Business records checks: how to keep good business records
HMRC requires business owners and sole traders to keep good business records so the correct amount of tax can be calculated and paid.
On this gov.uk page, HMRC makes it clear that businesses must keep records to fill in tax returns and pay the right amount of tax at the right time. HMRC also states that it can choose to check your records.
While the checks are usually conducted over the phone, HMRC can choose to pay you a visit and ask you to explain about your business and how your records are kept. They will also seek to verify a few transactions before deciding if your business records are adequately kept or not.
The thing is, even if HMRC doesn’t tell you to keep good business records, it is wise to make the process as part of your financial discipline. Business records are useful – for example, historical data can help you plan and set realistic goals for the future, making sure that your business remains profitable and on the right growth path.
In this article, our small business accountants aim to discuss:
- Business records for a limited company
- Business records if you are self-employed
- PAYE records if your business employs staff
- VAT records if your business is VAT-registered
- Pay and tax records for your Self Assessment
Keeping business records for a limited company
HMRC is very clear that every limited company must keep two types of basic records: records about the company, as well as financial and accounting records.
Records about the company
As a company director, you must keep the followings:
- Details of directors, shareholders and company secretaries
- The results of any shareholder votes and resolutions
- Promises made to repay medium to long-term loans at a specific date in the future and who the creditors are
- Promises made if something goes wrong and it is the company’s fault (‘indemnities’)
- Transactions when someone buys shares in the company
- Loans or mortgages secured against the company’s assets
- Register of people with significant control, referring to anyone who has more than 25% shares or voting rights, can appoint or remove a majority of directors, and can influence or control your company.
Financial and accounting records
You must keep:
- All money received and spent by the company
- Details of assets owned by the company
- Debts the company owes or is owed
- Stock the company owns at the end of the financial year
- The stocktakings you use to work out the stock figure
- All goods bought and sold
- The suppliers you bought the goods from and the clients you sold to (unless you run a retail business where you can’t identify each customer)
- Records that are used to prepare and file the annual accounts and Company Tax Return
The last point can include:
- All money spent by the company, for example receipts, petty cash books, orders and delivery notes
- All money received by the company, for example invoices, contracts, sales books and till rolls
- Any other relevant documents, for example bank statements and correspondence
How long to keep these records
All company and accounting records must be kept for 6 years from the end of the financial year they relate to. Sometimes you are required to keep them longer if:
- They show a transaction that covers more than one of the company’s accounting periods
- The company has bought something that it expects to last more than 6 years, like equipment or machinery
- You sent your Company Tax Return late
- HMRC has started a compliance check into your Company Tax Return
If the records are lost, stolen or destroyed
In the event that your records are lost, stolen or destroyed, you must do your best to recreate them. You must also inform your Corporate Tax office accordingly and mention this in your Company Tax Return.
Business records if you are self-employed
If you are a sole trader or a partner in a business partnership, you must keep records of business income and expenses, which are:
- All receipts for goods and stock
- Bank statements, chequebook stubs
- Sales invoices, till rolls and bank slips
If you are using traditional accounting, you must also keep:
- What you’re owed but have not received yet
- What you’ve committed to spend but haven’t yet paid out, for example you’ve received an invoice but haven’t paid it yet
- The value of stock and work in progress at the end of your accounting period
- Your year end bank balances
- How much you’ve invested in the business in the year
- How much money you’ve taken out for your own use
You do not need to send your records when you submit your tax return but you need to keep them so you can work out your profit or loss for your tax return. Also, when HMRC asks, you have records to show them.
In addition, you must keep records of your personal income.
How long to keep these records
You must keep your records for at least 5 years after the 31 January submission deadline of the relevant tax year. If you send your tax return more than 4 years after the deadline, you’ll need to keep your records for 15 months after you send your tax return.
