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As a small business owner, you may find you don’t have much time to balance your accounts and identify areas where you could be saving your company money.

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Many people make the mistake of leaving updating their accounts until the last minute before they file their tax return. This can often be an expensive exercise as data entry errors or the provision of insufficient evidence can result in penalties or fines.

Anyone who has income that has not been taxed at source or not taxed at the correct rate needs to complete a self-assessment tax return. This usually includes self-employed individuals and company directors.

We’ve put together a list of the top five mistakes that small business owners need to avoid to get their tax returns right the first time.

Not taking bookkeeping seriously

Bookkeeping is the process of recording financial transactions, such as sales, purchases and payments relating to the business.

This is an important business function for a number of reasons:

  • It assists in identifying how much tax needs to be paid and where savings may be made;
  • helps company directors make better decisions in relation to the company’s operations; and
  • improves how cash flow is managed within the business.

Bookkeeping helps small business owners keep on top of their cash flow and identify areas where savings can be made and company profits maximized, therefore it’s important that your bookkeeper communicates clearly.

Making data entry errors

A fundamental aspect of running a small business is recording all transactions and correctly classifying them in the year-end accounts.

Company financial statements should present a “true and fair view” of company profit and expenditure. Accounts must be free from material misstatement and accurately represent the company’s financial situation to allow investors, borrowers and other stakeholders to make informed decisions on behalf of the company.

While you may not intentionally provide an inaccurate reflection of your company accounts, HMRC will treat any discrepancies as suspicious and you may be penalised as a result.

Not keeping records and receipts

Companies are required to maintain a record of income and expenditure for at least six years from the end of the accounting period. Failure to adhere can result in penalties.

As frustrating as it can be to request a receipt each time you buy a meal or put fuel in your car, it’s a legal requirement that companies keep records of expenditure and financial data.

Records and receipts are usually sufficient evidence, however, if HMRC chooses to investigate your return, you may need to provide further evidence.

Using your business account for personal expenses

While small business owners can claim many business-related expenses through their companies, it’s important to keep personal and business finances separate.

Using the company bank accounts solely for the business avoids getting into a financial mess when it comes to paying liabilities.

In the event you use personal finances to pay for something for the business, this can be accounted for in your director’s account (if you have a limited company).

Not hiring an accountant

While software is available that can record expenses and automate some of the accounting process, it can’t add value in the way of providing the advice you need to grow your business.

In addition to balancing your accounts and keeping a record of your expenditure, employing an accountant offers the following benefits:

  • Saves you time by taking care of your small business financial affairs (leaving you to focus on making money)
  • Ensures tax returns are filed correctly and paid on time, helping you save money
  • Checks you’re running the business efficiently
  • Provides advice to minimise tax bills and grow your business
  • Keeps you from overspending and checks you have enough to pay your tax bills

It’s also worth investigating if making monthly payments for your accounting services may work out more cost effective than simply employing the services of an accountant each time you need to file a tax return – particularly if you have a large number of receipts to be reconciled.

Setting up a limited company

Here’s one thing we recommend you don’t avoid: setting up a limited company.

When you set up a limited company, you can nominate yourself as a director, which allows you to make decisions about how company profits are spent. You can then pay yourself through a combination of salary and dividends, meaning you’ll take home more than if you were just a company employee.

You’ll also be able to claim business-related expenses to reduce your corporation tax and increase your company profits so you can have more left over to spend as you choose.

You can even claim your accounting fees as a business-related expense and we can set up your limited company for free.

Cobia Accounting specialise in accounting and tax services for contractors and small businesses. To set up your limited company or learn more about the benefits of doing so, contact us today.