Books and records

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 what information is 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, as well as copies of invoices sent to customers. Bills for expenses and purchases must also be retained, and a record of stock kept if you run a shop or similar business. This 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, you it is better to have a separate bank account for business and personal transactions so that the distinction between your business and personal funds is quite clear. 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 and other documents in connection with business expenses incurred. They are evidence that you have spent this money. 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.

Bank statements relating to the business must be retained, and it is sensible to keep bank statements relating to your personal accounts too. These records will help if HMRC starts an enquiry into your tax affairs and you want to prove the accuracy of your records – and that no unexplained, potentially taxable, receipts have been paid into your personal account. 

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.

You can get free help with setting up records from HMRC Business Advice Teams – http://www.hmrc.gov.uk/startingup/bus_sup.htm

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. (Most small businesses will not send the actual accounts to HM Revenue and Customs, just the Tax Return). Your bank manager may also want to see the accounts, particularly if your bank account is overdrawn.

Your accounts will normally be made up of two things; 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 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.

You can find out more about accounts at:

http://www.businesslink.gov.uk   Setting up a basic record-keeping system

http://www.businesslink.gov.uk Financial and management accounts: the basics

http://www.businesslink.gov.uk   Set up a simple profit and lossa account for your business