How long do small businesses need to keep tax records?

Business owners looking at paperwork in a warehouse

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?

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.

Read on for everything you need to know, including:

How long do you need to keep tax records?

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 2022-23 tax returns ready for the relevant deadline on 31 January 2024, you’ll need to keep your records until 31 January 2029.

If you run a limited company and need to file a company tax return, there are more rules and regulations.

For example, you’ll 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, such as:

  • they show a transaction covering more than one of the company’s accounting periods
  • the company has bought something that should last more than six years (like equipment)
  • you sent the company tax return late
  • HMRC is investigating your company tax return

Record keeping: step-by-step for the self-employed

Businesses need to keep records of their income and expenses, but the rules are different depending on your legal structure.

Record keeping for sole traders and partnerships

1. Choose an accounting method

There are two accounting methods the self-employed can use – traditional and cash basis accounting.

Using traditional accounting:

  • you record income and expenses by the date you invoiced or were billed
  • so if you’re billed on 25 March 2024 and don’t make the payment until the end of April 2024, you record the expense for the 2023-24 tax year rather than 2024-25
  • this is more suited to larger businesses, or businesses that expect fast growth

Using cash basis accounting:

  • you record income and expenses by the date you receive a payment or pay a bill
  • so if you invoice a customer on 27 March 2024 and don’t get the payment until the end of April 2024, you record the income for the 2024-25 tax year
  • you only use this method if your turnover is £150,000 or less a year, and it’s useful for smaller businesses because you won’t be taxed on income you haven’t received

2. What business records to keep

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.

3. How to keep business records

There’s lots of information you need to keep – HMRC says you should also keep proof alongside your records, including all:

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.

There’s accounting and invoice software available that can automate some of these tasks and keep your records in one place. For example, some apps let you scan and upload your receipts.

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:

  • keep your personal and business bank accounts separate – here are the best business bank accounts
  • reconcile your accounts at least once a month – your income and expenditure records need to match up with your financial statements
  • spend time creating and maintaining your filing system – you can break your paperwork down by year, quarter, or month, depending on what works for your business (but the important thing is to stay on top of filing and don’t procrastinate)

Record keeping for limited companies

1. Company records

While limited company directors will need to file a Self Assessment tax return, 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:

  • directors, shareholders, and company secretaries
  • shareholder votes and resolutions
  • debentures (promises to repay a loan at a future date)
  • indemnities (payments to make when things go wrong and it’s the company’s fault)
  • transactions when people buy shares
  • loans and mortgages secured against the company’s assets

You should also have a register of ‘people with significant control’ (PSCs). PSCs are likely to be people who have:

  • more than 25 per cent of shares in the company
  • more than 25 per cent of voting rights in the company
  • the right to appoint or remove the majority of the board of directors

If you don’t keep your records in the same place as your registered address, you have to tell Companies House.

2. Accounting records

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:

  • money spent and received by the company
  • details of assets owned
  • details of debts the company owes or is owed
  • stock the company owns at the end of the financial year
  • stocktakings used to work out that figure
  • all goods bought and sold (and who from and to)

You should have all the records needed to file your company tax return, including:

  • turnover
  • income (including profits, trading losses brought forward, and property income)
  • chargeable gains
  • profits before other deductions and reliefs
  • deductions and reliefs
  • tax reliefs and reductions
  • tax reconciliation
  • losses

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.

3. How to keep limited company records

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.

Accounting and invoice software can also make record keeping a lot easier.

Do you have any unanswered questions about keeping tax records? Let us know in the comments below.

More guides for small businesses

Ready to set up your cover?

As one of the UK’s biggest business insurance providers, we specialise in public liability insurance and protect more trades than anybody else. Why not take a look now and build a quick, tailored quote?

Yuri A/peopleimages.com/stock.adobe.com

Sam Bromley

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.

This block is configured using JavaScript. A preview is not available in the editor.