Sunday, July 4, 2010

Start-up Sunday: Week 5 - Self Assesment, PAYE & VAT

Good Morning and welcome to Week 5 of our Start Up Sunday series.

Today we are going to touch on the subject that you have all told us scares the living daylights out of you. We are limited for space and taxes is such a wide ranging subject that I will touch on the most common problems or fears. If I do not cover anything you need to know, just leave a comment and we will pick it up at the end of the series. We all like to know how we are doing, so please leave us a comment and tell us what you like or would like to see being featured.

Self Assessment:
When you actually start your business, if you are a sole trader you automatically become regarded as self employed. You therefore have to register your self employed status with HMRC. You can do this online, or via telephone or post. I personally recommend registering by phone. You can find more about the 3 methods or registering on the HMRC website here

You also become liable for Class 2 National Insurance contributions. If you expect your self employed earnings to be small, less than £5,075 for the tax year 2010-11, then you can apply for an earnings exception.  However, please consider your position carefully - Class 2 National Insurance contributions are counted when calculation your entitlement to a basic state pension, incapacity benefit or ESA, bereavement allowances and maternity allowance. If you are over state pension age, you are automatically exempt from Class 2 National Insurance contributions no matter what your projected income may be.

HMRC has several advice teams all over the UK and they run free courses on a wide variety of subjects. I strongly recommend that, whenever possible, you attend the newly self employed course they run. It covers everything from registering as self employed to Class 2 contributions to basic recordkeeping and where to go for further help. I also feel it helps you see HMRC as just another organisation that is human and not something to fear.

So now you are all registered as self employed, its time to keep records.

Record keeping is quite simple; however, it is easy to muddy the waters which is why I recommend you attend the HMRC start up course so you can ask questions and get answers right away. Your records should comprise of 3 or 4 different books, you can keep records electronically and there is a wide variety of software availible for you to do so. 

I personally find computers to be unreliable and, as records have to be kept for a minimum of 6 years, I prefer to use paper. You wil need a cash book, a sales ledger and a purchase ledger as wel; as a wages book if you have employees. You can make these out of regular A4 note pads with a ruler to seperate colums but you can buy pre made books from Staples, Amazon and all good stationers. Books can be bought in A6, A5 or A4 size - I personally prefer A4 size as I find the smaller books difficult if you need to write a lot.

So now you have your three or four (if you have employees) books. What do you record in each one?

The cashbook is the final record of what comes in and what goes out of your business, it is often referred to as the cash flow,  To help complete your cash book, you need to keep cheque book stubs, cancelled cheques, paying in books, bank statements, copies of your own invoices, receipts and delivery notes, your suppliers invoices, receipts for all your cash purchases, remmittence advice slips from customers, copies of payments made or received using online banking systems.

The sales ledger records sales your company has made, the amount of money received for goods or services and the amount of money owed at the end of each month. It is recommended that you number your invoices and record each number against the entry in your sales ledger, you can then file your invoices in numerical order for ease of finding in the future. It will also help you fill our your VAT return if applicable. More about VAT later.

A purchase ledger records all purchases made by the business, it helps you monitor your business outgoings and how much money you owe at any one time. This also helps you complete your VAT return. It is a good idea to number each bill as you receive it then record the number against the entry in your purchase ledger. You can then file the bills in neumerical order for ease of finding in the future.

A wages book is only required if you have employees - you can use P11's as the basis for your wages book. If you have employees, you should seek professional advise from either HMRC or an accountancy firm/payroll provider and either be taught how to keep wages records or turn that area of you record keeping over to the professionals.

So now we have registered you as self employed and you have kept full and complete records for a full accounting year. It is now time to complete your tax return.

Despite what I have said about my mistrust of computers when keeping records electronically, I always file my tax return online. Firstly, I feel its better for the enviroment - a tax return has quite a number of pages, many not applicable to you yet (on paper, it comes as a booklet and you just ignore the irrelevent bits). Secondly, when filing online, as you complete the sections of the form you can check double check and amend things before submitting which you cannot do with a paper form.

