29th January 2015 By Simon Misieiwcz
Are you confused with HMRC requirements for record keeping?
Are you feeling anxious because you are falling behind on your admin, administration & accounts?
If you are responsible for the numbers in your business it is imperative that you keep good records. There are no rules on how you must keep records. You can keep them on paper, digitally or as part of a software program (like a book-keeping software). HMRC can charge you a penalty if your records are not accurate, complete and readable (1).
You should keep details of the dates when you let out your property, all rent you receive, any income from services you give to tenants (eg if you charge for maintenance or repairs), rent books, receipts, invoices and bank statements and allowable expenses you pay to run your property (eg services you pay for such as cleaning or gardening) (2).
The accounting components will take the form of a:
• Profit & Loss account that illustrates the income, costs and profit. This is also used for the tax computations.
I would say that using a profit and loss sheet is the very best way to monitor the financial performance of your property portfolio. Now this may sound obvious but it still surprises me when I am faced with a bag of receipts being asked to put together a set of tax schedules nearly 18 months after the first trading month.
Using a profit and loss account you will be able to identify a monthly trend analysis, similar to the above image from Xero an online accounting system (3).
This will show you, for example, the income month on month. What would happen to your income if one of your properties were empty? Your income would fall. If you saw this each month and were determined to build your wealth then you are more likely to take action to correct it.
Equally if you saw that your maintenance costs were significantly increasing for one property, yes Xero allows you track the financial performance of each property, then you may investigate why tenants were trashing your house or if your refurbishment works lacked quality requiring to be fixed.
• Balance sheet – This will show the total assets and the liabilities that you owe to other people / organisations
Assets for property investors would be the house itself and any capital expenditure such as new doors, windows and extensions. Assets may also include furniture. Some of these items need to be identified to calculate capital allowances if you have furnished holiday lets, shops, offices or serviced apartments. Capital allowances are costs that help reduce your tax liability.
Any money that is owed by a tenant is also called a asset (debtor).
Liabilities are items such as mortgages or Joint Venture Investor loans. They could also include payments to be made to suppliers. These are amounts that are to be paid to someone else / organisation within a defined times.
The above components may also be used to calculate your Return On Investment (ROI). You can calculate your ROI by comparing the net profit made within one year against the investment that you made. For example:
Sue buys a property for £200,000 with a mortgage of £150,000. She spends £10,000 on the refurbishment works. Sue has invested the deposit of £50,000 plus the £10,000 refurbishment costs. In total this is £60,000. She earns £6,000 profit after taking into account her rental income, property management costs, maintenance costs etc. The ROI is therefore £6,000 divided by £60,000 being 10%.
Many investors spend a lot of time working on their spreadsheets for due diligence proposes but seldom do they check out their actual ROI once they purchased the property. What is more important, checking before or after you have spent the money?
Payroll – paying yourself & people
There may come a time when you wish to either pay yourself (if using a limited company) or other people. If you are a director and you do not need to pay anyone else and wish to be tax efficient without paying national insurance then you will pay yourself the rate of circa £111 per week or £600 (4).
Dont forget that you will not pay any tax unless you have a total income of over £10,000 (5). If you paid yourself the £10,000 thinking that you have avoided all taxes think again as you will see from the above that you will pay National Insurance.
Setting up payroll: If you decide to run payroll yourself, you need to complete certain tasks to pay your employees for the first time. You can choose when and how often to pay your employees.
Register as an employer with HM Revenue and Customs (HMRC) and get a login for PAYE Online (6).
• Choose payroll software to record employee’s details, calculate pay and deductions, and report to HMRC.
• Collect and keep records.
• Tell HMRC about your employees.
• Record pay, make deductions and report to HMRC on or before the first payday.
• Pay HMRC the tax and National Insurance you owe.
• You’ll also need to complete certain annual reports and tasks to prepare for the next tax year, which starts on 6 April.
If you wanted to use a free payroll system then I would suggest using something like Payroo, which is a free online payroll software that complies with HMRCs real time information requirements (7).
You will need a bank account for your property business. This means that all property / business expenditure ought to be paid in and out of that bank account.
There are many investors that use their own personal credit cards and banks. This makes it very difficult to keep track of the expenses and even more difficult to put a set of account together at the year end.
If you are looking for an accountant or thinking of changing your current accountant because they do not understand property investing then please book an “Initial Free Consultation” on the below website: http://www.optimiseaccountants.co.uk/event/initial-free-consultation-2/
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