Home » Tax basics » Book-keeping

Book-keeping

Tired woman

The law requires you to keep business records which are good enough to enable you (or your accountant) to complete your tax return form each year. If your books are disorganised, full of gaps or non-existent, you are likely to find it much more difficult and stressful to fill in your tax return; and much more expensive if you pay an accountant to sort it out for you. There is a general rule that any unexplained money coming into a business is assumed to be taxable, while any unexplained money going out is treated as personal expenditure and not allowable. So if your books are incomplete or unreliable you may end up paying too much tax.

The other important reason for taking book-keeping seriously is to help protect yourself against the unwelcome attentions of a tax office investigation. Cash based business are always more prone to attack by HMRC, and without proper records the taxman is entitled to estimate your income from your banking records, your lifestyle, your field reports, your web site, and any other information available to him. But if you have a good set of records, which you write up as you go along, then you put the onus on the taxman to try to demonstrate that your records are unreliable.

The golden rules of book-keeping

There are two golden rules of book-keeping:

Keep it simple

Your life may be so full of excitement that you long for the opportunity to snatch a few guilty hours of dull turgid book-keeping. But believe me it will pass. There is no point in setting up some monumentally complicated double-entry accountancy system which you fill in religiously for two months only to realise, after the initial rush of enthusiasm has faded, that you can’t remember how it was supposed to work.

Your books need to fulfil a few basic requirements, and should be simple enough for you to keep them up to date with minimal effort and a few minutes work each week.

Keep it up to date

As Jane Austen apparently never quite got round to saying: there are few things in life more deadening to the soul than the dawning realisation that your ledgers have lain untouched for above a twelve month, for it must inevitably and swiftly lead to a contemplation of the heap of disarrayed papers which are your only means, besides hazy memory, of  conjuring up your income and expenditure.

Detailed research into the heaps of disorganised papers fondly described as accounting records has established that inevitably:

  • 20% of your receipts will have faded beyond legibility
  • 20% will be missing
  • 20% will consist of undated scraps of paper bearing enigmatic but meaningless comments “smelt of fish – £215 – collect deckchairs – figroll man £14.75 – left umbrella – Thurrock sink cancelled Friday £325 – ring Sylvia re-roof shed after 8pm – cancelled window cleaner”
  • 20% will turn out to be recipes for Trout and Peanut Butter Surprise, birthday cards you never quite sent and guarantees for kitchen equipment.
  • And just 20% will be just what you need.

And what’s more you won’t have a clue why last November you apparently drew out £750 from a cash machine in John O’ Groats at 3 am, and the following day spent £372.49 in the Penzance branch of Boots, before paying £635.23 into your Building Society account in Eastbourne the same afternoon.

It will take you a least five times longer to write up your books than if you’d done it as you went along, and you’ll end up continually swapping pens in a doomed attempt to disguise the date of writing. Even as you finish you’ll know the end result would not stand up to the detailed scrutiny of an inquisitive seven year old let alone the sharpest minds at the tax office, and you’ll contemplate sending your accountant an unconvincing “the dog ate my homework” note.

How to do book-keeping

Let’s face it. Book-keeping is really, really dull. In fact the most interesting thing I know about book-keeping is that it’s the only word in the English language (apart from book-keeper) to contain three consecutive pairs of double letters.

So having established that it’s a chore, right up there with ironing and emptying the bins, how can you make it bearable? Answer: set up a system. Either buy one, or set one up for yourself, that contains the following:

  • Daily record of your business income.
  • Daily record of your business expenses.
  • Record of how expenses have been paid – typically out of the cash you received from clients or from your bank account or credit card.
  • Journey by journey record of your business mileage.
  • Reconciliation of how the cash coming into your business was used. How much was spent on business expenses, how much was banked and how much cash from the business was available to help support your lifestyle.
  • Space for notes of any special features of your working week – for example tours or reasons you didn’t work.
  • And if you have a bank, building society or credit accounts used mainly for your business you need a record of all the receipts and payments on those accounts.
  • Finally you need to keep all the receipts and bits of paper, including bank and credit card statements, which support the entries in your records.

Off the shelf book-keeping systems

There are lots of book-keeping and accounting systems on the market.

If you want to avoid computerised records and stick with handwritten books then the simplest solution is get a diary with plenty of room to write down your income and expenditure each day. The main disadvantage with doing this is that most diaries run from January to December or follow the school year: it’s very hard to get a tax year diary.

Alternatively WH Smith sell a range of account books for the self-employed, all priced at around £15. Although so far as I know nobody produces an account book specially for escorts.

Except…….

Priced at just £12.50 (plus postage & packing) the TaxRelief Diary is specifically designed for escorts. It comes in a discreet cover, it’s A5 size so it doesn’t take up as much room as a conventional account book, it’s spiral bound so it lays flat for ease of use, and it comes with a full set of straightforward instructions and example pages. And it’s available here TaxRelief Diary.  Please be aware that Lulu.com is a print on demand service. This keeps the cost down but it does mean you should allow up to 21 days for your copy to be printed and delivered.

