Everyone should keep certain records of their taxes and income, even if they’re not associated with a business. For businesses or the self-employed, record-keeping is mandated by law, and the rules are quite strict.
Accurate record-keeping is indispensable when filing a tax return, applying for benefits, or substantiating financial details to HMRC. Without precise records readily available, navigating these processes can become challenging and potentially problematic.
Read on to learn more about keeping robust and compliant records.
Legal obligations for record-keeping
UK tax laws require both individuals and businesses to keep certain financial records.
Income and expenses
Individuals should maintain accurate records of all sources of income. This includes wages from employment, dividends from shares, interest from savings accounts, and any rental income received. It’s essential to keep payslips, bank statements, and any other documents that can serve as proof of income.
Expenses related to investments, savings, or property rental also need to be documented, as they may affect your taxable income.
Business operations
Businesses have a broader range of income and expenses to document. All sales and income must be recorded accurately, with corresponding invoices and receipts kept for each transaction.
On the expenditure side, all business-related costs – from utility bills and equipment purchases to employee salaries – must be documented.
Petty cash transactions, although small, can accumulate over time and should be recorded meticulously, with receipts kept for each expenditure.
It’s worth mentioning that limited companies and partnerships have a wider array of responsibilities for record-keeping, which we’ll discuss shortly.
VAT records
Businesses that are VAT registered have additional record-keeping responsibilities.
All VAT invoices must be kept, detailing the VAT charged on sales and the VAT paid on purchases.
Since the introduction of Making Tax Digital, VAT records must be kept in digital format.
Maintaining accurate VAT records ensures that you pay or reclaim the correct amount of VAT, preventing costly mistakes. It’s advisable to keep these records organised and readily available for inspection.
PAYE records
Companies with employees must keep comprehensive records related to staff payments.
This includes documenting salaries, bonuses, expenses, and benefits provided to each employee. Additionally, records of deductions made for tax and National Insurance contributions are required.
These records help ensure accurate payroll processing and compliance with tax obligations. They also serve as crucial documentation in case of any discrepancies or queries from employees or HMRC.
The required retention period for financial records depends on whether you manage personal finances or run a business.
Record keeping for businesses and the self-employed
For businesses
Companies, partnerships, and other business entities are subject to particular record-keeping requirements:
- Duration: Businesses must retain their financial records for at least six years from the end of the last financial year they relate to. This is essential for any potential HMRC inspections or if there are transactions that could be queried in the future.
- Complex transactions: If transactions span multiple accounting periods or relate to assets that are expected to last more than six years (e.g., property or machinery), it might be prudent to retain these records for longer than the standard six year period.
- Specific records: Alongside general income and expenses, businesses must keep other records, such as VAT records (if VAT-registered), PAYE records (if they employ staff), and details of assets and liabilities.
- Organisation and accessibility: A well-organised system, whether digital or physical, can simplify the process of locating and retrieving records when required. Regular audits or reviews not only guarantee precision, but also aid in identifying and addressing discrepancies promptly.
For self-employed individuals
If you’re self-employed, it’s crucial to adhere to HMRC’s guidelines on how long to keep your financial records:
- Duration: Generally, you should keep your records for at least five years after the 31 January submission deadline of the relevant tax year. For example, for the 2022-2023 tax year, which ended on 5 April 2023 and has a submission deadline of 31 January 2024, you would need to keep your records until at least 31 January 2029.
- Extended period in case of a late tax return: If you submit your tax return late, you must keep your records for five years from the submission date.
Tips for efficient record-keeping
Effective and efficient record-keeping is vital for ensuring compliance and simplifying tax submissions.
Stay organised
Develop a systematic approach to organise your financial documents. Whether you choose physical filing or a digital system, ensure everything is in order and easily accessible.
Embrace digital solutions
Using accounting software like Xero, Sage or QuickBooks can streamline the process of tracking income and expenses, reducing the risk of errors and making data retrieval straightforward.
Regular updates
Make a habit of regularly updating your records. Set aside time each week or month to check that all transactions are recorded accurately and that everything is up-to-date.
Seek professional advice
When in doubt, do not hesitate to seek advice from a professional accountant. They can clarify record-keeping requirements and best practices, ensuring you stay compliant with tax laws.
Conclusion
Maintaining good records is indispensable for fulfilling your tax obligations accurately. You can simplify your tax administration by understanding your responsibilities, retaining records for the required periods, and employing good record-keeping practices.
Remember, staying informed and organised is the key to managing your financial affairs successfully.
Pearson May is here to assist with your tax responsibilities. We can help you determine what records you need to keep, for how long, and how to manage records for the benefit of your business.
Get in touch with us today.