Last month Lee Frost looked at the importance of declaring your photographic income to the Inland Revenue. This month he tells you how to keep accounts - and offers advice on the pros and cons of being VAT registered.
The system I use for keeping accounts is known as 'Double-entry book keeping', and tends to be the most common method used by people running small business.
As the name implies, this involves entering all business expenses twice, so they can be analysed in more detail. To do this, you need an accounts books which has lots of ruled columns in which to enter figures - you can buy them from all good stationers.
A typical layout for each double page spread would be as follows:
- Use the first half of the left hand page for bank deposits - your income.
In this section you need the following columns: date, invoice number, amount, total deposit. If you're VAT registered (see later), instead of having just an 'amount' column you need an 'amount net' and a 'VAT' column. If you like you can also have a column headed 'details' where you can enter where the money came from - the title of a magazine, your picture library, a calendar publisher of whatever.
The total deposit column is handy because if you pay several cheques into your bank account at the same time on one deposit slip, or several invoices are settled in one payment by a client, you can list each invoice separately then enter the total deposit amount as well. This helps your accountant to determine what each deposit into your bank account consisted of so she can account for every invoice you generated and establish if it has been paid or it's still outstanding.
- Use the second half of the left hand page for details of withdrawals from your account - 'Purchases'. The columns should be headed: date, receipt number, amount cheque, cheque number, credit card, direct debit.
- The right hand page should be used to analyse those purchases. The column headings you use will depend on the type of work you do, but examples might include: Equipment, Film, Processing, Postage, Office (stationary etc), Car, Travel, Telephone, Credit card payments, Insurance, Pension, Miscellaneous, Petty cash, Drawings (any wages you draw from the account) and so on.
When a purchase is entered on the left hand page of the book, this amount is then analysed across and broken down if necessary. You may write a cheque for a new camera lens and several rolls of film, for example, in which case the total cost is entered in the left hand page of the book then on the right hand page the cost of the lens is logged in the 'Photographic equipment' column, and the cost of the film is logged under 'Film'.
If you are VAT registered, the first column on this page, or the last column on the left hand page, should be headed 'VAT'. In this you enter the VAT part of the purchase where relevant, then when you analyse that item across into a specific column on the right hand page you enter the net amount - the amount less the VAT.
- The petty cash column needs further explanation. Basically, when you run a business, sometimes it is necessary to have cash available - to pay for postage, buy envelopes, feeds a parking meter, or buy lunch when you are out on a job.
To do this, you draw 'petty cash' from the bank account. To keep records of purchases made with this cash, you also need to keep a petty cash accounts book - a small accounting book will be fine.
The accounting system used for petty cash is the same as for the main accounts. When you draw money from the main bank account, this is logged into the 'Deposit' section of the petty cash account. Purchases with that money are then logged and analysed in the same way as explained above, and petty cash receipts numbered and stored separately from the main receipts.
- When it comes to logging your receipts into the accounts books, they should first be sorted into date order and given a number - 1, 2, 3, 4 and so on. I also clip the receipts for each month together after logging, so they don't get mixed up.
If you follow this, or a similar system of accounting, your life will be made much easier. When the time of year comes for your accountant to call-in your accounts, they will be ready and waiting, instead of you desperately rushing around trying to get them completed. Having an efficient accounting system is also necessary in case the Inland Revenue decide to pay you a visit - if they can't see evidence of proper book-keeping, your tax benefits may be cut, or you could be forced to pay a financial penalty.
If your income from photography is expected to be very small, this may seem like a waste of time and energy. However, financially it makes a lot of sense because even if you don't actually make any sales, you can still claim tax relief against the expenses you incur in the process of trying. You can also claim relief against any new items of photographic equipment, and against any existing equipment you have, such as cameras, lenses, darkroom gear, a computer and so on, which you will be using in the course of the business.
The effect of this usually means that after your first year trading you will pay little it any tax, even after earning what seems like a quite a lot of money, because on paper your business has worked to a loss rather than a profit. In extreme cases you may also be able to claim tax relief against those losses on your earned income from your main job.
Expect to pay around £300 per year for an accountant to prepare your accounts and complete your Tax Return form ready for signature. This may seem like a lot of money, but it's worth every penny because you will establish an efficient system from the word go, a good accountant will minimise the amount of tax you need to pay, whereas you could make silly mistakes and end-up paying too much or too little.
If you want the Inland Revenue to calculate your tax, then your Tax Return must be completed and submitted by the end of September each year. If you are happy for your accountant to make that calculation for you, then you have a little more time as the Tax Return doesn't have to be received by Inland Revenue until the end of January the following year - at the very latest.
