Why Contractors Need to Keep Good Business Records
Keeping good records is essential for all businesses, including if you’re self-employed or working as a contractor. You need to be able to show that all of your records are in order so that you can prevent issues from arising – and to avoid a hefty penalty from HMRC.
Because we offer accounting for contractors, we’re aware of the importance of keeping good business records no matter the type of work you do. So, whether you’re self-employed, operating through an umbrella company or working as a limited company, you will need to have your accounts in order at all times.
What Are the Advantages of Keeping Accurate Records?
As a contractor or limited company director, you have certain financial responsibilities to comply with, including keeping certain company and accounting records. Aside from the fact that you are required to do this by law, there are also many benefits to ensuring that all documents, transactions and returns are recorded correctly. These include, but are not limited to, the ones we are discussing below.
Pay Taxes Correctly
It goes without saying that paying taxes correctly and on time is vital to avoid HMRC penalties. If your records are accurate, then you don’t have to wonder whether your information is right or if you’ve made a mistake in your taxes – after all, you don’t want to under or overpay either. Another advantage is that accurate documentation will help you to plan for tax payments, meaning you will always be prepared for the expense.
Proof of Expenditure
Keeping complete and accurate business records ensures that you have proof of expenditure as well; if you don’t have this information, then you won’t be able to claim tax relief on it. This is applicable whether you’re a sole trader or a limited company owner.
Work Out Profit or Loss
How can you be sure that your business, independently of the type of structure you choose to operate through, is turning a profit? When you have good records, you can easily tell whether or not you’re making a loss, which will help you to make changes to your business accordingly.
Allows You to Make Key Decisions
Having all your paperwork in order will enable you to manage your business better and make it grow. Even if you know your business inside out, having accurate information on hand will be beneficial to making important business decisions – if your records aren’t accurate or you’re missing crucial documentation, then it will be much more difficult to make good decisions that will reflect positively on your business.
Identify ‘Pain’ Points in Your Business
Another reason to ensure that you’re keeping good records is that it helps you to identify the strengths and weaknesses of your business (for instance, it will enable you to spot patterns, such as certain type of projects that are making you more money). This, in turn, will allow you to address any potential issues or seek opportunities, which can help you to grow your business.
Stay Organised Easily
Whether you’re dealing with HMRC, clients or suppliers, being organised is a must. You need to be able to produce documents such as invoices and quotes, as well as estimates, so that you know how much to charge, for example. Of course, having everything in order will also help you should you find yourself investigated by the government. HMRC may ask to see your financial information, in which case it’s vital that you can show everything is up to date and accurate.
Manage Change Better
As a contractor, it’s especially important that you’re able to adapt to change, whether this is change happening in your business or in your sector. By having good records at your fingertips, it will be easier to be flexible and make improvements in your business.
When you’re working with accurate records, it will be easier and quicker to prepare your accounts for year-end tasks. You also won’t have to spend time going through old projects and trying to remember if everything is in order – or trying to find an important file.
When you’re a business owner, time is better spent growing that business, instead of wasting time pouring over your accounts. This is tied to your peace of mind as well – if you know your records are up to date and accurate, you don’t have to stress about a thing.
Easier to Distribute Profits
If the financial information you have is correct, you can easily use it to allocate profits to shareholders or take dividends, for example. You will also have the added confidence of knowing that you’re distributing the correct amount every time.
Get a Bank Loan More Easily
Having a correct overview of your business, being aware of your business financials and having all documents in order will also make it easier to get a bank loan or an overdraft. You have a lower chance of getting rejected if you keep accurate records.
Check if HMRC is Correct
Everyone makes mistakes and this can include HMRC as well. By being organised, knowing where everything is and having your financial information up to date will help you to check your tax position accurately – this means that you can easily notice if a mistake has been made in your favour.
Avoid Getting Fined
As a contractor, the last thing you want is having to pay penalties to HMRC due to late or incorrect tax information. Running your business can be stressful enough without also worrying about whether you’d paid the right amount of tax or if you filed all returns on time. Having good, accurate records will help you to pay the right amount at the right time.
