Accounting and reporting for a PSC suffers from the general complexity that exists around the topic for companies, and can seem quite daunting.
In this section we try and run through some basics to help make life easier, look at recording, financial reporting and non financial reporting.
This guide is part of a series. This is the index:
- Index to our PSC Guidance
- Whitefield PSC services
- PSC Basics – including set up and closure
- IR35 & Related Issues
- Tax and VAT for a PSC – including Corporation Tax, Income Tax, NI, PAYE and VAT
- Expenses for a PSC
- Accounting for a PSC – including bookkeeping, invoicing, receipts, dividend administration
- Practical Issues for a PSC – some of the questions and issues our clients raise reguarly
- Whitefield PSC Spreadsheet
- Understanding Business Turnover
- Financial Records and Accounting Systems
- Receipts and Invoices for Expenses
- What accounts and returns need to be filed
- Directors current account
- Dividend Administration
Part of the complexity with accounting is understanding the terms:
- Turnover – sometimes called “takings” “sales” “business receipts” “gross income” or “business income” – this is the total amount of your business income
- Expenses – also called “costs” “outgoings” – this is the total of items you’ve spent running your business, ie the costs of earning your turnover
- Profit – also called “net income” – Turnover less expenses
- Accounts – a summary of your turnover, expenses and profit used to report your business performance for tax and management purposes (also called Financial Statements). Typically comprises a Profit and Loss Account and a Balance Sheet. These will be drawn up for your Financial Year which is normally the tax year, but you could choose a calendar year or the anniversary of your starting in business
- Bookkeeping – the keeping of records of turnover and expenses for accounting purposes
- Director – an individual running a company – normally in a PSC this will be the worker providing services through the PSC
- Shareholder – the owners of a company, who hold its shares. In a PSC these will normally be the directors or their close family
- Salary – a payment for work done – within a PSC this will be paid to Directors. Its deducted from the company profit before tax.
- Dividend – a return on shares held in a company – within a PSC this will be paid to Shareholders. This is paid from company profits after tax, and as tax has already been paid on these profits is subject to a lower rate of tax.
- Salary / Dividend Mix – given that in a PSC Shareholders and Directors will normally be the same, and that these two streams have different taxation, the mix between them is important for tax
- Corporation Tax – a tax on a company’s profits
- Income Tax – a tax on an individuals income
- Dividend Tax – a subset of Income Tax, charged on income from dividends
- National Insurance – a social security charge, separate to tax, charged on earned income – for a PSC this will be salaries rather than dividends
- VAT – Value Added Tax – a Turnover based tax on business activity
- IR35 – a set of tax anti avoidance provisions which impact some PSCs – read our separate briefing
- PAYE – a system for collecting tax at source on salaries
- CTSA – Corporation Tax Self Assessment – the system for reporting and paying Corporation Tax, via CT600 and iXbrl
- Self Assessment – the system for individuals to report and pay their taxes
The composition of business turnover (sometimes called “sales”) can be a cause of confusion. Lets look at how its made up.
The starting point is normally monies received during the period in cash, VAT adjusted:
- If you are not VAT registered then there is no adjustment
- If you are VAT registered and use normal VAT then the amount is receipts less VAT output tax
- If you are VAT registered and use Flat Rate VAT then the amount is receipts less your Flat Rate Payment.
The VAT adjusted monies received then need to be adjusted for:
- Debtors – these are unpaid invoices at the start and end of the year. The unpaid invoices from last year are deducted (they would have been added on last year). The unpaid invoices at this year end are added on – this is because you are entitled to the money, just it hasn’t been received. Debtors are normally adjusted net of vat.
- Work in Progress (WIP) – again net of vat and the opening figure deducted and the closing figure added on, however this time its for sales that haven’t been invoiced but which are partly or wholly complete. Normally these would be valued at a percentage of final billing, but it could also be on time expended or any other fair value. For example, if your year end was March, and you had a project spanning the year end, completed in May, which was 25% complete at end of March, you bring in 25% of final invoice value. Historically these amounts were shown separately as WIP in the accounts – the latest accounting standards require them to be included in turnover and debtors.
