While mistakes are common, getting things wrong when it comes to your annual accounts can have a significant impact if you are a contractor. Some of the common mistakes we find with contractors, particularly in the construction industry, include:
Focusing too much on labour costs incurred and hours worked rather than other elements such as overheads including rent, equipment costs and executive salaries.
The incorrect classification of expenses and poorly estimated job costs can also be an issue. Construction companies often have more than one ongoing project at the time they are processing their accounts payable.
For smaller businesses, one of the most common problems is not separating personal and business expenses making it difficult to maintain accurate records. The amount of tax paid can also be affected by not including all the allowable expenses.
Late filing can be a big issue and can often end up with a business coming under more scrutiny from HMRC and even being fined for delays.
Here we take a closer look at the mistakes often made particularly in construction businesses.
Who should prepare contracting business annual accounts?
Preparing annual accounts, particularly for construction companies can be challenging which is why it’s always a good option to hire the services of a professional. Many small businesses try to do filings themselves without fully realising how much accounting errors may be costing them.
This is particularly true for sole traders who can face difficulties in keeping accurate records and maintaining their books.
Need help with your company accounts? Contact VW Taxation today.
Mistakes contractors should avoid when filing annual accounts
Construction companies accounting can invite errors because of the difficulty of assessing the expenses and costs incurred in any work. This can include hiring subcontractors and is further complicated by IR35 issues and off-payroll working.
Leave the filing too late
Late account filing is a common occurrence with construction companies. Sometimes this is due to being disorganised and not keeping appropriate records. For smaller businesses, finding times to do the accounts can be difficult, of course.
There are several ways a construction business can overcome this. The first is to access the right accounting software rather than relying on traditional paper invoicing. This, however, will only get you so far if your business is more complicated, which is why it is much better to use the services of a professional accountant.
Incorrect classification of expenses
Expenses when undertaking a project can vary considerably and include not just employing contractors but areas such as material and equipment costs. Not classifying these costs accurately can have a big impact on the way that your annual tax burden is calculated.
Using a percentage of completion for estimated job costs can lead to incorrect, actual cost accumulation at the end of the day, something which can further hamper accurate representation when put together. Estimating costs and comparing to actual costs needs to be done regularly and not at the end of the financial year.
Failing to claim allowable deductions
As a construction company, you will certainly want to reduce the amount of tax you pay by including allowable deductions in your return.
This can include everything from administration costs and rental fees to equipment hire and transportation, as well as advertising and consultant hire. Again, this comes down to accurate record keeping but also understanding what are allowable deductions and how they need to be applied.
Not keeping accurate records
Particularly for sole traders, accurate records often seem to be a problem. As we’ve already mentioned, construction accounting can be complicated with a mix of estimated costs, indirect costs and direct labour costs.
Smaller businesses will sometimes leave record keeping to the last minute, which can lead to mistakes when putting together the construction company accounts – not least preventing a business from claiming all the allowable deductions.
Mixing business and personal expenses
Small businesses and sole traders also tend to mix business and personal expenses and that can make bookkeeping more difficult and accounting errors a lot more likely. Simple changes like opening a business account for the construction company can make a big difference.
A professional accountant can also help sift what is a business expense and what is personal to prevent mistakes.
Building contractors will sometimes work in joint ventures, and that can make the division of expenses and costs a lot more difficult to define. It’s not unusual for two contractors to add the same costs to their accounts because of poor record keeping.
File your annual accounts correctly with VW Taxation
End-of-year accounts can be challenging even for smaller businesses. At VW Taxation, we specialise in working with contractors, particularly construction companies, ensuring that the process runs smoothly.
If you want to partner with a local company that understands your needs, contact our team today.
Accounting mistakes can not only cause problems with HMRC but can cost you more in tax. Construction companies that regularly contract to third parties have a particularly challenging time making sure they maintain accurate accounts and avoid errors.