Common accounting issues faced by IT contractors
There are certain issues that have been raised in other areas of this guide that require further comment.
What constitutes a valid business expense?
Knowing what a valid business expense is to process through the company books, is essential. You should consult with an Accountant if your expenses are high relative to your income and you are unsure about how these should be treated in your books and records. There is a good reason for this – there are guidance rules issued by HMRC but they are always being tested by Accountants and legal challenges and the sum and total of the published rules and the results of those challenges result in the sum and total of the current boundaries of what is allowed as a deduction and what is not. Your Accountant should be up to date with recent developments.
That darn paperwork
Keeping paperwork that will be required to produce accounts and Tax liabilities such as VAT in an organised fashion, can be a real headache. Not keeping appropriate books and records such that an accurate financial position for the company can be established and accounts produced is illegal under Companies Act legislation. In addition, it is an assumption of taking on the title of Director that the person doing so understands what their legal responsibilities are under Companies Acts legislation as a Director. If you don’t know what these are I’d suggest you get busy with a google search to find out. The Accounting Body ACCA has in the past had a very good e-guide for Directors but there are others available.
Mixing business and pleasure
Mixing business payments and receipts between personal and business bank accounts, is a definite problem, although this is not entirely illegal based on the guidance above once you can disentangle the personal and business expenses from your various bank accounts when it comes to filing annual accounts. However, it is a mess usually, one that can be avoided with a little bit of structure and in particular with regard to how you pay expenses.
What system to use
Should you keep records on excel or use Accounting software. Either can suffice and there is a little bit of learning necessary in order to get up to speed to use an Accounting Software package. In the long run if the number of business transactions that you carry out including the number of disparate business expenses, and that’s the actual number of bills and receipts rather than the number of expense categories, that you incur is likely to increase, then you will probably need to move over to an Accounting Software package at some point.
Scale your business, scale your advisors
If your business affairs become more demanding or complex, in particular, if your advisors specialise in a niche that you may have surpassed, you’ll need to grow your base of trusted advisors. If you start going down different pathways to the norm of transaction and business that your Accountant is used to then it is time to consider whether you need to look for another Accountant to handle some of all of your requirements. An example of this would be is you decided to explore or actually set up a Family Trust – if you are dealing with an Accountant who specialises in a ‘stack ‘em high and sell ‘em cheap’ service to SME’s may not be aware enough of the subtleties of Trust rules and legislation to effectively effect this the formation of this for you.