Neil Hooton Accountancy informs us of the advice he gave to Gary and Bob:

I explained to them the need to keep good accounting records and to keep them up to date. In that way it not only makes my life easier but also pleases the tax man, the bank manager etc.

I recommend that you purchase an off the shelf version of SAGE Instant Accounts for £159.99. We have highlighted Staples but you could go direct to SAGE or Currys, Dixons or WH Smiths.

Once they were up and running, one of the partners should take responsibility for preparing the bookkeeping records.

For all four of our start up candidates, the first 100 days of a business you need to address the following:

• What type of bookkeeping systems do I use
• Informing the Taxman that you are trading
• Considering whether VAT registration is an issue

One of the most daunting things about giving up full-time employment to start your own business is the prospect of looking after the company accounts.

For an ex-employee who is used to having his or her tax and National Insurance contributions deducted at source via PAYE (Pay As You Earn), the prospect of dealing with the vast, looming shadow that is the HM Revenue & Customs (HMR &C) can be quite frightening.

It's tempting to say that there's no need to worry and that the entire bookkeeping process is child's play, but that wouldn't be strictly true. If it were, accountants wouldn't be paid so well. But the HMR&C is not - unless provoked – a bullying, authoritarian organisation.

On the contrary, their aim is to help businesses to manage their accounts as effectively as possible. To this end both organisations, and particularly the IR side of the organisation, publish regular newsletters and leaflets giving tips and guidance on bookkeeping and have teams of advisors on hand to help out over the 'phone should you run into difficulties.

Before you even launch your own business, talk to the local offices of the HMR &C and call them, make an appointment, explain the details of your business plan and ask them exactly what you need to do. They'll provide you with advice, relevant leaflets and a selection of forms - such as VAT registration - that you should complete before beginning trading.

This is important. If you start off with all the necessary information it will make the bookkeeping process much easier. It also helps to have a contact within the local offices that you can call whenever you run into any difficulties.

Self-employed

"You could manage your accounts by hand, but it's easier to do it using a computer"

If you're setting up as a sole trader rather than as a company with employees, then your bookkeeping work can be kept to a minimum.

There's the added advantage that the self-employed pay less tax than any other class of working people, although you have to be careful that you don't fall foul of the IR35 regulation.

This rule, which quite simply states that 'if it looks like an employee, it's an employee' was introduced to prevent contractors working on site for single clients for long periods of time, effectively acting as employees but invoicing as sole traders or single-employee Limited companies. The ruling has been challenged a number of times, but is unlikely to be repealed in the near future.

As self-employed you have to keep track of monthly income and expenditure, which means holding on to all invoices and receipts. You'll also have to talk to the MR &C about National Insurance contributions; the easiest way to handle these is by setting up a Direct Debit. The amounts involved are quite small currently £2.30 per week

You could manage your accounts by hand, but it's easier to do it using a computer. A spreadsheet will suffice, containing columns for income, expenditure and VAT (if you're VAT-registered).

This means keeping track of all invoices (along with the dates they were issued and the dates they were paid) and all receipts for work-related transactions, including any ground rent, telephone bills, heating and electricity bills and so on. If you work from home, some of your household expenditure may be tax-deductible.

This is all the information you'll need to fill in the Tax Return form each year. You can then either attempt to calculate the amount of tax owed yourself or send the form to the IR and have them do it for you. It's all quite painless and should take no more than a couple of hours each month.

Partnerships and Limited companies

A quick word on accountants. Some are good, some are less than good, and price is rarely a good indication of quality" Things get a little more complicated once you start employing people, because you'll have to look after their salaries as well as the general company accounts.

You'll have to manage the deduction of their tax at source, payment of employer and employee National Insurance contributions, plus any pension schemes, bonus arrangements and non-salary expenses.

It is possible to handle the accounts of a small company without a computer - after all, that's what was nearly always done until the 1980s.

But it's certainly not recommended. Computerised bookkeeping will save you time and money and allow you to track down and correct errors quickly and easily. Such software packages have the added advantage that they let you plot graphs of profit and loss or income and expenditure, track overdue payments (both incoming and outgoing) and the more advanced tools can even automate the submission of the relevant forms to HMR &C..

For smaller businesses, software packages such as MYOB and QuickBooks are ideal; realistically, QuickBooks can be used for companies of up to 20 employees, as can other products on the market such as Mind Your Own Business (MYOB) and Sage Instant Accounting/Payroll. Don't be put off by the relatively low cost of these packages.