What Documents Should You Keep?
As a contractor, it’s crucial that you keep records of all sales and income, all business expenses, VAT records and returns if your business is VAT-registered, and PAYE and National Insurance contributions. You should also ensure that your records include receipts, bank statements and sales invoices.
As a limited company owner, you’ll have added responsibilities that sole traders or umbrella company employees don’t have, and this includes keeping good records of debts owed by the company, details of transactions and of inventory, dividend minutes, payment records, charges to the company’s assets, annual accounting statements, and more.
As the director of a limited company, you could find yourself being fined £3,000 by HMRC – or removed from your position as director – if you don’t keep financial records. If you’re operating as a limited company, you will need to keep financial records for, at least, 6 years as well.
How FreeAgent Can Help
While before it was possible to keep records manually, this is no longer the best option. After the implementation of Making Tax Digital in April 2019, all of your financial records, from transactions and sales to VAT returns and income tax need to be stored digitally via accounting software compliant with HMRC.
FreeAgent bookkeeping software is one such system. This cloud-based service will help you to keep on top of your paperwork and keep certain records digitally, including the all-important VAT information. After all, businesses that are VAT-registered and with a turnover above the VAT threshold of £85,00, will have to comply with the requirements set by Making Tax Digital.
Getting the right accounting system will help you to keep good records. Contractors should make sure this system is set up as soon as possible so that they can begin to keep track of expenses, income and taxes from the get-go. FreeAgent is also user-friendly, which is ideal for both contractors who are just starting out and contractors who already have years of experience. By being easy and simple to use, FreeAgent will save you time by automating all calculations, running reports for you and allow you access to real-time information. The latter is of the utmost importance to manage your contracting business, as it enables you to make quick, informed decisions.
Developing Good Record-Keeping Practices
Even when using the best accounting software, it’s still crucial to input the correct data into it, as well as manage it well. While this process may seem like it will take a long time to get right, accurate bookkeeping shouldn’t be time-consuming; on the contrary, if you have ‘your house in order’, then you won’t waste time trying to get up to speed with all your documentation – and can even save money in the long run if your returns are all filed correctly and sent to HMRC in a timely manner. You’ll also be running a more efficient business.
Start by making sure you are keeping on top of important deadlines, like corporation tax, National Insurance payments and VAT. If you miss these deadlines, you will likely be liable to pay penalties, which can quickly add up over time. By making sure your accounts are up to date, you can easily keep track of your obligations, including how much you owe HMRC.
It’s also good practice to get the right accounting advice. There is a lot of information out there about record-keeping – or any other financial matter – and some of it can be contradictory. Talking to professionals who know the ins and outs of the accountancy world is crucial. In addition, bookkeeping can be a complicated subject with a wide set of rules, most of which you may not be familiar with; for this reason, it’s key that you ask for support if you need it.
You will also want to make sure that the information in your accounts match reality. This means that your income, expenditure and transaction information needs to be accounted for and is correct. This process has been made a lot easier by using accounting software, as you can automate it by importing bank statements; after this, the system will match your transactions to the information in your accounts.
Lastly, but definitely not least, you’ll want to use the data in your accounts and records to gain a deeper understanding of your business. Otherwise, you’d be missing out on valuable information that can be helpful to your business. Of course, it’s important to produce good accounts and keep accurate records for HMRC purposes – however, there is a beneficial insight to be gained from it as well, so don’t lose sight of how valuable that data can be to monitor the performance of your business.
At Gorilla Accounting, we have many years of experience helping people navigate the complex world of contracting. When it comes to the subject of record-keeping, ensuring good practices and staying on top of any potential issues will allow you to avoid penalties and grow your business.
We also aim to help contractors by offering tools such as our contract tax calculator, which calculate your take-home pay. Get in touch if you wish to learn more about what we can do for you.