UKC

When it comes to categorising financial transactions for a small business, I'm a bit unsure for some of them.

I'm buying things from a £2 box of bolts up to £1000 for timber or plant hire. Does this just all go down in the same catagory from an accounting perspective? Is the catagory just "expenses"?

I have a couple of really big items which I will keep a record of as assets with depreciation and so on. But if I'm buying something like a hand tool or a power tool, can I just put it down under "expenses" and avoid messily having to keep track of values of lots of things? Does the answer change if the tool is £10 or £100 or £1000?

I will be paying an accountant to do the tax return but just wanting to try and keep my information as correctly organised as possible so the time taken (and hence cost) by the accountant is minimised.

I've tried googling for this but I always end up either disappearing down a bottomless hole of incomprehensible professional accounting stuff or reading things which just are not relevant.

Let common sense, honesty and self interest be your guide! We rarely record items as an asset, even PCs - yes we get some marginal tax benefit by claiming all the cost as an expense on day 1, but if they break we throw them away so that seems fair enough to me.

I suppose the threshold would be reality - if you buy an asset and the business went pop, could you realistically sell it for a sensible sum? Because if you couldn't it's not really an asset, is it?

So a tractor definitely would be, a hand tool - nah.

What REW says makes a lot of sense but it would also depend on the size of your business and the size of the purchase.

You also don't say whether you've got a Ltd company or you're acting as a self-employed sole trader. "Rules" for Ltd companies tend to be a bit less flexible.

Probably (definitely) more detail than you need but...

From the annual financial accounts perspective it would depend on what the "materiality" is for your business. If you're not familiar with the concept then roughly it's what size error in the accounts would make a "user" of the accounts come to a different view about your business. So for example if your turnover was £1,000,000 and there was an error of £100, then nobody would care. But an error of £100,000 would likely be material since it would be a substantial proportion of your turnover.

However if it's a private company then there are very few "users", so maybe only you and HMRC, whereas a public company has shareholders to keep happy, etc.

From the tax perspective, depreciating assets is basically splitting your tax relief on the expense over several years rather than taking it in the year of purchase. Also, writing it off in year 1 (rather than depreciating) means none of its value gets on the balance sheet whereas a depreciating asset will add (diminishing) value to the balance sheet over some years. Less important obviously if it's a private company unless you want a healthier looking balance sheet to help attract finance.

Another consideration is how long the item lasts and how often you replace them. So if it lasts 10 years, is of some value and you only ever have 1, then that would be more likely to be a depreciating asset.  But if it lasts 10 years but you buy 1 every year and always have 10 on the go, then it would be more like REW's PCs and less likely to need depreciating.

You might want to categorise things so that you can see what you spent your money on in the future. You might want at least 3 basic categories (nominal codes) - stuff you bought, stuff you sold, overheads (rent, power, accountants, etc). 
 

if you want to know more about your business in the future maybe categorise what you bought in finer detail - plant, vehicles, tools, timber, screws, etc. 
 

it really depends on how much you want to analyse your own business. 
 

We class everything we buy for jobs as "parts and equipment for site" but we record all tools as assets, as well as computers etc. But we have separate "accounts" for these items.

the accountant sorts the rest out.

What are you using to record your transactions?

We use QuickBook, and you can set up as many income and expense accounts as you like, with sub accounts e.g. Motoring, Fuel or Motoring, repairs.

Thanks. That sounds like a course of action that I can follow and should be pretty easy.

I guess that if the company did go bust tomorrow and you had inventory and other stuff lying around that wasn't listed as an asset, there would be a system for selling it and making the accounts/tax work correctly for that.

Simple accounting software makes this stuff much easier to manage.  Can be done on a spreadsheet but if you're VAT registered you have to use approved software to submit your return anyway (MTD) although can be done with "bridging" software.  I use Moneymanager, basically an automated spreadsheet that allows lots of analysis, bank reconciliations etc. but usefully you can change entries without messing around with reversals.  There is a free one month trial.