If you have a full double entry bookkeeping system, the turnover will automatically be debtors adjusted, and only WIP will need adjusting.
Keeping books and records – bookkeeping – is a requirement for anyone running a business under Companies and Tax legislation.
As a minimum you need to keep:
- Records of income as its received including copies of invoices raised
- Records of expenses you incur including receipts and backing information
- Records of amounts you take from the business as salary or dividend
- Records of bank and cash transactions
- Money that you owe or are owed
- VAT workings
- Payroll workings
- Mileage Log
- Evaluations of contacts for IR35
There are a number of options for keeping books:
- A diary (only if things are very simple)
- An accounts book or paper
- A spreadsheet – we have one for you here (note Spreadsheets may not be viable post Making Tax Digital)
- A computer package like Freeagent, Quickbooks, Sage or Xero
- Bespoke package – in certain sectors bespoke software is available which covers both accounting and business management
The proposed Making Tax Digital regime will mandate the use of some sort of electronic accounting system in due course, some when after 2021 (2019 for VAT registered businesses). We are recommending FreeAgent to clients as an accounting system for MTD compliance, but we are “open platform” so we will endeavour to work with whatever system you choose to use.
Common Problem Areas with record keeping:
- Make sure income is recorded as its received
- Make sure income is not double counted, eg cash income recorded and double counted as a bank deposit (in fairness, cash income isn’t normal for a PSC)
- Use a simple referencing system for receipts and vouchers – you could just start from “1” and work upwards, and if you receive a receipt late it doesn’t matter if the numbering is out of order
- Make sure income and expense is marked as cash, debit card, cheque, credit card etc – it makes it easier to track where things have come from/gone to
- If you use an accounts book or spreadsheet you can summarise and use a fresh page/sheet each month or quarter if you wish, or just run on for the year – personal preference
- Make sure your bookkeeping is done regularly – this is a requirement under Making Tax Digital.
Its a good idea to get receipts for expenses where possible, and keep them referenced back to your bookkeeping
- A simple numbering system starting at 1 is perfectly adequate
- They could also be numbered monthly, filed monthly, or what ever suits you.
- If you have a lot of small receipts for the same thing, its fine to batch them up for filing and entry into your accounts.
- Receipts can be stored in paper format or kept electronically using a scanner – so long as you can get them when needed. A cloud system can be used.
- There are apps available for scanning and saving receipts, and these may be worth looking at. Some interface with accounting systems as plugins.
If you don’t have a receipt then it doesn’t mean an expense cannot be claimed, but you may need to show alternative evidence to HMRC in a tax enquiry, eg a bank statement or credit card statement with the transaction on it. For un-receipted cash expenses so long as there isn’t a lot of them a contemporaneous note of the expense will probably suffice – make a note when its incurred (eg send an email to yourself)
The important returns for a company are:
- Annual accounts to Companies House
- Annual Confirmation Statement to Companies House – note this is not a financial return. It reports statutory information about company ownership and control
- Corporation Tax return (CT600) and iXbrl tagged account to HMRC
- Employer returns to HMRC under RTI
- Personal Self Assessments to HMRC
- Quarterly VAT returns
The directors current account (DCA) (also known as simply Directors Account), or Directors Loan Account is a notional balance between a company and its directors. For clarity its not a real bank account, and is not represented by real money. It records:
- Any money lent to the company (credit)
- Amounts drawn out of the company over and above salary and dividends (debit)
- Other drawings by the director – eg personal bills paid by the company (debit)
- Net amounts of salary and dividend due, if not directly paid (credit)
- Expense re-reimbursements due, if not directly paid (credit)
Normally a directors account must be kept in credit – that’s to say cumulative credits must exceed debits. If not it is “overdrawn”.
