With more people turning to self-employment for an income; there is more untaxed income floating around the money markets. For a few this is a deliberate attempt to defraud the taxman; but for many it is down to a lack of knowledge or discipline about managing the accounts of a sole trading account or small business. In this beginners guide we will look at the basic needs of sole-trader accounting and what you need to do to keep the right side of the law. We will look at what is and is not a business expense, how to keep track of your earning and point you towards HMRC's own help to keep you on the straight and narrow.

Is self-employment for you? Working for yourself often means working longer hours, big financial investments and if your venture is not successful may leave you worse off.

Important Note: that this article is not a replacement for sound legal or financial advice and if you are struggling in your own small business or sole-trader company, then you should seek qualified professional advice.

  1. Basic Accounts Housekeeping
  2. Income and Expenses
  3. HMRC Tax Allowances
  4. Preparing Your First Tax Return

Basic Accounts Housekeeping

Keeping regular account of your income and expenses on your business is essential for staying financially sound. Declaring too little or too much income at the end of the financial year can lead to being investigated by the HMRC if they think it necessary and this is more problematic than being honest in the first place.

The #1 rule of keeping good accounts is to do little and often. I am quite thankful that the work that I do means I have a few income receipts at the start of the month and very few expenses receipts. I will keep hold of the paperwork and audit monthly to make sure all of my figures are correct; this would not be very useful for a tradesman such as a plumber or electrician who will be going from job to job and continually buying supplies, fuel, etc. A tradesman might choose to collate and file their receipts on a weekly or fortnightly basis to ease the burden of a large pile of till stubs to account for.

Small Business AccountsCredit: FreeDigitalPhoto.net
Image: FreeDigitalPhotos.net

Keeping a written record of your accounts is always a good idea; either in electronic or hand-written form but must be legible and easy for you to understand. One of the easiest ways that a new sole-trader business can keep his or her accounts in order is by purchasing a simple cash account book like the Guildhall Headliner Account Bookand entering details manually.

The beauty of something like the accounts book pictured is that they are easy to enter more information to when your business develops. If you have an income page and an expenditure page; on the latter you can add new catagories if you need to start buying advertising space for example, as well as an all emcompassing misc. option.

In whatever way you keep your accounts, you have to keep them for a several years (6 years after the end of the tax year for the UK) and you must make sure that the descriptions for income and expenditure are easy for you to understand many years later.

Income and Expenses

Something you must have an appreciation of is what exactly is income and expenses. For the new sole-trader the boundaries might be blurred where an item or purchase is used for business and personal tasks; an acceptable practice if dealt with correctly. 


If you have earned money by performing tasks for money then this is obviously income, but if that money is earned as cash-back, this might not be the case. One example that I use myself is that of QuidCo, a website that gives you cash back from many retailers. If you have used this to make purchases then technically you receive payments of money but these are not income; handy to remember if you have to buy something like a computer, the cash-back is not usually shown on any receipt you get.


Expenses are more complicated when it comes to what you can and can not claim for. If you work from home then you can claim back a proportion of your rent or rates based on the extent of your home business; likewise if you can show distinct separation between your business and personal use on other expenses, the HMRC allows you to claim the business element as an expense[4635].

Capital expenditure is different. Some items such as computers and machinery are subject to a limit on what you can claim where others are not permitted to be reclaimed. These rules can change annually, so the best place to start is the HMRC website.

HMRC Tax Allowances

The larger general area of HMRC tax allowances for the self-employed is not as complicated as the capital expenditure of computers. If you use a car to drive to and from business appointments; you can claim a mileage rate in return and during the current tax year (2012/13) these are 45 pence per mile for the first 10000 miles and 25 pence per mile afterwards[4636].

A full list of tax allowances is available from the HMRC[4635] online and if you are claiming a considerable amount of expenses then consulting a professional accountant (for which you can claim tax relief on expenses) is the best advise.

Preparing Your First Tax Return

Preparing your first "long" tax return seems a lot more daunting than it really is. The most important thing to remember is that you must register in advance if you want to send your tax return online; by far the simplest way to do your taxes now and far easier to pay anything you own (or receive anything they owe you!) and with a complete audit trail to back you up if anything was to go wrong.

When you receive your notice from the HMRC in April; you have until 31 October (paper tax return) or 31 January (electronic tax return) to send your documentation and then make sure that you have paid any outstanding balance owed by 31 January. If you are filling in your tax return online it is really easy to complete a few questions at a time and then save your answers before continuing, perfect if you find a question you can not answer straight away. 

The HMRC offer a downloadable PDF[4673] for your self-assessment tax return so even if you want to complete it online, you can prepare the questions in advance. If you prefer to use commercially available software then many of them are specifically compatible[4674]with the HMRC who even offer a list to help users choose. 

Managing Small Business Finance is Easy

It might sound like finance is difficult but by considering what you have read here today you will find that it will only get easier. I continue to manage my own small business finance and submit my own tax returns manually. If I make more profit in the future, I am confident that I will be able to save on the cost of professional financial advice, and you can too by using this beginners guide to small business finance as a starting point and keeping on top of your own small business.