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How long do you need to keep tax records for in the UK? What’s the importance of record keeping? And more importantly, how should self-employed people go about keeping business records in the first place? Find out the answers below.
Accurate record keeping is really important for self-employed business owners.
Not only do accurate records mean you’ll pay the right amount of tax, they can also keep you out of trouble in the event of an HMRC tax investigation.
What’s more, business owners are required to keep tax records for a certain number of years.
Self-employed Self Assessment taxpayers need to keep their business records for at least five years after the 31 January deadline of the relevant tax year.
So if you filed your 2018-19 tax returns ready for the relevant deadline on 31 January 2020, you’ll need to keep your records until 31 January 2025.
If you run a limited company and need to file a company tax return, there are more rules and regulations.
You need to keep your accounting records for longer – six years from the end of the last company year they relate to.
There are some situations when limited companies need to keep records for longer, if:
Businesses need to keep records of their income and expenses, but the rules are different depending on your legal structure.
There are two accounting methods the self-employed can use – traditional and cash basis accounting.
Using traditional accounting:
Using cash basis accounting:
HMRC lists the records that sole traders need to keep. They include:
And if you use traditional accounting there’s more records you need to keep, like what you’re owed but haven’t received yet, as well as how much you’ve invested in the business over the year.
As established, there’s lots of information you need to keep – HMRC says you should also keep proof alongside your records, including all receipts (for goods, stock, and expenses), bank statements, cheque stubs, sales invoices, purchase orders, till rolls and bank slips.
So it’s really important to have an effective filing system for all your business records. This should make everything easier when it comes to the tax-year end.
If you do end up losing your records, you need to tell HMRC whether you’re using estimated figures or provisional figures when filling in your tax return. Provisional figures are best estimates while you wait for the actual figures.
Here are some tips for record keeping:
While limited company directors will need to file a Self Assessment tax return, as described above, they’ll have more responsibilities than sole traders when it comes to record keeping.
That’s because the limited company legal structure is more complex, as it’s a separate entity.
This means you need to keep records of the company itself (not just financial records). These include:
You should also have a register of ‘people with significant control’ (PSCs). PSCs are likely to be people who have:
If you don’t keep your records in the same place as your registered address, you have to tell Companies House.
If you don’t keep accounting records, you can be fined £3,000 and disqualified as a company director, so it’s important you do this correctly.
As well as information about the company, you need to keep financial and accounting records. These include:
You should have all the records needed to file your company tax return, including:
If your records are lost, you need to try to recreate them. Tell your corporation tax office straight away and mention it in your company tax return.
With the breadth of business records that limited companies need to keep, it’s important to have an effective system in place.
Hiring professionals like accountants and bookkeepers can be useful – but make sure you do your research and only work with people who have a good reputation.
While professionals are often expensive, they free up your time so you can focus on running your business. Plus, they can advise on record-keeping and your overall tax liabilities.
Sam has more than 10 years of experience in writing for financial services. He specialises in illuminating complicated topics, from IR35 to ISAs, and identifying emerging trends that audiences want to know about. Sam spent five years at Simply Business, where he was Senior Copywriter.
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