Just how important is good record keeping in business? Surely as long as there is more money coming in than is going out then everything is ok? Do I really need to keep track of every penny?
Essentially the answer is yes – you do need to keep a close eye on your company’s accounts. You need to know how much money is coming into the business, how much is being spent and what it’s being spent on, and how much tax you are liable to pay. Without knowing these details you are likely to fall foul of a number of different issues.
Why Do I Need To Keep Good Accounting Records?
There are several reasons why it is important to keep clear and accurate accounting records. First of all, without knowing exactly where all of your money is going you won’t be able to get an accurate idea of how well, or badly, your business is doing. You also won’t be able to keep track of which parts of your business are flourishing and could be expanded, or conversely to identify any areas which are struggling and need addressing.
Having accurate financial business records are also imperative if you wish to apply for a loan or other form of credit for your business, as these will have to be submitted and scrutinised before a funding decision is made by your bank or other lender. Maintaining precise accounts will also allow you to keep on top of your debtors to ensure that you are being paid what you are owed and receiving it in a timely manner.
It is also imperative that you keep precise accounting records so that you can correctly submit your accounts for tax purposes or submit your self-assessment tax return. As a company director you have a legal obligation to ensure that your tax returns are submitted accurately and on time – otherwise you may be liable for a penalty.
Inaccurate Information on Tax Returns
Perhaps one of the most important reasons for keeping accurate accounting records is to ensure that you are fully compliant with any tax liabilities. Inaccuracies may result in tax being unpaid, understated or even over-claimed by HMRC, and if these inaccuracies are viewed as being the result of a careless, deliberate or deliberate and concealed behaviour then this is where the trouble can begin.
The penalties for inaccurate record submission resulting in tax errors can be severe, especially if they are viewed as being the result of a deliberate and concealed behaviour, i.e. purposefully trying to avoid paying the full tax liability.
Rather than fixed penalty rates, HMRC imposes penalties that are based on a percentage of their ‘potential lost revenue’ (PLR). If the issue is viewed as deliberate and concealed then the penalty can be up to 100% of PLR which will have to be paid on top of amount of taxed owed (or PLR) itself. However if the inaccuracy is deemed as a result of carelessness then a penalty will still be imposed but could be between 0% and 30% of PLR.
Can I Limit My Inaccurate Accounting HMRC Penalties?
Obviously the best way avoid penalties is to ensure that your keep accurate records in the first place and then submit them in the most accurate way possible. Or if you find this too much of a challenge then either utilise specialist accounting software or employ a professional accountant to do this for you.
However if you do wish to handle things yourself and you believe that there are inaccuracies in your records, then you may be able to limit or avoid any penalties by telling HMRC about them as soon as possible. HMRC will treat an inaccuracy as ‘unprompted disclosure’ if you disclose it before you have any reason to think that HMRC may be about to find it. This is as opposed to a ‘prompted disclosure’ which refers to a disclosure that is made to HMRC at any other time.
Unprompted disclosures will generally serve to reduce the penalties that you pay. For example the penalty level for the submission of an inaccuracy classed as ‘deliberate’ if it is discovered as a result of an unprompted disclosure will be between 20% and 70% of PLR. Whereas if the inaccuracy was discovered due to a prompted disclosure then the penalty rate will be between 35% and 70% of PLR.
Further information about the HMRC penalties that could result from inaccurate record keeping can be found in the HMRC Penalties for Inaccuracies in Returns and Documents checklist.
However the best advice we can give you if are concerned about your business’ poor accounting records is to seek the services of a professional accountant. Handpicked Accountants aims to connect small business owners and company directors with local, reliable accountants that they can trust. Our database features only accountants that have been thoroughly vetted so you know that you will be getting an exceptional level of service for a fair and honest price. Let us help you to find an accountant today.