If you submit it after than date then you will automatically be charged a £100 penalty for late submission. The same amount will also be charged if you do not make an income tax payment on account by the end of January and the end of July each year, so it's worth getting your act together otherwise you could be penalised quite heavily.
REGISTERING FOR VALUE ADDED TAX (VAT)
If your business turnover exceeds a certain limit in any 12 month period - it's currently £77,000 in the UK - or you expect it to in the next 12 months, by law you must register for VAT. You can also register for VAT voluntarily if you like, no matter how small your turnover is. To do so, contact your local Customs and Excise office - it will be in the phone book - and ask for the relevant forms to be sent out.
Once you are registered you must add the current rate of VAT (currently 20% in the UK) to all invoices you issue for work done or sales made. Every three months this VAT is then paid to the VAT office.
In some areas of the photographic industry, having to register for VAT can be more trouble than it's worth. If you are doing wedding and portrait work for the general public, for example, chances are you could lose work because your clients have to pay the VAT on top of the normal bill, so it would cost them much more to have a job done. Either that, or you have to lower your rates to absorb the VAT so the bills do not seem so high. To prevent this, some photographers actively try to avoid taking their business turnover beyond the maximum amount so they can avoid being VAT registered - in the early days this shouldn't be a problem as you will need to go some to turnover £77,000+ per year, especially if you're freelancing on a part-time basis.
Fortunately, in other areas such as advertising, publishing and stock, being VAT registered isn't a problem because the people you work for are also VAT registered so they can claim that portion of their bill back from Customs and Excise. Being VAT registered also means that you can claim the same rate of VAT back on all purchases you make- for photographic equipment, film, processing, motoring and travel costs, stationary, printing and so on.
The basic rule for claiming VAT back on purchases is that you have a receipt for that purchase, and that it shows the VAT registration number of the company concerned. The VAT part of the bill doesn't have to be listed separately, but the VAT number is crucial. If the receipt doesn't show the company's VAT number, you must ask for one that does. If they're not VAT registered, then clearly you won't have paid any VAT on that purchase so you can't claim it back. Purchases made outside the UK don't contain VAT. For example, a lot of photographers purchase their film, batteries, inkjet paper and other goods from companies that have sprung-up in recent years in the Channel Islands. The prices these companies offer are extremely competitive because there is no VAT in the Channel Islands, so you get the goods VAT free. However, if you are VAT registered you may find it more cost effective to purchase those items in the UK then claim the VAT back.
Once you are registered, by law your VAT number must appear on your invoices, and the amount of VAT listed separately on those invoices, so the clients you work for can claim the VAT portion of your bills to them back from Customs and Excise.
Your accounts must also be compiled every three months so you can calculate the amount of VAT you owe and the amount you can claim back. Once registered you will be supplied every quarter with the relevant VAT form to completed and returned to Customs and Excise, with a cheque for the amount you owe them. The method of accounting mentioned earlier makes provision for VAT, so if you follow it you should be okay. With most purchases, the VAT you pay isn't listed separately, so you need to work it out. This can be done using the following calculation: divide the total amount by 6. For example, if you pay £100 for a camera lens, the VAT you can claim back is £100/6 = £16.67. You need to do this for all purchases made in each three month period that have VAT on them and add the amounts up. The VAT you have charged on your invoices is also totalled, then from this you deduct the VAT paid, and the remainder is what you owe Customs and Excise.
Being VAT registered does involve extra paperwork and accountancy, but from a financial point of view it can be beneficial as you actually save money. When you first become VAT registered, for example, you can claim back all the VAT you have paid on equipment that belongs to the business retrospectively, providing you have a VAT receipt for each item. This includes photographic hardware, computers, darkroom equipment, mobile phone, answering machine, fax, and anything else you may have purchased that will be necessary for your freelance operation. This usually means that when your first VAT return is completed, the VAT office owe you money rather than the other way around - something you should take advantage of, as it will only happen once!
Your local Customs and Excise office will be able to supply you with all the help and advice you need if you need to, or are considering voluntarily, registering for VAT.
Keeping you paperwork organised will make life much easier when it comes to preparing accounts - I use a series of suspension files, each with a different heading.
I use the traditional method of double-entry book keeping to keep my accounts in order and still prefer to write details in an accounts book rather than using computer software.
Keep you receipts in date order so your accountant can work through them quickly and easily.
At the end of each financial year I place all the relevant items - receipts, invoices, bank statements, credit card statements, cheque book stubs and so on in a box file and hand it over to my accountant so she can calculate my tax liability and complete my Tax Return form.
When you register for VAT, Customs and Excise will supply you with various booklets and leaflets that help you to understand how to keep correct records and complete your VAT return each quarter.