As we touched on briefly earlier, if you have employees you have to operate a PAYE scheme. If you decide to have employees, you will need to register with HMRC as an employer - you can do so here.

I cannot stress too much the importance of attending the HMRC new employer course that shows you how to keep PAYE records as well as covering statutory sick pay, maternity pay and student loan deductions. If you opt to be sent a new employer pack it will contain everything you need to set up electronic records for your employees. PAYE records should be kept electronically for submission to HMRC but this will all be explained both at the new employers course and in your new employers help pack.

If you supply good or services within the UK and your turnover of taxable goods or services within the UK was more that 70k in the last 12 monthsm then you will need to register for VAT.

There are all sorts of other reasons you may need to register for VAT, even if you do not live in the UK but do supply goods or services to the UK. There is more about this on the HMRC website here. VAT is an incredibly diverse and sometimes complicated subject. If you feel anything less than 100% confident in dealing with it, I suggest you employ a prefessional to deal with your VAT returns on your behalf.

So there we have it, a brief overview of self assesment, PAYE and VAT. Unfortunately, with everyones circumstance being different, it's impossible to go into specifics using a particular person or business - however, if you feel there is something that we did not cover,  then please leave a comment or drop us an email.

If you do have a specific queary about anything specific related to taxes, PAYE or VAT and your liability for any of these, please do contact your local HMRC Office.

Don't forget to drop back next week when we'll be discussing our Week 6 topic - Legislation and Insurance.


  1. Excellent article - these are the things that scare people so much so it's really important to have such great advice and information. And thanks for the offer of contact in case of queries - sounds like a fab idea!

  2. I mirror everything Celine said, fabulous article and very very helpful.

  3. Are you not a bit out of date advising people to keep manual book-keeping records with cash books and sales ledgers? Even if you don't want to invest in an accounting software programme, at the very least a simple spreadsheet record would be more appropriate (free spreadsheets progs. are available, you don't have to buy Excel). I suspect there are very few business in this day and age who are still doing their record keeping with manual books. Just seems a bit out of date to be honest.

  4. Fantastic article. So many people don't even think about registering as self employed when they are selling reguarly.

  5. Very good article, thanks. We tend to forget that there's a wealth of free information out there for self-employed people, both from the HMRC and Business Link, and no doubt numerous other organisations. Thanks for the reminder!

  6. Great article! I have a question, at the mo I just have one book, each month I have a page of incoming and on the other outgoings, which is the sales and purchases of what you described above. With the cash book, should it just be the month end totals, not all the details of where the money has come from or gone? Am I confusing???

  7. Hey Lois. That is a great question and no not confusing at all. The cash book is just the totals and the sales/purchases or if your prefer incoming/outgoing book hold the details. I hope that clarifies things a bit more for you.

  8. Alison, great article, thanks. This is definately an area lots of people struggle with, so great to get some advice in black and white. x

  9. Anonymous - I appreciate your comments however HMRC require you to keep paper records for 6 years. HMRC recommemd to all start up busnesses keep full and comprehensive paper records.
    Computer systems are far from reliable or in many instances secure. Many of us have had data files corrupt on us for no aparent reason.
    I would also suggest that physically recording sales on paper actually make your business seem more real that a bunch of numbers on a screen.

    I think you would be surprise the amount of businesses that do their record keeping with manual books. It is a method that has worked very well for many years and is a great many years away from being replaced if ever.

  10. Also, even though a lot of people are computer savvy with regards to the net, using simple spreadsheets can baffle some people. It's a dangerous assumption to make that everyone knows how to use computer systems enough to keep important documentation such as this. I don't think it's "out of date" advice, as Anonymous says to advise keeping manual records - I think it takes account of the fact that is very likely the system most people would use.. especially when starting out.

  11. Hi, just like to mention I started out with paper records, but as I expanded things did start to get out of control! I now have most of my records on Quickbooks accounting software, and if you have a simple system you can start with the free version which I use. In the long term it will save alot of time.

  12. Thanks Allie that does indeed!

    I agree also that you should keep paper records, I do record totals onto a spreadsheet on my computer so I can produce graphs for comparison but having it all in ink and using my calculator helps me to understand how good or bad my business is doing!