5 Looking after your accounts

Few people are naturally inclined towards book-keeping, but this can be especially true for freelancers. Indeed, the attributes of freelancing have a lot to do with freedom from structures, systems, and processes. It’s about getting to the point of the work, not focusing on the surrounding administrative necessities. So, as a freelancer, you’ll probably need to muster sterling resolve to apply yourself to your accounts.

However, keeping your accounts in order gives rise to a sense of virtuousness and satisfaction and, if you can keep on top of them, they won’t be too onerous in the end.

Step one: Think about some common questions

I’m starting off as a freelancer and I don’t know where to begin to find the information I need. How do I start?

A good place to begin is at the HM Revenue & Customs (HMRC) website (www.hmrc.gov.uk/selfemployed).

You’ll find all sorts of information there about becoming self-employed and starting up a business on your own. Also, HMRC run Business Advice Open Days which provide you with an opportunity to get advice and information on running your business successfully. Have a look at www.businessadviceday.gov.uk to see if there are any events in your area.

I’ve worked for an organisation all my professional life, so I’ve never kept my own books. Where can I learn about how to do this?

If you trawl around the Internet, you’ll find many software packages designed for sole traders and small businesses — SAGE is a particularly popular one (www.sage.co.uk). Choose a couple and experiment with putting in some fictitious figures—so you can get the hang of each program. If one is more intuitive and easy to use than another, you may want to adopt it. Go for the least complicated version you can find or simply use a proprietary spreadsheet to capture all your financial transactions. It’s just a matter of practice.

I’m quite a disorganised person and although I’m looking forward to becoming a freelancer, I dread the book-keeping side. How can I make this easy for myself?

The only way it will become easy for you is if you develop a discipline and a routine. When you come home after an assignment, make a habit of opening your accounting package and recording your expenses. File your receipts and issue an invoice as soon as any work has been completed. Note the amount on the invoice and when it was sent. This way, you can keep track of everything without getting bogged down in bits of paper once a year.

I’m concerned that I’ll miss something essential and that I’ll get into trouble with HM Revenue & Customs. How can I protect myself?

The only way too protect yourself is to be informed and organised. Visit the HMRC site (address above) and follow the self-employment links. You’ll pick up all the essential information this way. If you’re confused, used the helplines or consult an accountant to make sure you haven’t missed anything.

Step two: Decide on your business structure

Before you even contemplate setting up an accounting system, you need to decide what kind of business you’re going to adopt, as this will have a bearing on the accounting system you use. Here are three of the most likely options.

1 Sole trader. This is the most usual business structure for a freelancer, and the most simple. If you’re a sole trader, it means that you’ll trade under your own name— or a trading name—and that you’ll be responsible for your own accounts—regardless of whether you’re going to be handling them personally or with the help of a professional accountant. You or your accountant should make sure that your accounts are submitted to HMRC.

2 Partnership. This is the type of business structure that you’d adopt if you were going to work alongside someone else in a formal arrangement. This is a legal entity so you’d need a solicitor to draw up a partnership agreement that could be verified by the government’s fiscal bodies. You need to be a little bit cautious when entering this kind of arrangement as both of you are collectively liable for the debts of the partnership—and if one of you defaults, the other will be responsible for honouring the debt.

3 Limited company. A limited company is a viable alternative to the structure of the sole trader and the partnership. With a limited company, your liability is restricted to the share capital of the company. In this way, you’re protected from personal bankruptcy should the company fail—notwithstanding any failure on your part to fulfil your duties as a director. If you’re starting out with a small concern, forming a limited company may not be recommended for you as there’s a heavy administrative load to carry. However, in the long run, if the company is successful and grows, you may find this an efficient solution.

Step three: Set up your business systems

Once you’ve established the structure of your business, you need to get down to setting up a system to capture all the information you need as easily as possible. You’ll need to do the following:

1 notify various authorities. Whatever your chosen company structure, you’ll need to notify HM Revenue & Customs. As a sole trader, you’ll be responsible for calculating and paying your Income Tax as well as your National Insurance payments. In the UK, you’ll pay Class 2 National Insurance Contributions (NICs) as well as Class 4 contributions as a percentage of your taxable profits. If you don’t earn very much, you may be entitled to the Small Earnings Exception (SEE).

If you’re setting up a limited company, you’ll need to register this with Companies House and draw up a Memorandum & Articles of Association (agencies will do this for you at little expense). The Memorandum &Articles of Association set out the structure, purpose, and operating parameters of the company in accordance with the Companies Acts 1985 to 1989. When you’ve registered your company, you’ll be sent a certificate of incorporation along with a company number. This should be included on your invoices.

2 set up a bank account. It’s really important to set up a separate bank account so that your personal and business monies don’t get confused. If you do this, you’ll be able to see the ebb and flow of your finances and reconcile your accounts at any time. You can arrange to have a regular salary paid into your personal account if you wish.

