Separating Necessary From Nonsense – What Business Records Do I Need to Keep and For How Long?
Your record keeping “strategy” probably goes one of two ways – either you’re keeping too much, or too little. An odd but useful tip is to start at the end. Keeping records allows you to complete a tax return, so get to know the form and work backwards to figure out what’s necessary and what’s nonsense. You don’t actually need to send your records in when you submit your tax return but without them you can’t properly know or prove your profit or loss.
The first question you need to answer is which form is required for your business structure. You must keep records of your business income and expenses for your tax return if you’re self-employed as a sole trader or a partner in a business partnership eg. an LLP *. The tax return form is available online or from Government tax offices.
1. Accounting Methods
You’ll need to decide which accounting method to use and stick to otherwise your records won’t be accurate or will be confusing. Your first option is traditional accounting – this is when you record income and expenses using the date that you received or issued an invoice for payment. If the year ends, and you have invoices issued but not yet paid (either incoming or outgoing) they are still counted as liable for Income Tax. The second option you might have is cash basis reporting (for small businesses, income of less than £83,000 per year) – this is when you record income or expenses only when you actually receive payment or pay a bill. The important difference is that with cash basis accounting, you will only pay Income Tax on money that has actually come in or gone out in that year.
2. What to keep?
You’ll need to keep records of all business expenses, assets, VAT records if you’re registered for VAT, PAYE records if you have employees, all sales and income.
If you’re using traditional accounting, you should also keep a note of any unpaid invoices (incoming and outgoing) and the value of stock and work in progress, how much you’ve invested in the business that year, year-end bank balance and how much money you’ve taken out of the business personally eg. your salary and personal expenses.
3. How long to keep your records
You need to keep your records for at least 5 years after the 31st January submission deadline of the relevant tax year so if you submit your 2015/2016 return online by 31st January 2017, you need to keep those records until 2022.
If your records are lost, stolen or destroyed you need to notify HMRC. You still need to submit a tax return and you can use estimated figures or provisional figures as long as you let HMRC know how you are figuring these out.
4. What else should I hold on to?
You should also keep a safe record of business agreements, executive decisions and board meeting minutes, contracts between suppliers and staff and regulatory compliance data that shows that you are complying with issues such as health and safety law.
Keeping records shouldn’t be seen as painful admin. Instead, it is an exercise in risk management, reducing the chances of you receiving an unexpected tax bill, penalty or criminal charge. Accurate records are the driver of your business – keeping good records gives you the financial facts to showcase to banks, shareholders, HMRC and can be the difference between losing or securing that all important investment!