Books and Records

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So you are a sole trader and you are going to take a chance (measured, I hope) and prepare your own self assessment accounts and file at HM Revenue & Customs? Very brave in my opinion. Let me explain why.
You believe that you have been clever. You have meticulously gathered together all your purchase receipts and sales invoices (were they all issued-did you forget any?) From this you have prepared a simple income and expenditure account. (“I am not sure what I do with the bank statements? However, just in case, I had better make sure that these are all present and correct. I know, I must look for all standing orders and direct debits and, I know must also look for bank charges and interest. I remember this because, George, my brother, has an accountant and she is always moaning that certain bank statement numbers are missing as well as cheque and paying in books. However, I never did really understand why I needed them all in the first place. Surely, I can make some estimates or… I know, just ignore them altogether?”).
So, the trader has gone on-line (the scenario of applying to Revenue & Customs for a username and password has been passed) and has punched in his/her figures, got-out a tax calculation (doesn’t really understand a word of it except for the final tax to pay at the bottom of the page) and then pressed the button and hey presto… Revenue & Customs have the completed tax return.
The trader is not sure whether the entries have been made in the right boxes. For example:
“Where do I enter Use of Home as Office?”  What is the difference between repairs and renewals? What is the difference between capital items and renewals and how do I best claim? What is this thing about direct costs and why are there different boxes depending on different levels of turnover?  Don’t understand basis periods and what this has to do with accounting periods? Someone even said “Change your accounting date to save tax,” but I dare not try this for fear of making a dire mistake! Don’t really understand this business of Savings and Investments and what do I enter if I have only ISA savings (although the tax helpline after dialling an 0845 number, going through five options and security – I never do remember my NIC number but do know my date of birth-were helpful).  “I don’t even understand this business of paying half now and half later but on 31 January of the next tax year (whenever that is) I now have to pay a balancing payment (why?) and a first payment on account (I don’t even know what my profits or tax is so why must I pay my tax in advance?) But I pay because this is what the software says… but I do not understand. Still, I have saved on accountancy and tax fees, haven’t I?”
So, the trader goes about his business, happy that this agonising process has finished for another year…when hey presto, a dreaded letter from HM Revenue & Customs arrives on the doorstep (“never had one of these before.”) The trader opens the letter it and reads its contents.
“The gross profit ration appears low in relation to turnover. Motor expenses seem high. Was there any private usage and how was it computed. I note a claim for secretarial expenses. May I sight the invoices? In conclusion, the drawings are low in relation to your appeared means and I would be grateful if you can also forward your balance sheet so that I can sight assets of the business, cash at bank, creditors and drawings. I expect a reply within thirty days.”
The trader reads the letter again and again and again and tears flood to the eyes. Doesn’t understand a word of it. Balance Sheet, creditors, drawings… what the flippin … does all that mean! The trader phones the spouse.” I told you to employ the services of an accountant. Thought you would save money, did you? You never listen to me. Get on with your own work and employ a professional! We are now in trouble, thank you very much and bang goes my holiday and yours too!”
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