The most effective way to reduce the amount of tax you pay is by keeping good quality records of your everyday financial transactions. That means keeping details of what you earn and what you spend for your business.
You need to have the right system in place to be sure that invoices or receipts do not get misplaced and that it is included in your End of Year Accounts.
These Accounts will form the basis for you Self Assessment Tax Return and the amount of Tax you pay. With this in mind it is highly worthwhile being well organised.
This is only intended as a rough guide, I would suggest that if you are in any doubt keep all your paperwork and send it to me. The best way to do this would be to keep any paperwork safe in a folder with details of how it was paid.
I understand that it seems a lot but this only needs to take a few seconds, whilst you are writing a cheque to put the same information on the invoice that you are paying.
Bank Statements & Cheque Books
Your first priority should be to keep all your bank statements, most high street banks give you folders for your statements when you open an account. You must keep all your statements in these, if you lose any statement most banks will charge a fee to give a replacement.
Along with your statements it is imperative that you keep your bank paying in book and cheque books, and to write on the stubs exactly what it is you are paying in and writing a cheque for. I would use ‘generic’ terms in your description along with the payee’s name for cheques.
If for example you are a photographer and you bought a new camera, write camera and the store that you bought it from. The technical name for the camera is unimportant and would confuse most accountants unless they had an interest in photography.
Receipts and Payments
The next most important item would be to keep copies of all your receipts that you spend on your business and what you sell.
This includes everything you bought in the year, not just what you paid for. Any set of accounts would typically have a list of items that were unpaid at the end of the year. If for instance you have a telephone bill that has not been paid but relates to the period of your accounts, that is an expense of your business in that financial year. It needs to be included in your accounts.
If you are managing your money wisely you would make use of any free credit period that you can get or any time that you have to pay invoices.
On the items that you pay I would also write the method that you pay by, be it cheque, credit or debit card or cash. If you pay by cheque, don’t forget to write the cheque serial number on the invoice. This helps trace the payment through your bank account.
If you are sent statements by any company that you buy goods from, please keep these as generally they would give indications of the balance of your account at the year end and show any potential missing invoices.
Keep all your invoices in A4 or foolscap ‘LeverArch’ folders, these can be purchased in most stationery stores, with the invoices ‘punched’ and filed in date order.