Do you find that it gets to the end of the tax year and you’re frantically searching through every drawer imaginable trying to find that work receipt? Or does your accountant’s face sink when you hand over a bin bag full of crumpled paper receipts? If this sounds like you, don’t worry. Below, we outline 10 top tips from expense experts on how to track your costs as a freelancer.
1. Know which records you have to keep
First of all, it’s important to know how long you need to keep your receipts. For those who operate as a sole trader, it’s five years.
From April 2023, some sole traders will have to submit tax returns through Making Tax Digital (MTD). We’d recommend staying ahead of the curve by using MTD-compliant software that keeps your records safe, digitised, and easily exportable if they’re requested by HMRC.
The Business Toolkit from Starling Bank is one example of digital bookkeeping software that can help. Some businesses registered for VAT have had to submit their VAT returns through MTD-compliant software and keep digital records since last year. Software like Starling’s can make this simpler, enabling you to submit VAT returns directly from the Toolkit.
2. Have all your business expenses in one place
When running a business, it’s important to make sure all expenses are being paid out of the same account where possible. Sometimes you’ll end up paying with a credit card or petty cash, but having a business bank account for most transactions is both pragmatic and professional.
Setting up a business account can take months, but you can apply for a Starling Sole Trader Account or Business Current Account for limited companies/LLPs in minutes. What’s more, our business account has no monthly fees.
If you also decide to subscribe to our Toolkit, which costs £7 per month, all the transactions made through your account automatically sync and appear in the Bookkeeping section of your online banking. This makes it much easier for you to sort through expenses.
3. Storing your receipts
Proper storage of your receipts is an essential. You wouldn’t be the first person to have lost a receipt, or spilled something on one. Plus, no one wants to go through all their pockets at the end of the tax year, gathering together all the odds and ends from the last 12 months.
One simple solution is to keep your receipts digitally. Starling enables customers to take pictures of receipts and assign them to specific transactions instantly.
4. Group expenses into categories
When it comes to your tax return, all your expenses need to be categorised so that you can fill out the relevant tax sections. For those who are new to freelancing, there is plenty of information on the government website to get you started.
Alternatively, choose accounting software or an app (like Starling) that automatically assigns your transactions to groups that align with the HMRC tax categories. If the auto-categorisation isn’t quite right, you can move things around.
What if you’re unsure about where to assign transactions? Thankfully, Toolkit has done all the reading to provide bite-sized insights to help you, using the same categories HMRC has on its tax forms.
5. Make sure you can remember what you bought
If you’re staring at your bank statement wondering what it was that you bought a week ago, you’re not alone. With all the responsibilities that come with running your own business, it can be hard to remember all your purchases.
David Allen, a business author, popularised the two-minute rule: “if you can do it in two minutes, do it now.” So if you can write down a note on your receipt to type up later, or even better add a note to your transaction in your Starling Bank app, then you’ll always know what you bought and why you bought it. It also helps that we name all our merchants in your feed so it’s easily readable.
6. Check your expenses regularly and update them
Staying on top of your expenses is key. It means that the information is still in your head and you avoid the panic of doing everything at the end of the tax year.
It’s important to take the little and often approach. The Starling Business Toolkit streamlines this by having all the information readily available in the online banking portal. You can make payments and categorise them quickly and efficiently, helping you make expenses part of your daily routine.
7. Include personally paid expenses into your bookkeeping
Sometimes you may not be able to pay for expenses through your business account. Maybe you get a great rate on a business credit card, paid for something with spare petty cash, or you want to include part of your working from home bills. Whatever it is, it’s important to keep a record of all your expenses in one place. Going through multiple statements where you’ve spent money can be soul-destroying, but it’s avoidable.
You can keep a spreadsheet of what expenses you pay from where, or you can add an external transaction within the Starling Toolkit. This feature not only adds it to your bank transactions but notes the source, so you can remind yourself of which method you used to pay for that expense.
8. Make sure you’re only making claimable expenses
It’s important to know which expenses are claimable. HMRC disallows “any expenditure not incurred wholly and exclusively for the purposes of the trade, profession or vocation.” So if part of a purchase is only for business purposes make sure to only include it in your bookkeeping with the taxable deduction showing. Helpfully, the Starling Toolkit enables you to input the tax allowable amount as you go. It will also provide an estimate for your tax bill if you’re a sole trader.
9. Keep it simple
Some expenses are easier to consider when you don’t have to separate personal and business to the minute detail. HMRC allows simplified expenses to give tax deductions for costs related to your car, working from home, and living at your work premises. These are useful if you don’t want to divvy up every single expense, and you can include them simply for your bookkeeping.
10. VAT registered? Record your VAT correctly, and get a receipt
For those of you who are VAT registered, it’s important to make sure you request a VAT receipt from your supplier. All VAT registered suppliers will be able to provide a VAT invoice/receipt on request (but may need to be prompted), and you will need a copy in order to claim on your VAT return.
Then all you need to do is make sure you record this correctly in your bookkeeping, so you can claim the right amount of VAT back. The Toolkit does this easily with all the options available to make sure that your expenses are input correctly on your VAT return.
You’re now ready to go tackle those expenses. Good luck!
This article was provided by Starling Bank.