Record keeping is an essential for any business, whether you’re a contractor or you oversee finances for a major company. But record keeping is a lot more than hanging on to receipts and invoices; you also need to keep them well enough organised for them to be useful when it comes time for documentation.
So what records will HMRC want to see, what other records are useful to have, and how can you best manage them?
Financial Record Keeping Fundamentals
To run a successful business (and for HMRC’s purposes), you will want to be able to track all money coming into your business, all your expenses (and other costs) and you will want to be able to provide supporting documentation.
Let’s break that down.
Recording Income
All money coming into your business must be recorded or your tax return cannot be accurate and complete. Internally, it’s obviously also important to keep track of all money accrued, whatever the source of the income or the payment method (bank transfer, cash, online payment platforms, etc.)
If HMRC can identify missing income, this is one of the most common reasons for an HMRC inquiry, which makes complete and accurate records of your income vital.
Recording Expenses
Allowable expenses for your business can be claimed against your tax liability. These will be costs incurred exclusively in the process of running your business; rent, phone bills, marketing, advertising, etc.
Which expenses are allowable, and to what extent, can vary according to the type of business. As always, if you’re not sure which expenses would apply, we highly recommend you get in touch with an accountant who can discuss your case specifically.
Payroll Records
As the name itself suggests, payroll comes with a record in the payroll itself. While these are not allowable expenses, they are still key outgoings. HMRC submissions will require payroll for your salary as an owner-director and for salaries and wages paid to any staff you employ.
We’ve written several times on things to watch out for in payroll, including this list of common payroll errors to avoid.
VAT Records
If your business is registered for VAT (and the chances are good that it is), you’ll also need to track your input and output VAT, with records of how that all happened, as the basis of your VAT returns.
Supporting Documentation
For as long as you keep your financial records, you should also retain relevant supporting documentation. There are certain minimum periods your business should retain records for:
- Payroll/PAYE Records should be kept for at least three years after the end of the tax year
- Limited companies should keep financial records for at least six years beyond the end of the relevant accounting period
- VAT Records should also be retained for at least six years
- Sole traders and partnerships should retain records for a minimum of five years after the 31st January deadline
That supporting documentation might include:
- Sales invoices, bank statements, payment confirmations, etc.
- Receipts and invoices, petty cash records, and purchase or order confirmations
- Contracts, insurance documentation, rental agreements, loan details, and any legal or HMRC correspondence that may be relevant
- Employee personal details and contracts, PAYE and National Insurance contributions (NICs), and pension scheme records
- VAT invoices and credit notes receiver and issued
- Any other items directly or indirectly related to income, outgoings, or eligibility for tax opportunities
The Good News
The Making Tax Digital initiative and MTD-compliant accounting software is making it easier and easier to upload and store these records digitally, meaning that it’s easy to store and refer to these. However, it’s worth remembering that it’s one thing to keep your records up to date; understanding what they mean is a different skill.
If you need any support in interpreting your records or determining what may or may not be an allowable expense (or if you want to outsource your payroll) we at ICS Accounting are here for you.
