(And how to avoid making them)
This new tax year will bring changes as many businesses adopt and adjust to the new structures of Making Tax Digital.
However, we mustn’t lose sight of the basics of good financial and business management. The mistakes many small businesses make with their finances have very little to do with changing regulations or HMRC, but have more to do with routine financial admin.
Now’s the ideal time to go back to basics to check that poor practice and silly errors are not costing you money and time.
It’s hard enough running a business without the unnecessary stress of accounting problems. Too many businesses fall into the same avoidable traps, often not realising until it’s too late.
Most accounting errors are common, predictable, and avoidable, so here’s a quick reminder of the seven most common accounting errors we, and probably most other accountants, come across.
1. Poor cashflow management
Too many otherwise solid and profitable businesses struggle or fail due to cashflow issues.
Poor basic bookkeeping, late-paying customers, unexpected expenses, and not keeping a close enough eye on the overall picture can leave your business short of cash and vulnerable when you need it most. It doesn’t matter if there’s a big deposit coming your way or a lucrative contract in the pipeline; if you haven’t got the cash when you need it, you haven’t got a solvent business. Profit does not equal cash in the bank.
How to avoid:
- Keep a rolling cash flow forecast (3 to 6 months ahead)
- Invoice promptly and have a solid system of following up on due accounts and late payments
- Build a cash buffer for quiet periods, unexpected bills, VAT and tax payments.
2. Mixing business and personal finances
If your business is already registered for MTD, you will have this in hand. But for others, this is a habit to get out of (or not get into for new enterprises).
Having one bank account for everything and sorting it all out at the end of the month may seem convenient, but it leaves you open to errors, confusion over how your business is actually doing and can cause problems with HMRC.
How to avoid:
- Open a business bank account separate from your personal arrangements
- Pay yourself a salary or drawings consistently
- Do not take personal expenses from your business account (and vice versa)
3. Poor record-keeping
Another one for the not-yet-MTD practitioners. Missing receipts, unrecorded income or last-minute bookkeeping can lead to omissions, errors, and even fines and tax penalties. It makes tax deadlines even more stressful, and HMRC requires accounting records to be kept for six years by law.
How to avoid:
- Get into the habit of recording transactions regularly (you’ll have to do it eventually for MTD, so start now).
- Record receipts for goods and services digitally; that way, they won’t get lost or forgotten
- Use accounting software – any subscription fees you’ll pay will be more than worth it for the peace of mind (and time taken to unravel mistakes).
4. Misclassifying expenses
Claiming the wrong expenses or missing allowable ones is a common mistake.
Common errors:
- Over-claiming 100% of mixed-use expenses (e.g. home broadband)
- Under-claiming allowable expenses (e.g. use of home office)
- Not claiming business running costs such as software subscriptions (accounting software) or professional fees (e.g. bookkeeping and accountancy services)
- Misunderstanding travel vs commuting costs
- Misunderstanding entertainment expenses
How to avoid:
- Understand basic HMRC rules on what is ‘wholly and exclusively’ for the business
- Keep notes about mixed-use expenses (if you have shared services, like home/home-based office broadband, etc.).
- Ask your accountant for advice
5. Missing tax deadlines
Although we pride ourselves on never missing a tax deadline for our clients (as should all professional accountants) the onus is on you, the business owner, to know your responsibilities and to make the information HMRC needs available and in the correct format.
Late submissions for VAT, self-assessment and Corporation Tax carry fines and can accrue daily interest!
How to avoid:
- Know your responsibilities
- Set calendar reminders for all key deadlines. Allow sufficient time to get the required information ready, or provide it to your accountant to prepare
- Set aside monies for paying any eventual tax demands; there is no period of grace on HMRC payments due.
6. Not registering for VAT at the right time
Business owners can lose track of their turnover and miss the VAT registration threshold.
In the UK, a business must register for VAT once the £90,000 taxable turnover figure is passed. This threshold is calculated on a rolling monthly basis, not on annual turnover.
Late registration can lead to penalties and backdated VAT becoming due immediately.
How to avoid:
- Good cash management – monitor your turnover monthly
- Take advice on whether the Flat Rate Scheme or standard VAT is best for you
- Take advice on whether voluntary registration would help you to reclaim the VAT you’re paying on business expenses, equipment, etc.
7. Trying to do everything yourself!
Understandably, you’ll want to do a lot of tasks yourself in the early days of starting a business, to keep control, to keep costs down, and because it’s your business!
But as your business grows, there are more and more plates for you to spin. Your finances will become more complicated, and mistakes will be more expensive!
How to avoid:
- Consider using an accountant for advice and reviews
- Think of professional help as an investment in growing your business, not a cost. A good accountant will help you plan, meet your financial obligations, and ensure you don’t pay more tax than you legally have to.
Final thoughts
Accounting mistakes are common, but they’re also preventable. With good systems, regular checks, and the right support, you can stay compliant, reduce stress, and make better financial decisions for your business.
If you’re unsure about any part of your accounting, getting professional advice early can save you time, money, and headaches down the line.
We’re here to help
We’re always here for our clients and for new enquiries. Call 01482 631700 or use our contact form to get in touch.
Elsewhere on this website, you’ll find resources, guides, and articles to help you stay on top of your responsibilities, or at the very least, know which questions to ask.
Blog articles on the following topics:
Making Tax Digital
Protect your cashflow in 10 minutes
Dealing with late payers
Car and travel expenses for the self-employed
Decisions around VAT
Start-up guide for small businesses
https://www.rackhamsaccountants.co.uk/wp-content/uploads/2021/12/Rackmans-Doc-FINAL.pdf