They really are powerful accounting tools that can double as business assessment and stock control systems, giving you a real feel for which areas of your business are doing well and which are failing. For the sake of convenience, it's best to ask your accountant which software package he or she prefers to use and then buy that one for internal use.

Note that your accountant won't do the donkey work of everyday data input for you, unless you're prepared to pay extra - a lot extra. What they will do is take the figures you have provided for the year and plug those into various forms to tell you the amount of money you have to pay for each class of tax.

For a small business, Neil Hooton Accountancy Services will charge no more than £500 to £1,000 per year for this service. Obviously that cost will rise as the size of your business goes up, but the more work you do in-house, by entering income and expenditure data into the accounting software, the cheaper it will be.

A final word on accountants. Always go for a Chartered Accountant and preferably choose on the basis of a friend or colleague's recommendation. A good accountant should make recommendations as to where you can save money, in addition to completing the relevant forms and dispensing advice as needed throughout the year. A plug for my practice, we set this website up as we genuinely believe that a portal approach is by far the best way of assisting start up candidates in the maze which is Starting Up a Business. We hope you like it.

Although it can seem as though there's an endless array of forms to be completed and taxes to be paid, in fact there aren't really so many. If you bear in mind the following basics, you won't go far wrong.

1) During the tax year you must:

• Deduct the correct amount of PAYE from your employees' pay.
• Work out how the amount of National Insurance contributions that you and your employees have to pay.
• Keep a record of your employees' pay and PAYE and NICs due.
• Make monthly or quarterly payments of the total PAYE and NICs due to the Accounts Office
• Manage VAT Return completion and payment on a quarterly basis.

2) At the end of the tax year you must;

• Send a Return (form P35) and an End of Year Summary (form P14) showing details of each employee's total pay and the PAYE and NICs due, to the HMR&C office.
• Send details to the Inland Revenue office about expenses you have paid to employees or benefits you have provided (forms P11D and P9D).
• Give each employee (who has paid PAYE or NICs and is still working for you at the end of the tax year) a certificate showing their pay, PAYE and NICs details (form P60).
• Give each employee a copy of the information you have given the HMR&C office about their expenses payments and benefits provided (duplicate of form P11D).

3) At the end of your company's accounting year you must;

• Send a Formal Return for your company's accounts to the HMR&C office.
• You should receive copies of the Employer's Bulletin from the IR along with the Employer's Annual Pack. Ask for them if you haven't received them within a month or so of starting your business, as these provide useful tips on the above duties, plus contacts and advice for business owners

Above all! tempting as it may seem, don't ever attempt to 'cook the books' and the VAT Considerations………….

For companies, and sole traders for that matter, whose annual turnover exceeds a certain amount (currently £64,000), quarterly VAT returns must be completed and sent to HM Customs and Excise along with any payment due.
 

The VAT forms are very simple - just a single page, in fact - and usually work in the company's favour. This is because although you must pay VAT on any income generated, you can claim back VAT paid on some goods and services, such as office supplies, vehicle servicing, fuel and so on. So the extra accounting is definitely worth it and even companies whose turnover is less than the VAT limit can still register voluntarily.

Not all products and services attract the standard 17.5% VAT rate, so it's worth contacting your local HMC&E office to request one of their introductory videos, which will explain the basics of VAT accounting. If that's not enough, you can also enrol on a brief course, again run by HMC&E, which will go into greater detail.

Try to keep track of changes to tax regulations. This means listening to the entire Budget speech, not just the part about cigarettes, alcohol and petrol! Your accountant should do this for you, but it doesn't hurt to know about VAT limits, changes in basic tax rates and changes to the company car regulations yourself.

The percentage of companies audited each year by either the HMR&C is quite small, but both sides of the organisation have effective ways of tracking suspicious returns. The auditing process is thorough and time-consuming, since all receipts and invoices must be checked against the returns and shown to the investigating accountant. Also, the Statute of Limitations is biased in the auditors' favour, so you may have to dig out paperwork going back many years.

Because of this, you may want to take out auditing insurance with your accountant. The work involved during an audit is considerable - allow for three days at the very least - and could become very expensive if you pay your accountant by the hour.

Ultimately, you should remember that you're expected to account for every single business-related penny spent; this includes invoices for trade magazines and newspapers, for example. Although there may be some discretionary leeway, you are expected to show each month's transactions in sufficient detail that your profit and loss, income and expenditure - and therefore tax - can be clearly calculated.