Support independent publishing: Buy this book on Lulu.

If you want to go with computerised accounting records there is a bewildering choice of packages. But if you have Excel and your accountant acts for several escorts then it’s worth asking if he produces an Excel book-keeping template you can use.

I would recommend avoiding most of the popular small business accounts packages. Software like Sage, QuickBooks, TASBooks, MYOB are all way too complicated for your needs, as well as being pricey. Sage50, which many accountants routinely recommend for small businesses, is nearly £700 incuding VAT (that’s a lot of blow jobs) – and what’s more, you will hate it. Even Sage Instant is over £100.

A cheap and cheerful program like Do$h Cashbook (which is £49.00) or a personal finance package will be more than adequate for your needs.

And remember the golden rules of book-keeping. Keep it simple and keep it up to date.

Business bank accounts

Most escorts probably don’t have a separate business bank account. Any income they bank goes into their personal account, and business expenses are either paid in cash or from the same account. I would recommend you set up a separate account for your business, and possibly a separate credit card for business expenses that you pay by plastic.

But don’t worry. I’m not suggesting you trot along to your High Street bank and fill in a form to set up a small business account in the name of “Jane Smith trading as BustyBunny of Bungay.” A name like that won’t fit on your cheque book and you don’t want to end up paying business bank charges.

What I suggest is that you get a second personal account and mentally designate it for your business. And if you pay for hotels and travel with a credit or debit card then get a second one of those too. All you need to do then is keep your business income and expenditure in these separate accounts. Then as your income starts to build up you can pay yourself from the profits by making a transfer from this business account to your personal account.

There are several advantages of doing this. First of all it separates your business and personal expenses and makes it much easier for you to keep track of your business transactions and make sure you record them all in your books.

But there is a more important reason. HMRC have the right to ask you to produce the records which support the entries you make on your Tax Return. If you have a separate business bank account then all you would have to produce to them is your business bank statements and your account book. But if your personal and business transactions all go through the same bank account you could be faced with sending in your personal bank statements, and then trying to convince the taxman that the £150 you received in August was from granny towards the children’s school uniforms, and £2,000 came from the sale of your boyfriend’s motorbike and not from an overnight.

What you are trying to do is protect yourself from the taxman’s attentions by having a set of books and records which are consistent with each other and don’t leave open invitations for questions to be asked.

Of course if you are subject to an in-depth inquiry then you may have to produce all sorts of personal records to HMRC but even then if you can demonstrate you are careful to keep business and personal transactions separate, you will be on much stronger ground than if everything is swilling around in the same account.

FUCQS

I started my business on 1 September 2013. Should I keep my records up to 31 August each year, or adopt the end of the tax year as my year end?

You certainly can run your accounts to 31 August each year if you really must. But if you do you are likely to get completely confused about how your tax bills are calculated. What will happen is that your 2013/14 tax bill will be based on your income from 1 September 2013 to 5 April 2014 – worked out from the number of days in the year to 31 August 2014 which fall before 6 April 2014. Then your 2014/15 tax bill will be based on all the income shown in your accounts for the year to 31 August 2014 – because 31/8/14 falls in the 2014/15 tax year. So already part of your income has been taxed twice and part of the income you earned in 2014/15 hasn’t yet been taxed. When you eventually pack in your business there will be an adjustment made so that over the life of your business all the income has been taxed just once and nothing has been missed out.

Of course 5 April is a damn silly date, so HMRC are quite happy for you to do your accounts to 31 March each year and pretend it’s really the end of the tax year. So I’d strongly suggest you do your first year’s accounts from when you started on 1 September 2013 up to 31 March 2014, and then do them annually to 31 March.

Whatever you decide to do will have no effect on the date you pay your tax. Self- employed income tax is always payable on 31 January and 31 July.

How long do I have to keep my business records?

Your business records need to be retained for 5 years and 10 months after the end of the tax year they relate to. So your records for the 2014/15 tax year should be kept until 31 January 2021.

I’m not sure if some of my expenses qualify for tax relief. Should I put them in my books?

My advice would be to record them anyway along with a note so that they can be considered by your accountant.

I have lost, or never got, receipts for some of my expenses. Can I still record them in my books?

Yes.

Can I write up my books in pencil?

Don’t do it. Book-keeping is not about pin-point accuracy and copper-plate writing. Mistakes are inevitable: if you make a mistake simply cross it out and write in the correct details.

I can’t be bothered with all this. Can’t I just shove everything in a plastic bag and get my accountant to do what he’s paid for?

You could, but you’ll end up paying an excessive amount in accountancy fees, probably pay too much tax, and you’ll be defenceless if you get selected for a tax enquiry. And if I were your accountant, you’d get the kind of response that you reserve for punters who can’t be bothered to wash.