From what you say I'd be job-costing materials, plant hire, etc but separately identifying tools etc. that would be used over several jobs and decide whether to capitalise when you see what the amounts are at the end of the year. 

Thanks. I was partly worried that it would in some way to viewed as an exploit or not right if I'm just writing off things on day 1 when they might be used for years. Toilet paper or electricity seems straightforward as a rightoff on day 1 but a driveway or plumbing pipes are long term things and I just didn't know if essentially writing them off straight away would make HMRC unhappy for some reason.

For background: Limited company. I'm only shareholder. At this time there is no reason to try and make the balance sheet look rosy as I don't need to borrow any more money (thank god!). Turnover to be determined but almost certainly a bit under six figures.

So sounds like there are very few transactions where I will need to consider registering an asset.

Edit: just seen the above post regards being a Limited Company so advice is redundant.

Thanks. I'll probably do this too but good to know that these distinctions are not relevant for tax purposes.

[cough] excel [cough]

Yeah, I know, I know. It's just I can't find the time right now to learn something new and I know how to make a good spreadsheet. Maybe I can use a proper accounts program for next year's accounts.

I am not VAT registered and will not be. My business is glamping but I'm realising it sounds more like I'm a builder or something from what I said. All the stuff I have been buying has been things to build the site basically and the tools and so on will be used time and again to make things/repair things/replace things on/for the site.

Give some thought to how you extract money from the business.  Small salary (just over the the LEL so you get a Class 1 credit) and the rest in dividends so no NI contributions.  £40k per year into pensions when / if you can afford it is tax efficient.

Thanks David. I've got a pretty good handle on how to extract the money from reading a fair bit about it. The tax relief on pension contributions is limited to 100% of your income though so it seems like you might as well limit pension contributions to that and put the rest into an ISA as this also offers tax free gains (also, I'm not keen to lock a huge amount of money behind my pension wall where it won't be available for decades).

The income limit on pension contributions only applies to personal contributions, the Company can contribute up to the annual £40k limit subject to the lifetime cap of around £1m -  although not an issue for most. 

Take your point about not locking money away in the pension in your situation, I'm at the other end of the spectrum, over 55 and planning at least partial retirement in the next couple of years so I'm more comfortable piling cash into the pension pot with it's deferred tax advantages.

Ah, that is very interesting. I have not read about company pension contributions, good thing to be aware of, thanks.

On this, am I right in thinking that typically companies can't contribute to a SIPP? I.e. the company would have to set up an alternative pension plan for employees.

No, the company can contribute to your SIP.  Pension providers (Hargreaves Lansdowne for one) ask who is making the contribution the individual or the company.  If the individual then basic rate tax is added by the provider to the contribution, for example if you contribute £2,880 they will add £720 to take the contribution to £3,600.   If the company then only the actual contribution added to the SIP.

It's a complex area but HMRC offer a free one-to-one consultation for the over 55's that's pretty useful.

Thanks.

Oh, in that case it again is probably not more beneficial than just sticking it all in an ISA, although I suppose if financial catastrophe does happen, money in my SIP would be safe where as the money in the ISA would not.

Being pedantic here and I know David will know this, but those limits are of course only the "tax free" limits. You can of course exceed them but I can't imagine why anyone (even if they were rich enough) would want to since the tax rates are quite punative if you do exceed them.

Totally forgot to say, good luck with your business venture.

The advantage of the SIP is that it's tax free going in and 25% tax free coming out - you only pay tax on the 75%.  The ISA contribution is made with 100% taxed money but tax free coming out. 

Ideal is a combination of the two, the ISA to give a ready source of cash (say if you need a new car) and the SIP can be dripped out on an "uncrystallised" basis to minimise tax liability.

I wouldn't think a SIP is any "safer" than an ISA, both benefit from the Government £85k guarantee per provider, after that you're on your own.  With a large pot inconvenient to spread around a lot of providers.  The big risk is the choice of the underlying investments......

