Keeping accounts to date and falling for the VAT trap

When you start up a business, you have to do everything to set up the foundations right.

I should guess that most people who have launched themselves into the financial uncertainties of self-employment and desperately want to succeed, will therefore have spent at least their first year doing everything they can to set up secure foundations from which to grow their business.

That’s precisely what I’ve done with my own marketing company. And every now and then I’d raise my head from work and think: “Hm, maybe I should do the accounts? Nah - build another website instead.”

I had taken advice from a couple of accountants at the very beginning - one already knew how much they were charging me, without ever having seen how much work was involved (walk away); another talked about tax but never really seemed to push certain options and criteria (what is the advice I’m getting??).

I really wanted someone to tell me what the clear lines of action should be from day one. I didn’t get that, so I figured I didn’t need an accountant yet, and carried on.

One issue I knew to be aware of was VAT. I knew once you hit the VAT limit, you needed to be VAT registered (for those outside of the UK reading this - VAT is a form of UK sales tax).

IMPORTANT: Requirement for VAT registrations is determined by your income over the proceeding 12 months, regardless whether this crosses different tax years.

I thought wrong - I thought it was tax year dependent. I also didn’t have a proper idea about my accounts because my book keeping was not simply behind, but I wasn’t keeping proper track of my income/outcome, namely because I had a rough idea of my profit margins.

That was a bad mistake.

Figuring that I was about to go over the VAT limit in this tax year, I decided to finally contact an accountant and see what should happen.

He corrected my misperception on VAT, my mum came to visit and got the book-keeping to date, and I got the shock of my life when I discovered how much my revenues over the proceeding 12 months had actually been.

The accountant was very decisive. Close down my sole-trader business, set up as a limited company, and apply for VAT registration immediately. Or else fax a big fat tax bill.

I’m very lucky in that my business has done so well - the first few months I absolutely scraped by, but then business developed exponentially over the first year.

The failure to keep the most useful information on my accounts at hand could have been damaging - and the threat of facing a hefty VAT bill was frightening.

Additionally, I had also confused the corporate tax rates as applicable for sole traders.

Although I’ve been good in growing a strong reserve fund for tax purposes in my reserve business account, if I had fallen completely into the VAT trap and hit the upper tax bracket, I could have been wiped out.

Suffice to say, I’ve learned a few important lessons:

1. Have an accountant at the start of any business venture

2. Keep up with every aspect of book-keeping at all times

From what I’ve been told, it is not uncommon for start-ups to leave the paperwork until last. After all, the financial insecurities of self-employment means you have to devote your energies to creating a secure platform from which to develop your business.

It’s like swimming - you’ve got to keep moving at first, otherwise you may sink.

I’ve been trading 18 months and still feel vulnerable, especially within the dynamicism of the internet. After the various disruptions of this year, I feel like I’ve stopped swimming and am now treading water, which isn’t good in forward moving markets - I’m still building that business platform and expect to expand it over the Autumn.

But the importance of paperwork - and keeping up with it - has been hammered down on me.

After all, it would be absolutely tragic to build up momentum on a new business, only to find it stopped dead by tax bills from HM Treasury and HM Customs and Excise.