Bookkeeping for Sole Traders, Contractors, & Freelancers

When you decide to work on a freelance basis, perhaps as a sole trader or contractor (limited company), it is essential that you keep proper records. As well as making good business sense it is also a legal requirement and you can attract penalties if you fail to keep appropriate records. Many freelancers are responsible for their own bookkeeping activities so it is vital to know what records to keep, how to keep them and for how long. Use of good accounting / bookkeeping software such as MyBookkeepingManager will also make life easier.

There are many benefits to keeping good records. As well as being able to quickly see how much you owe others and how much they owe you, you will also be able to keep track of your business expenses. Keeping proper records will also ensure that you can complete your tax return and pay the right amount of tax, and by using appropriate software you will be able to easily generate reports that you can pass on to your accountant.

The type of records that you need to keep depends to an extent of the type of freelance work that you undertake. At a basic level you will need to keep records of all sales and takings, for example, sales invoices, bank statements, paying in slips and accounting records. You will also need to keep records of all purchases and expenses, for example, receipts, purchase invoices, cheque book stubs and bank statements.

By keeping these records you will be able to complete your profit and loss account, which will show the annual income, expenses and resulting profit or loss arising out of your freelance activities.

If you are working in the construction industry then you will also need to record whether you were paid on a gross basis or whether deductions towards tax were made. This will enable you to reclaim any tax overpayments. If you work under the Construction Industry Scheme (CIS) then you will also need to make monthly returns.

You should also keep records of any capital purchases or sales, for example, computer equipment or tools. This is because these are dealt with differently when you come to complete your tax return as you cannot claim the expenditure against your profits. Instead you can claim a capital allowance whereby tax relief is granted for the items in question.

If your business is VAT registered then there are a number of additional records that you will need to keep. These include your VAT account, VAT sales and purchase invoices and export and import documentation. This will enable you to complete your VAT returns accurately. (If you are working through the VAT Flat Rate Scheme (FRS), accounting for VAT is far simpler - see here for more details.)

How you keep your records is up to you. You may choose to manually enter information in a cash book and ledger. Alternatively, there is a large selection of good sole trader / contractor accounting (bookkeeping) software available that can assist freelancers in keeping accurate records. Such packages allow freelancers to maintain records in many different areas, including sales, loans, tax, national insurance, bank charges and interest and business expenses. Some are also able to automatically calculate VAT owed.

You will need to keep your records for up to six years. If HMRC starts a check on you then you will need to keep them for even longer - at least until HMRC tells you they have finished performing their check.

Whilst the number of records that you need to keep when you start freelancing can seem daunting it is important that you get it right from the start. Not only will this help you to maximise the amount of time you can spend working, rather than searching for documentation, you will also be making sure that, from the outset, you receive and pay the correct amount of money in the long term.

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