I was meaning from the point of view of someone suing me for something or my house burning down when I didn't have insurance and had a large mortgage or anything else that might result in bankruptcy. I think the pension would be safe from that whereas the isa is not.

If you are successful enough to be in a position to exceed the limits then what many people do is employ their wife / partner and make the contribution to them, effectively doubling the allowances.  I do the same with dividends (called income splitting and legal) to minimise marginal tax liability. 

Thanks. It's going pretty well so far - right now every pod is booked for every day from the day I opened a couple of weeks ago till 28th August and there are a few bookings already being made for Sept. So fingers crossed this demand will continue till late autumn and I can get some debts paid down

Not something I've ever considered - bit of a disaster scenario.  I understand pensions are usually considered in divorce settlements so I guess that could apply to other claims on the estate but outside my area of knowledge. 

It is unlikely that I will have these sorts of big money problems as I need to keep under the VAT limit and after expenses I doubt I'll have trouble disposing of the profit!

(actually for several years a good whack of it will just be paying back various loans).

Yes, VAT a bit of a nightmare for your sort of operation where a lot of the expense is your time and limited VAT recoverable - prices have to go up.  However there are ways of dealing with it when / if the time ever comes.

Good luck with it all, not the easiest of arenas to scratch a crust in but your timing has been pretty good....

Don’t know; once listed two Ducati’s as Italian drill rigs. Despite a tax inspection from HMRC during the period, .all good.

The other main problem with VAT is that my customers are all private people, not other companies, so there isn't any way for them to annul the vat, it just feels like a 20% price hike for no good reason.

Something I happily used until IR35 came along - if ever there was a sledgehammer to crack a nut, IR35 was it - couldn't really avoid it either since I was in an IT contract that had been repeatedly extended and it ended up lasting over 6 years.

May have been a sledgehammer but probably something was needed to stop the abuse of "disguised" employment.  Repeat / regular clients / customers not a problem but if you only ever work for one organisation hard to argue it's not employment......

My advice would be find a local accountant who looks respectable and you get on with and get their advice on what accounting software and how to set it up.   It will be less hassle in the long run and very likely save money because if the system is set up the way they like it will take fewer billable hours to do your tax and annual return.

If you register for VAT you will want an accounting program to do the returns.   Cloud software like Quickbooks or Xero isn't a big upfront cost or mega hassle.

IR35 was brought in to stop a loophole that allowed tax minimisation by paying low salary and high dividends to effectively avoid NI and higher rate tax bands. But it went over the top 

IMO the two unreasonable IR35 factors were the 5% limit on tax free expenses - which was ridiculous if you needed some equipment or training or needed to live away from home midweek, and the having to pay employers NI as well as employees on the deemed salary.

The stated aims for IR35 were to make you the "same" as a permanent employee. What they actually did was make you worse off than large firms who were effectively doing the same thing providing "long term consultants" to firms.

This was all when IR35 came in. I've no knowledge of how it's changed in the last 10 years or so but I can't imagine it's become better.

Oh and the final indignity was government departments, even HMRC, paying some senior people via one person service companies and not being deemed as being under IR35.

On the subject of depreciation, I believe there are some 'standard rates' used e.g. 3 years for a PC. It would be worth you looking up some of these rather than inventing your own.

The obvious assets to depreciate are the glamping pods themselves. There might not be a "standard depreciation" for these since they're not really either permanent buildings or temporary structures.

It might just come down to how long they're expected to last before needing replacement. If the business plan includes that factor then that would at least give a depreciation rate that was justifiable.

If you pay your accountant by monthly retainer (and have them take your books annually to make into accounts +do your personal tax return). Then email them the question.

After all they'll be the ones who'll make your books into submittable accounts and they will probably have an xls template for you to use, or advise on Xero or something and give you guidance like this

Not necessarily, I still use XLS and then some bridging software to do the submission, but yes for a novice that'd probably be a good call

Again as your account which software, they may have a preference for one so they can have their login linked to yours and supervise the accounts directly (if you wish). My accounts like Xero for small businesses (although I don't use it myself)