An overdrawn directors account can sometimes be corrected with a paper dividend, however dividends cannot exceed retained profit – if there is insufficient retained profit then the directors account will have to be cleared another way, eg introduction of funds, or left overdrawn.
A directors account which is overdrawn for a long period of time, has a number of connotations:
- An overdrawn directors account is subject to a 32.5% Corporation Tax surcharge, referred to as S455. S455 is a temporary liability, and the amount is repaid when the directors loan account is written off or repaid.
- There is a benefit in kind charge on the notional interest forgone on the loan – and this is subject to Income Tax and Employers NI.
- Loans over £10,000 need shareholder approval (normally one and the same as the director taking the loan, though)
- An overdrawn directors account can be indicative of insufficient funds set aside for tax, which suggests a possible cash flow problem.
In order to be paid by your agent or client, you will need to invoice them – in many cases there may be other client specific approval requirements.
There are some template invoices for download below.
The important features are:
- Company name, address and vat number
- Date of invoice
- Description of work done (for IR35 purposes it is better if this can be a project related description, linked to a milestone rather than a charge for hours / days worked)
- Invoice number (there are no hard and fast rules on invoice numbers, but a consecutive numbering system is preferred, and is easier to use/track)
- The invoice amount before vat
- Vat if applicable
- Total after vat
- Payment terms
If your first invoice is raised before your vat number comes through, then “vat number applied for” should be entered. Your agent/client may withhold the vat element of the invoice pending your providing the registration number.
Confusion often arises with invoicing on expenses on which vat has been incurred. Our advice is:
- Total up the expenses to be charged, gross amount including any vat you have incurred.
- If you are vat registered deduct from this the vat you can recover
- The total of 1 less 2 is the net amount you invoice to the client / agent
- You add your vat onto the total at 3.
A common mistake is that if you incur an expense without vat, eg a train fare, then to try and invoice it on without vat. This is not correct. Travel is zero rated when provided to you because the train company is providing travel; when you charge on to your client you are not invoicing for travel services – you are invoicing supplementary costs to your professional fees, and therefore the expenses have the same vat status as your main fees.
Eg – Suppose you incurred a hotel bill of £100 including vat and a rail fare of £50 no vat. You would invoice your client £100 less vat = £83.33 for the hotel bill and £50 for the rail fare. Total invoice to your client £133.33 +20% vat = £160.00. Your client recovers vat of £26.67 to leave the net cost to them at £133.33, i.e. £83.33 + £50.
Make sure you are clear on payment terms on your invoice – see our separate guidance
There are a few housekeeping considerations when paying dividends:
- Dividends are a share of the company’s profit, payable to its shareholders. As this description suggests, there has to be profit for dividends to be available. As soon as a dividend is paid it is deemed to have been declared. Before declaring a dividend therefore, you must check that the company has sufficient post tax profit to cover the distribution; this can be a relatively informal calculation based on assets less liabilities, including tax accrued to date.
- Before declaring a dividend you should evidence that you have considered the viability of such a distribution, as covered above, and you should record the decision to pay a dividend. This would normally be done by producing minutes of a Board meeting, held to discuss and agree on such company matters, however these do not need to be overly formal – a simple note which records the company’s “state of play” immediately prior to the decision to pay a dividend, and a simple calculation which proves that the dividend is “affordable”, alongside the boards authorisation will suffice. We’ve provided a template below.
- Once a year the Board should meet to approve the annual accounts, agree the final dividend (if applicable), and note company plans for the coming year. A simple minute is all that is needed. We’ve provided a template below. If the board consists of just one individual, then common sense should prevail, and simple minuted notes of the considerations made should suffice.
- It is good practice to prepare dividend vouchers for each payment – template below.
- By convention dividends were always referred to in their net amount, but for tax purposes they were grossed up by way of a tax credit, which worked to give the shareholders credit for company corporation tax paid. From April 2016 dividend tax credits are abolished, and the dividend paid is the dividend declared ie no gross/tax credit/net any longer.