Sole traders, partnerships and limited companies alike require certain business records
Records pertaining to sales and income and business expenses are the cornerstones of record-keeping. This includes such documentation as receipts, bank statements, sales invoices and cheque book stubs. Such records also take into account money that you are owed from customers which you haven’t yet received, what you are committed to pay (through invoice) but haven’t yet paid for, and year-end bank balances, as well as how much you have invested in your business and how much you have taken out of your business for personal use.
This is the bare minimum in terms of business information that you need to retain in order to comply with your legal requirements for HMRC. You need to keep these records for at least five years after the self-assessment deadline, so for tax year 2017/18 submitted on 31st January 2019, you would need to keep these records until 31st January 2024 at the least. For limited companies these records need to be kept for at least six years from the end of the company financial year they relate to. Where business records are lost or destroyed, you must endeavour to recreate them or use estimates in your accounts – but it must be explicitly clear when estimates are used and wherever possible you must attempt to replace them with actual figures as soon as possible.
Limited companies also have additional recording requirements in order to meet their legal requirements for HMRC and Companies House. These include details of shareholders, directors and company secretaries, details of any company loans or indemnities, results of shareholder votes and resolutions as well as a register of people who have significant control in the company – these are people who own at least 25% of the shares in the company and who have influence over the company and the directors.
Not only can your limited company receive a £3,000 penalty if it fails to keep these records, you can also be disqualified as a company director if you are unable or unwilling to keep adequate business records – these significant penalties highlight just how essential good record-keeping should be to your business. If your company is registered for VAT or employs other people, you will also need to keep VAT and PAYE records. Your VAT records should include all VAT sales and purchases as well as details of how much VAT is owed to HMRC and how much you may be able to reclaim, as well as a summary of VAT. PAYE records must show how much your employees are paid and the deductions made on their behalf, as well as details of any annual leave or sickness absence, taxable expenses or benefits they receive and PAYE reports and payments your company makes to HMRC.
PAYE records must be kept for a minimum of three years and VAT records at least six years, or 10 years if your company uses the VAT MOSS system. Again, the penalties can be costly if you fail to do so. However, it isn’t just businesses who need to keep good pay and tax records. Employees are also required to keep certain information such as P45s, P60s and P11Ds as well as details of any benefits received or business expenses they may incur. Failure to keep personal financial records may cause problems when moving between jobs or claiming a refund on overpaid tax, as well as when applying for mortgages and loans. Financial records don’t have to be time-consuming or complicated, especially now so many records are sent and held electronically – it can take less than half an hour a month to ensure that all receipts and bank statements received that month are stored in an organised manner for easy retrieval.
David Redfern is a tax preparation specialist and director of DSR Tax Claims, which identifies maximum allowable expenses and provides maximum tax refunds for clients throughout the UK.