PLEASE NOTE: The charity TaxAid advises only those people on low incomes whose problems cannot be resolved with HMRC.

Books and records

Starting a new business

You need to keep books and records for your business. These will show what happens in your business on a day to day basis. HMRC have extensive powers to check your business records. Failing to keep accurate and complete records can lead to financial penalties. In addition you may be at risk of a costly tax enquiry.

This means setting up a system to record the information needed, and to keep the required documents. The system does not need to be complicated – the simpler the better as long as it provides the information you need.

You are legally required by HM Revenue and Customs to keep records of all income and expenditure, so that the items can be identified. You will need copies of invoices sent to customers. Bills for expenses and purchases must also be retained. A record of stock must be kept if you run a shop or similar business. The information and documents must normally be kept for nearly 6 years. HM Revenue and Customs can fine you if you do not keep proper books.

Whatever form your business takes, it is better to have a separate bank account for business and personal transactions. This keep a clear distinction between your business and personal funds. It is sensible to identify receipts into your private bank account, to show that they are not unrecorded business sales.

If you operate via a limited company you will need a separate bank account for the company right from the start.

It is important to keep all invoices, bills, bank statements and other documents in connection with business expenses incurred. They are evidence that you have spent this money, and that the expenses was a business expense. If you are VAT registered you need invoices to show the VAT you have paid.

If HM Revenue and Customs decide to make enquiries into your tax return, they will wish to see the books and records which back up your tax return entries.

HM Revenue and Customs have the right to visit your business and examine your books of accounts. If you have employees, HM Revenue and Customs have the right to visit and look at your payroll records.

In addition to records for any self-employed business, you still need separate records for your own personal tax affairs. Your personal tax records would include details of non-trading income like savings and rental income as well as other information like gift aid donations and pension contributions.

HMRC has webinars and videos which may help – https://www.gov.uk/government/collections/hmrc-webinars-email-alerts-and-videos .

Business accounts

The books, records and bank statements are used to prepare annual accounts. The information on these accounts is needed to fill in your annual tax return. Your bank manager may also want to see the accounts, particularly if your bank account is overdrawn.

Your accounts will normally include a profit and loss account, and a balance sheet. The profit and loss account shows your business income and expenses for the year, and the profit or loss you have made. The balance sheet shows a snapshot of the assets and liabilities of your business on the last day of your accounting year. It shows the vehicles and machinery you use in the business, your stock in trade, what you owe and what is owed to you. It also shows your financial stake in the business. If you own business premises, or have loans, this is where they are shown. If your business is very small, you may just prepare a profit and loss account.

Some adjustments may need to be made to the profit shown on the business accounts to take account of items which are treated differently for accounting and tax purposes. A key difference is the treatment of expenditure on equipment, machinery and vehicles used in the business.

As the UK moves towards a fully digital tax administration it is increasingly likely that you will need to maintain your records on accounting software which can interface with HMRC.

You can find out more about the type of records you need to keep on the Gov.uk website at https://www.gov.uk/self-employed-records