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?
If you are in business as a self-employed sole trader or in a partnership (including property letting businesses) you need to set up a system for keeping your accounting 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.
It is very important you keep your personal records separate from those for your business.
For more information have a look at the e detailed examples of the types of business receipts and expenses that HMRC might consider to be appropriate records in various scenarios in their internal guidance manual.
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.
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 2016/17 tax return the following 31 January will be 31 January 2018 – you must keep your records until 31 January 2023.
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.