If the records are lost, stolen or destroyed
In the event that your records are lost, stolen or destroyed, you must do your best to provide the figures. When you file your tax return, tell HMRC if you are using estimated figures or provisional figures. Provisional figures mean temporary estimates while you wait for the actual figures and once the actual figures arrive, you will need to submit them.
PAYE records
A large portion of small business owners today choose to outsource their payroll service to an accounting firm like us for cost-saving purposes. Providing complete payroll services, we take care of your payroll function (including records keeping) and make sure that it is complying with regulations.
Payroll records to keep are:
- What you pay your employees and the deductions you make
- Reports and payments you make to HMRC
- Employee leave and sickness absences
- Tax code notices
- Taxable expenses or benefits
- Payroll Giving Scheme documents, including the agency contract and employee authorisation forms
How long to keep these records
You need to keep them for 3 years from the end of the tax year they relate to.
If the records are lost, stolen or destroyed
With Payroll, you report the figures to HMRC every month so when you cannot find the records, HMRC may be able to help by providing you with the historical figures you have paid your employees.
If you are using estimated or provisional figures in your final payroll report to HMRC, you must tell them accordingly.
VAT records if your business is VAT-registered
If your business is VAT-registered, the records to keep are:
- Sales and purchases
- VAT invoices
- A separate VAT account
If your business has a turnover of more than £85,000, you must follow the rules for Making Tax Digital (for VAT) which require you keep some records digitally.
The VAT account is a summary of your total VAT sales, total VAT purchases, and the VAT you either owe HMRC or can reclaim from HMRC. It can also include the VAT on any EU purchases or sales if you trade with EU countries.
When it comes to writing off bad debts (of more than 6 months old), things get a little complicated. In this case, you should keep a separate VAT bad debt account showing the total amount of VAT involved, amount written off and any payments you’ve received, the VAT you’re claiming on the debt, when you paid the VAT, the relief you are claiming, as well as the corresponding invoices. Talk to our friendly VAT team if you have questions concerning your VAT account or the VAT bad debt account.
How long to keep these records
You must keep VAT records for 6 years (or 10 years if you use the VAT MOSS service). For the VAT bad debt account, the information must be kept for 4 years.
If the records are lost, stolen or destroyed
You can easily reconstruct the data lost by reviewing your invoices or asking your suppliers for duplicated copies.
Pay and tax records for your Self Assessment
For company directors and PAYE individuals who submit Self Assessment every year, you must keep your records for at least 22 months after the end of the tax year the tax return is for. For example, if you send your 2018 to 2019 tax return online by 31 January 2020, you should keep the records until the end of January 2021.
For self-employed individuals, you know that there is no separation between and your sole proprietorship. In this case, you must keep your records for at least 5 years after the 31 January submission deadline of the relevant tax year.
Get your accounts sorted with Tax Agility
Business owners know the importance of keeping good records but not everyone has the time to go through and organise them – after all, your focus should be on running the business and not dealing with administrative burdens. Contact our teams at Tax Agility on 020 8108 0090 and let us help instead.
Our teams consist of:
- Small business accountants: championing small business across London, our small business accountants aim to save you time and money by getting your financial statements in good order. We also help you to interpret the financial data so you can use them to make business decisions with greater confidence.
- Tax accountants: be it personal tax, business tax, corporation tax, our tax accountants are here to help you minimise your tax obligations and maximise your income legitimately. We do not believe in shortcuts that can get you into troubles. Also, we can provide expert tax advice and assist companies when they are being questioned by HMRC.
- Payroll specialists: providing a complete range of PAYE and payroll administration, processing and reporting functions. We can also provide specific payroll advice pertaining to your industry.
- VAT specialists: taking care VAT registration, quarterly returns, VAT control and reconciliation, as well as providing the best VAT strategy for your business.
Give us a call today on 020 8108 0090 or use our contact form to get in touch.
You may also be interested in:
- How can management accounts be used effectively
- How to control costs
- Managing your business finance for success
This blog is a general summary. It should not replace professional advice tailored to your specific circumstance.
