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Five tax and expense mistakes the self-employed should avoid

Paloma Kubiak
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Paloma Kubiak

For the nation’s army of self-employed people, there are some common mistakes to avoid when it comes to managing accounts and expenses, as well as paying taxes.

Here are five common mistakes and ways to avoid them cropping up in the first place:

1) Making payments in cash

Payment using a card, or electronic transfer, means the bank records the date, amount, and the recipient’s name, which can be recorded in business accounts.

Payment by cash usually means a later entry into your accounting system.

The chances of it being forgotten, or an entry error occurring are likely to increase when using cash as opposed to cards. Try to avoid using cash where possible as a means for payment of allowable expenses. This avoids the risk of transactions being missed when putting accounts together – therefore losing allowable deductions – and suffering unnecessary extra tax liabilities.

2) Failing to set money aside for tax

Preparing and filing your tax return is one matter. However, some budget needs to be set aside to pay for the eventual liability. This is essential to mitigate against a big bill you are not prepared for.

While the deadline for filing an online tax return is 31 January, it helps to prepare it shortly after the end of the tax year on 5 April. Completing this return early leaves plenty of time to set money aside for both payments on account and balancing payments.

3) Poor record keeping

When records aren’t kept properly, self-employed workers are vulnerable to losing money. This could include settling money owed on time, filing accurate tax returns and making payment to HMRC.

Every transaction needs to be recorded, preferably in real time. Only by doing this can the self-employed accurately gauge how well they are doing.

If individuals are claiming deduction for allowable expenses, HMRC requires evidence of receipts for up to six years. Poor record keeping will not allow this, resulting in potential disputes with HMRC, as well as fines.

A careful analysis must be undertaken of the accounting software being used to record income and expenditure, ensuring it is fit for purpose.

A professional will be best placed to help find the right package for individual circumstances, the industry being operated in, and the needs. This is important, as most taxes have become digital, and require keeping digital records.

4) Not managing cash flow effectively

Many self-employed individuals need cash coming in to operate from one day to the next. As such, invoicing customers when work is done is essential. This should likely result in money being received in a timely manner, ensuring liabilities are settled with any suppliers ahead of deadline.

When invoicing is delayed, customers take longer to pay, resulting in cash flow issues regarding payment of personal bills. Running out of cash is why most businesses and individuals fail.

Consider using tools that come with an accounting system to streamline this, ensuring efficiency is maintained for a healthy flow of cash in the business.

5) Not taking professional advice

Self-employed workers should be honest with themselves, and assess whether they can dedicate the time required to regular and detailed bookkeeping.

Taking on an accountant will reduce the potential for errors, and ensure they stay fully compliant with all legislation with regards to:

  • Allowable expenses
  • Allowances and reliefs
  • National Insurance Contributions
  • Tax returns and liabilities

This ensures they avoid fines for mistakes, or missing deadlines.

Ercan Demiralay is partner at accountancy firm Wellers