You need to keep records of your business, to be able to fill out your self-assessment accurately and pay the right amount of tax. You must normally keep your records available for 5 years, but if you are late sending in your returns you may need to keep them longer. Your records are legally required by HMRC. If they are not accurate or complete this could lead to financial penalties or even a costly tax enquiry.
Record keeping is an essential part of being in business. If your records are poor, then it will be incredibly difficult to challenge any claims made by HMRC during a tax enquiry. Accurate records will also make it much easier to fill out your tax return correctly and quickly.
In addition to records for any self-employed business, you still need separate records for your own personal tax affairs but these need only to be kept for a minimum of 22 months after the end of the tax year.. 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.
What records do I need to keep?
If you are self-employed, these are the types of records you need to keep:
- Business records
- All sales and income ( eg invoices, till records & bank statements.)
- All business expenses (eg invoices & mileage records)
- VAT records if you are VAT registered
- PAYE records if you have employees
- Other records – Records about your personal income, or any additional income you have
- Grants, for example, if you claimed a Covid-19 support grant through the Self-Employment Income Support Scheme (SEISS)
If you are VAT-registered, there are more detailed requirements for record keeping. It would be wise to take advice in these circumstances.
How to keep records?
It doesn’t need to be complicated. You can use a paper cash book, or a computer spreadsheet or accounting system to do this. You will also need to keep all the necessary paperwork to back up your records, such as receipts and invoices.
It is sensible to have hard copies and digital backups of all essential information in case any of your records are damaged or lost.
There is some guidance on record keeping on the Gov.uk website. As tax administration moves digital, you may need to consider keeping your records using book-keeping software which can interface with HMRC through your digital tax account.
Tips for keeping records
You can use spreadsheets or apps or bookkeeping software as well as files, folders or diaries to keep track of paper records.
- File your invoices in a safe space, preferably in alphabetical and date order
- Use a separate bank account for your business transactions
- Keep backups of computer records so important data is not lost if something happens to your computer
- Keep all of your receipts in one place, perhaps a file or a box. Some people will staple receipts into a diary so it is easy to keep track of the dates of transactions.
- Track all income received and keep track of the people who owe you money and those who you owe money to
- Set time aside once a week or even once a month to do your bookkeeping so that you stay on top of it and it is not overwhelming
- It is best to have a separate bank account for your business transactions, to keep a clear distinction between your business and personal funds. If you run a Limited company you will need a separate bank account right from the start.
Business accounts
Your books, records and bank statements are used to prepare annual accounts. This information is used when filling in your tax return. Your bank manager might also want to see your accounts.
Your accounts will include a profit and loss account and a balance sheet.
- Profit and loss account: This shows your business income and expenses for the year, along with the profit or loss you have made. If your business is small and straightforward, you may only need a profit and loss account.
- Balance sheet: This shows a snapshot of the assets and liabilities of your business on the last day of your accounting year. This shows machinery, vehicles, stock in trade, what you owe and what is owed to you. It also shows your financial stake in the business, such as if you own business premises or have loans.
Some adjustments may need to be made to the profit shown on the business accounts to take into account 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.
