your online banking service . . .
4.9. Set the dates so that you can see an online statement covering the whole of last month. Then print that to PDF. That’s a whole lot easier than fiddling around with the crazy download tool that the bank gave you!
4.10. Save your bank statements using meaningful file names. Repeat that for each business current account, savings account, PayPal account etc. Make sure that all of the PDFs that you’re making include the Balance column. Then add these PDFs to the pending/bank folder on DropBox. Even if there are no transactions on any given account in any given month, we still need a statement which shows that. A copy of “a NIL document” will let us know (in any future records inspection) that there were in fact no transactions, as opposed to leading us to think that there is a missing document!
4.11. More info
4.11.2. Why won’t you accept CSV files with bank records? (link TBA)
4.11.3. Why won’t you treat my private credit card as a business credit card? (link TBA)
5. Expense Receipts
5.1. We use the word “Expenses” to mean personal expenditure on business activity, incurred by a member of staff. A good starting point for Step 5 is the pile of expense receipts which you had left over from Step 3 above. This step applies to all people who are employees, or directors of limited companies, or partners in business partnerships. If you’re self employed (and you haven’t pushed everything though your business bank account) you will need to pretend that you’re an employee for this step.
An example Expenses Claim form
5.2. In the old days, you needed to fill out an expense claim form, submit it to the lady in accounts, get it authorised and then (if you were lucky and a. your form was correctly filled out and b. your items were genuinely work related) the business would reimburse you for the exact amount of your claim. Supporting receipts were stapled to the back of the form. This system is for things like taxi receipts, the books of postage stamps, or the toll for the Dartford Tunnel. As much as we would like to get these suppliers to invoice your business directly, they tend to expect cash or some other form of instant payment. If you paid for such things with personal cash or with a personal card, then you must keep a record of this in order to claim back such things as allowable expenditure of the business.
5.3. Take the pile of expense receipts which you had left over from Step 3 above. Is your business VAT registered? If it is, then divide this pile of personal expense receipts into two, the ones which make no mention of VAT and the ones which are proper VAT receipts. Prepare separate expense claims for non-VAT items and for VAT items.
5.4. You can make your claims using electronic means. For example, Expensify will give you a summary in PDF form. Alternatively use the proformas from the links below and prepare a PDF of your completed form. Some of our clients do this on paper and then scan the completed form. Others work the XLS file and then print it to PDF.
5.5. Add all of your expense claim PDFs to your personal folder under the pending/expenses folder on DropBox. Principally, we need the claim forms, and you need all of the supporting receipts. However, it makes sense to put all of the supporting receipts on DropBox too. We do sample checking of receipts and we will definitely want to check the supporting documentation for anything big or for anything which is out of character with your business. By keeping all of this on DropBox you will have the right records in the right place if and when there is a records inspection.
5.6. We know that some people prefer to keep small fiddly paper receipts as “paper only”. That’s fine by us, as long as you can find it when it’s needed. Remember, records have to be kept for six years. Do you have a copy of that mobile phone bill from 5 years ago? If not, and if your system is deficient, do something about it now and make it bullet proof!
An example Mileage Claim form
5.7 You can also claim for motor expenses in accordance with the HMRC approved FPCS rates, which apply to business miles done in your personal car.
5.8. More info
5.8.1. What is a business expense?
5.8.4. What happens if I don’t have a receipt? (link TBA)
5.8.5. VAT receipts – the fine details (link TBA)
5.8.7. Can I claim a refund of foreign VAT? (link TBA)
6.1. In April 2013 HMRC introduced Real Time Information (RTI) for payrolls. You can no longer seek to engineer an artificial reality, especially when it comes to payroll. Whatever happens in the company and on the company bank statement happens. And anything that did not happen on the company bank statement simply did not happen.
6.2. We maintain payrolls for some clients and we store the PDFs on DropBox for them. If we run a simple payroll for you (following the small salary and big dividend method) it is your responsibility to make the correct bank transfers at the correct time. Every April, when the new tax year starts, we update our advice and we notify our clients. It’s up to you to implement that advice before the April pay day.
6.3. If you look after your own payroll, then we need monthly payroll summaries from you. Please add P32 reports and an analysis of all staff and their net pay figures to DropBox. Your bookkeeper or your payroll bureau will know what that means.
6.4. More info
7. The quarterly reports
7.1. We have a fiendishly clever system of logging your records in our software, and that helps us generate quarterly reports. Some people want basic reports from us, and some like to see every detail. The quarterly reports dovetail into the year end accounts work, and that dovetails into the tax return work. That’s why getting the basics right is so important. Remember GIGO?
7.2. The point of giving you regular quarterly updates is to provide you with an early forecast of your likely profits, and an early warning of your future tax bills. Steadily, as the trading year progresses, these forecasts become more and more accurate and that enables you to prepare a suitable tax reserve and to avoid any nasty shocks!
7.3. More info
7.3.2. The system of four digit sentinels (link TBA)
7.3.3. What is a sentinel? (link TBA)
8. IR35 and Contractors
8.1. These days HMRC is taking a greater interest in contractors who work through their own limited companies. It’s nothing much to worry about as we all know how to keep things on a level playing field. Sometimes that might mean a more intense records inspection than normal. And that can mean costs in terms of time and money.
8.2. To minimise these risks contractors may want to join the Professional Contractors Group. If you have PCG Plus membership then you are insured in the event that costly enquiries arise. There is nothing in this recommendation for us, as we receive no commissions. It’s simply a case that annual membership of the PCG gives peace of mind and may minimise the problems caused by enquiries.
9.1. You may have heard that we have a reputation for deliberately losing some of our clients. It’s true! Every year we lose the people that cannot give us proper records. It usually starts with missing bank statements. And there are some cases where invoicing is not done properly. If you cannot keep a full set of bank statements and a full set of invoices, should you really be trying to run your own business?
9.2. And, if there are a few too many indiscretions with a crossover between personal and business bank accounts, then you’ll soon find yourself needing a new accountant. Each year, we identify the worst 5% of our client base and we let them go. The best gardeners in the world do not keep a patch for the weeds. We apply that same philosophy to our business. You might like to adopt it too! It sure makes business a lot more rewarding.
9.3. The good news is that we have a great relationship with our clients, they get regular reports and regular tax updates, they are almost always on top on things and they rarely get nasty shocks from the taxman. Plan to look after your business, and plan to keep proper records.
Sir John Harvey Jones:
“The only good thing about not planning, is that failure comes as a complete surprise, and is not preceded by a period of anguish and fear.”