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The Relationship Between taxation & Accounting

Tax and accounting are two separate entities that also have an intrinsic link. All taxation involves accounting processes which is the practice of calculating financial statements and figures. These statements are used to make tax calculations. In reverse, accounting is not necessarily associated with tax unless that is its purpose, e.g. in tax accounting or auditing where accounting is being used to calculate tax.
What’s the Difference Between Tax and Accounting?

Tax and accounting are both associated with economics and finance. Both involve financial calculations and are relevant to all taxpayers in the UK.

What is Tax?

Taxes are payments collected from the government for a variety of social security, health, and infrastructural purposes. These include Income Tax, Corporation Tax, and Council Tax.

What is Accounting?

Accounting is the process of collating, calculating, and organising financial statements. Accounting processes are used to calculate tax deductions and payments.

So is taxation part of accounting? In essence, whilst taxation always has a relationship with accounting, accounting does not always have a direct relationship with tax. Accounting can instead fulfil many purposes. You may account for your personal earrings to work out whether or not you can afford something, or account for investments and other expenditures. In business, though, accountancy works with all figures relating to your business. Accounting is not optional, it is a legal requirement of HMRC.

HMRC and Accounting

If you’re self-employed, own a limited company, or are part of a limited company partnership in the UK, you are legally required to maintain proper accounts of your operations and finances. These need to be kept for 6 years or longer if they document purchases that will last longer than 6 years, e.g. machinery.

There are different rules for charities and other NGOs. Limited companies must submit their annual accounts and Company Tax Returns at the end of the financial year. The self-employed must file a self-assessment instead. For larger companies, accounts and tax returns will also need to be audited by a third party. This is why business accounting and taxes are intrinsically linked in the UK because there is a legal link between business and accounting for the sake of tax.

Accounts Required for Business Owners
  • Outgoing and incoming cash and money. Includes all petty cash and till money as well as contracts and invoices
  • Details of all company assets
  • Stocks owned at the end of each financial year (dated for 6 years)
  • Debts and loan details
  • Stocktaking details and inventory
  • Financial statements of all incoming and outgoing goods
  • All payroll statements for companies with employees
  • Loans or mortgages secured against company assets

At the end of the financial year, ‘full statutory accounts’ and a company tax return must be submitted including:

  • A balance sheet with the values of everything owned by a company, everything the company owes and is owed by the business on the last day of the financial year
  • Profit and fewer statements that show sales, incomings, outgoings, and operations costs
  • Notes on the statements
  • A director’s report

Note, businesses that count as micro-entities will not need a director’s report and can send simplified accounts without the need for an audit. They must have:

  • A turnover of £632,000 or less
  • Fewer than 10 employees
  • £316,000 or less on the balance sheet

Companies classed as small companies also will not need an audit:

  • A turnover of £10.2 million or less
  • Fewer than 50 employees
  • £5.1 million or less on the balance sheet
For the Self-Employed
  • Personal income records
  • Coronavirus support grant-information claimed on the Self-Employment Income Support Scheme
  • All expenses related to your self-employment
  • Invoices, contracts, and record relevant to all income related to self-employment

At the end of the year, you will have to submit a Self-Assessment Tax Return that includes:

  • Statements of untaxed income including dividends and shares interest
  • Record of expenses
  • Contributions to charity that are eligible for tax relief
  • P60 or statements of income received where you already paid tax
Why Do I Need to Keep Records that I Don’t Need to Submit to HMRC?

You may be wondering why you are required to keep and maintain records and accounts for things that you don’t need to submit. In the event of a tax investigation, where HMRC asks you to check your accounts and ensure tax compliance, they may want to look over all of your business’s financial statements.

It’s also very important that you keep in-depth and detailed accounts in case of any issues or mistakes. Tax compliance checks can often result from benign and innocent errors or technical mishaps, but you need detailed accounts to present if this does happen to you - it will greatly accelerate the process.

During a tax investigation, HMRC will review:

  • Accounts and tax calculations
  • Your Company or Self Assessment tax returns
  • PAYE records where relevant
  • Your present and past paid taxes
Tax with Accountancy Cloud

To ensure your accounts are fine-tuned and optimised for HMRC, Accountancy Cloud can help. Our team of tax accountants will get your taxes ready for the end of the financial year and reduce any risk of tax investigations. We can also help you claim tax relief such as R&D tax relief.

Get in touch today and set your taxes straight.

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