3 set up a company credit card. In the spirit of keeping your personal and business finances separate, take out a company credit card so that you don’t have to trespass on your personal credit rating when incurring business expenses.

4 establish a good filing system. Good organisation is the key to good accounting practice. Putting things in their proper place and being able to retrieve them again is essential. Keep and file ALL your receipts, just in case HMRC ever want to scrutinise them.

Step four: Use a spreadsheet to keep track of your finances

Using a spreadsheet becomes easy with practice and is an invaluable way to keep an eye on the state of your financial health. Make sure you discipline yourself to enter every single detail of your financial transactions. This is the most important aspect of looking after your own accounts. You’ll need to create back-up copies of your spreadsheet regularly; if you don’t you’ll quickly realise how tedious it can be to re-enter every single invoice! By using a spreadsheet as the cornerstone of your accounting system, you’ll be able to:

create invoices. It’s a good idea to create a template that you can use for your invoicing. This should include all your bank details, company number if you have one, contact details, VAT number (if you have one, see below), and so on. See chapter 8 for advice on how to make sure you get paid on time.

keep track of your income and expenses. Make sure your invoices are sent out promptly and that they contain the details of the work you’ve done along with any business expenses and mileage you can reclaim. You’ll be able to see at a glance whether there are any unpaid invoices that you should chase after the agreed payment period has elapsed. Use your spreadsheet to compare your business activity from month to month and project into the future.

don’t forget to record all sales as they come in along together with, when appropriate, any money from the sale of business assets. Also, record all purchases of business stock. If you take money from the business, make sure you account for this as well as any that is returned to the business from, say, a life-assurance policy. If you take out indemnity insurance to protect you from unforeseen calamities in your work, don’t forget to record this as a business expense along with any accounting costs or other professional services.

calculate your tax liabilities. You may have set up a PAYE arrangement with the HM Revenue & Customs, in which case, this will roll on automatically. If you change your level of income, make sure you adjust your PAYE payment. If you have a limited company, you will be liable for corporation tax. Corporation tax isn’t paid by sole traders but is paid on Limited Companies’ taxable income. Currently, the corporation tax rate stands at 19% for companies with profits of £300,000 or less.

calculate your VAT. If you’re turning over more than £64,000 in the UK (for the tax year 2007–08; this figure will change annually), you must register for VAT. Once registered, you’ll be sent a registration number which you have to include on all your invoices. You’ll need to charge VAT on all fees and expenses you charge your customers. Then you can claim VAT paid out in respect of your own business. You may elect to go for a flat rate which simplifies the process of returning your VAT.

Whatever you do: keep and file ALL paperwork relating to your business and record EVERYTHING on your spreadsheet so that it’s up to date at all times.

Common mistakes

You think the rules don’t apply to you

Claiming that you didn’t know that you had to pay a particular tax or weren’t aware of the relevant deadlines is no defence. As a self-employed person, you’re completely responsible for paying the government the various taxes you are liable for and you need to take this seriously. Talk to your local tax office about what’s required of you (and when), or seek the advice of an accountant so that you can be ready in plenty of time.

You give up on accounting software too soon

A great deal of time is spent by the uninitiated on getting to grips with the technology. Fazed by apparent complexity, they often resort to a paper equivalent approach which has none of the advantages of a sophisticated accounting package. Spend time getting to know the package you’ve chosen and perhaps invest in a short course to acquaint yourself with its functionality. When you’ve learned a particular function, write out a simple crib sheet for yourself so that you can refer to it in the future.

You miss deadlines because of bad time management

You won’t be the first if you miss a deadline or a payment due to pressure of work or a lack of resources— but it can be a costly mistake. Be aware of the deadlines and the financial obligations you have to meet and note them in your diary well in advance of the due date. If you think you’re going to miss a deadline or a payment, call the appropriate office and discuss it with someone relevant. You may be able to negotiate an extension or a special arrangement—if you do, make sure you take a reference number of the call, your contact’s name and so on.

You make your accounts a low priority

Many freelancers think that they’ll be able to look after their accounts and calculate and submit their own tax returns. However, if you’re not informed or interested in this activity, it’s likely to get pushed to the bottom of your list of priorities and become an insurmountable burden. A better option might well be for you to spend your time doing what you do best and appoint a professional accountant to do all your accounting work for you!

STEPS TO SUCCESS

Look at the HMRC website to see what your financial and tax liabilities will be.

Invest in a financial software package that you feel comfortable working with.

Seek professional advice from an accountant or financial adviser if you feel out of your depth.

Don’t ignore tax deadlines—and make it a priority to submit your invoices as soon as you’ve finished a project, supplied your services, or whatever. Don’t be afraid to chase overdue invoices.

Keep your business and personal finances separate from each other.

Set up a business account and credit card—this will make it much easier to keep an eye on your cash flow and will make things more straightforward when you have to submit your accounts and tax returns.