What business records should I keep?
If you are self-employed or a partner in a partnership then you must keep adequate records of your business income and expenses in order to prepare an accurate Self Assessment tax return.
What business records do I need to keep?
As well as maintaining any records you need to retain for other types of income, if you are in business as a self-employed sole trader or in a partnership (including property letting businesses) you need to keep some additional records for your business. You can keep your records on a computer but you should ensure that you can always access these records if, for example, you upgrade your computer or software.
It is very important you keep your personal records separate from those for your business. This is so that if HMRC ask to see your business records, they are completely separate from your personal records.
Although the accounting records a business needs to keep will vary depending on the size and nature of the business, a general guide would be that a business should aim to keep the following records:
- Record all sales and other business income and retain the records, for example, invoices, bank statements and paying-in slips.
- Record all purchases and other business expenses as they arise and ensure, unless the amounts are very small that you keep invoices and receipts.
- Keep a record of all purchases and sales of assets which are used in your business.
- Record all amounts taken out of the business bank account, from cash or stock, for your own personal use.
- Record all amounts paid into the business from your own personal funds, for example, paying for stock with your personal credit card
- If you are claiming mileage allowance for business trips you must record details of the journey, such as date, number of miles travelled, destination and purpose of the business trip.
You need to set up a system for keeping your accounting records. You should at the very least have a cash book – this should record payments to and from your bank, cash receipts and payments and any amounts you take out of the business. You may also want to keep a separate record book for your day to day small cash transactions – a petty cash book.
Some specific examples of records you should keep include:
- If you use your own home for your business you need to allocate running costs between private and business use (unless you are using the simplified expenses flat rate).
- A record of all your own or your family's personal drawings from the business. This is money that your family or you take from the business bank account or petty cash etc for your own purposes.
- Details of any hire purchase or leasing arrangements taken out (including rent agreements).
- Details of any money or assets you introduce into your business.
- Copies of business bank statements and building society passbooks/statements. If you do not have separate business and private accounts you will need to keep an accurate record of which expenses are business and which are private.
- Wages records where you have employees or if you have subcontractors you need to keep records to support any payments you make.
- An inventory of any stock on hand.
- Unless you use your car or van specifically for the business only you will need to keep a record of business use to include both running costs and fuel (unless you use the simplified expenses for motor expenses).
Does it matter if I am using the cash basis or simplified expenses?
No, you can use the cash basis, simplified expenses or the accruals basis for preparing your accounts as long as you maintain adequate business records to produce an accurate Self Assessment tax return.
Does it make any difference if I am entitled to the trading allowance?
If your trading income is wholly or partially exempt due to the trading allowance, HMRC only require you to keep records of your income, however we recommend that you keep basic records of income and expenses even if you qualify for trading allowance as this will help you decide whether the trading allowance is beneficial to you as well as help you monitor how your business is doing.
How long should I keep my business records?
If you are self-employed and carrying on a business you need to keep your records for five years from 31 January following the tax year for which the tax return is made. So for example for the 2017/18 tax return the following 31 January will be 31 January 2019 – you must keep your records until 31 January 2024.
However, in some cases you may need to keep the records longer than the above time limit, for example where there is an ongoing investigation by HMRC you will need to keep your records until the end of the enquiry; also if you have submitted your tax returns late you need to keep your records longer.
HMRC may charge a penalty of up to £3,000 per tax year for a failure to keep records or for keeping inadequate records. However, if HMRC identify a failing in record keeping this will often go hand in hand with an under-declaration of profit. HMRC are then most likely to charge penalties (and of course interest) in respect of any additional tax and National Insurance that becomes due as a consequence of correcting the under declaration of profit.
If no business records are kept at all it is very likely that a penalty would be incurred for failing to keep records, in addition to any other penalties HMRC may apply.
If you think you are likely to be charged a penalty by HMRC you should consider seeking help from a professional adviser such as a Chartered Tax Adviser or from the tax charity, TaxAid which gives free advice to those on low incomes.
How will Making Tax Digital affect how I need to keep my records?
Making Tax Digital is a recent HMRC initiative which will eventually introduce the biggest change to the tax system for many years and which is designed to make better use of digital resources and methods to improve accuracy and efficiency when dealing with tax matters.
The first phase of the ‘Making Tax Digital’ programme begins in April 2019 and applies to VAT registered businesses. See our section ‘Making Tax Digital for VAT’ for more information.
The rollout of the programme more widely to other affected businesses will not be before April 2020. However one key element of the Making Tax Digital initiative is that there will be a legal requirement to maintain business records digitally. This means that some kind of electronic record keeping system will need to be used. This could be an accounting software package, a spreadsheet based system or maybe via an ‘app’ on a smartphone. Many of these products are still in development but they should begin to become available during 2018. HMRC expect that there will be a range of options to choose from by April 2019.
HMRC are not producing their own software or app to enable digital records to be maintained and therefore it will be necessary to choose purchase a system you feel is suitable for your business and within your budget.
HMRC will maintain a list of products that comply with the digital record keeping legislation on the GOV.UK website in due course. We will update this page when this becomes available.
If you are unable to deal with matters online, for example if you have a disability, or you live in an area where broadband is unreliable, or you just find it difficult to do so, then you may qualify for exemption from complying with the digital record keeping requirements. The method for claiming exemption has not yet been published by HMRC. We will update this page when this information becomes available.
HMRC will be able to provide some help if you do not qualify for exemption, but need support with digital processes nonetheless. We will update this page with details on how to access this support when it becomes available.
If you do not maintain adequate digital records and do not qualify for exemption from the ‘Making Tax Digital’ process in due course you may be liable for penalties. More details will be added when the rules relating to penalties have been finalised by HMRC.