The importance of keeping business & financial records

UK tax legislation outlines the obligations on individual taxpayers and businesses (including limited companies), to maintain and keep adequate financial and business records from which to prepare and submit complete and accurate accounts and Tax Returns.

Even the completion of a simple Self Assessment tax return will require reference to financial records of some kind. The preparation and filing of limited company and sole trader accounts is dependent upon the availability of records showing the business activities conducted over a year. Changes to the tax system introduced by HMRC, both in force now and to come over the next couple of years through the Making Tax Digital (MTD) initiative has brought with it requirements to keep effective digital records. Such records will form the basis of electronic quarterly and annual filing of business transactions automatically to HMRC.

What are the benefits of keeping records?

As well as the legal requirement for proper record keeping, there are many advantages to both individuals and businesses, including:

seeing whether certain work is profitable
monitoring and controlling your expense levels
providing an overview of the efficiency or otherwise of your business
identifying mixed business/private types of expenditure to determine whether a proportion may be eligible for tax relief.

Why do HMRC require adequate business and financial record keeping?

It’s required to ensure that tax returns are fully and accurately completed leading to the payment of the correct amount of tax by individuals and businesses. In the event of an investigation into an individual or business, HMRC can ask to see the original records which lie behind the return or accounts. They will be looking to examine the level of business income and the allowability or otherwise of business expenditure or tax claims made by individuals.

What information needs to be retained?

This will vary in scale and extent between individuals and businesses. It will include records of sales, invoices, other sources of income, and receipts for business expenditure. In essence all the original documentation used to prepare the returns and/or business accounts. If business mileage is being claimed, it is important to keep either a paper or electronic record of journeys.

Receipts and recording systems can be in paper and/or electronic format (but see the earlier comments about Making Tax Digital and the requirements which come with it). Whichever format or mix of records is used there are time limits for how long they must be kept. Electronic receipts, photos of receipts, spreadsheets and bespoke recording apps will all provide adequate evidence.

Financial information for Self Assessment tax returns should be kept for 4 tax years – this is the usual time limit for making tax claims. Although HMRC may investigate tax years prior to that there is no obligation to keep personal financial records for those earlier years. Sole traders are required to retain their business records for 5 years and limited companies for 6 years.

FAQs for contractors, entrepreneurs and other business owners

Here are some questions we are often asked by PayStream clients together with our answers

Expand all

What sort of business records do I need to keep to fill in my Self Assessment tax return?

You won’t need business records as such unless you are a sole trader, in which case you’ll have separate records to calculate your taxable profits. Otherwise as an employee or pensioner, you’ll need documents such as the annual form P60 Certificate of Pay/Pension and Tax deducted; details of any employment benefits you receive which are not included in your monthly pay (shown on a form P11D provided by your employer); statements of your investment income (bank interest statements, dividend statements in relation to any shares you hold).

I’ve lost an invoice for a business purchase and the supplier has gone out of business. What other kind of evidence of purchase would be acceptable?

If you paid for the item using a credit card or a debit card your bank or credit card statements should record the transaction and could be used as corroboration if necessary.

I run a non-VAT registered sole trader business and keep my business records on paper. Am I OK to keep doing this?

Yes, but with HMRCs intention to introduce Making Tax Digital (MTD) in future you may be required to keep digital records.

What’s the best way to record business mileage for HMRC?

You can do this in several ways - using a paper mileage log, a spreadsheet or a business mileage app of which there are many on the market.

If my limited company business records are not complete will this affect how HMRC view any penalties on unpaid tax?

Yes. Failure to keep complete and accurate business records will be seen as your company not taking reasonable care in the conduct of it tax affairs and could lead to a higher penalty.

Keeping paper business expense records for several years can take up a lot of space. Is there any alternative?

Yes. You can scan or take photos of the original documents as an alternative to retaining the originals. Make sure that your scans or photos are legible and that the date of the expenditure, amount, nature of the expenditure and supplier details are all visible. If you are reclaiming VAT, ensure the VAT number is clearly identifiable.

Which is the best app to use for recording business expenses?

That will depend upon your needs. There are simple recording apps and those which consolidate the information and provide profit and loss accounts. We recommend that you speak to your accountant to work out which is best for your business.

I have a let property. Do I have to keep business records for that?

Profits from letting property are taxable and you’ll need to keep records of your rents received and the expenditure you’ve incurred. They will form the basis of the calculation you use for the entry in your Self Assessment tax return or the creation of accounts if the property or properties are held in a limited company.

My part-time e-Bay business is only small and I haven’t bothered to keep records for the past few years because the turnover is so tiny. When should I start to do so?

The tax Trading Allowance covers micro businesses providing that the gross annual income is less than £1000. However, you should be keeping proper records to see if/when your income exceeds the £1000 p.a. and you need to include the profits on your Self Assessment tax return.

Does HMRC give any incentives or recommendations as to what electronic recording systems a business should use?

Sadly no incentives are offered to encourage taxpayers to keep proper business and financial records! They do however provide a list of software which has been registered by them as meeting the MTD criteria of accurate recording and filing for Income Tax.

Here’s a link to the GOV.UK website for more details: https://www.gov.uk/guidance/find-software-thats-compatible-with-making-tax-digital-for-income-tax

Search Results