Tax preparation specialist and Director of DSR Tax Claims Ltd, David Redfern, explains what business records you need to keep and for how long.
Keeping detailed and accurate business records have tripped up many a business owner. Spotting a gap in the market and building a good business brand are important factors in starting and growing a successful business brand, but this good work can easily be undone if you fail to keep your business records in order. For many businesses, both new and established, haphazard business records can be a financial burden which costs both missed tax relief opportunities and potential penalties for failures in record keeping.
Certain business records are required by sole traders, partnerships and limited companies alike. Records pertaining to sales and income and business expenses are the cornerstone of record-keeping. This includes such documentation as receipts, bank statements, sales invoices and cheque book stubs. Such records also takes into account money that you are owed from customers which you haven't yet received, what you are committed to pay (through invoice) but haven't yet paid for, year-end bank balances as well as how much you have invested in your business and how much you have taken out of your business for personal use.
Redfern said: "This is the bare minimum in terms of business information that you need to retain in order to comply with your legal requirements for HMRC. You need to keep these records for at least 5 years after the Self-Assessment deadline, so for tax year 2017/18 submitted on 31st January 2019, you would need to keep these records until 31st January 2024 at the least. For limited companies these records need to be kept for at least 6 years from the end of the company financial year they relate to. Where business records are lost or destroyed, you must endeavour to recreate them or use estimates in your accounts - but it must be explicitly clear when estimates are used and wherever possible you must attempt to replace them with actual figures as soon as possible.
Limited companies also have additional recording requirements in order to meet their legal requirements for HMRC and Companies House. These include details of shareholders, directors and company secretaries, details of any company loans or indemnities, results of shareholder votes and resolutions as well as a register of people who have significant control in the company - these are people who own at least 25% of the shares in the company and who have influence over the company and the directors. Redfern adds "Not only can your limited company receive a £3,000 penalty if it fails to keep these records, you can also be disqualified as a company director if you are unable or unwilling to keep adequate business records - these significant penalties highlight just how essential good record-keeping should be to your business".
If your company is registered for VAT or employs other people, you will also need to keep VAT and PAYE records. Your VAT records should include all VAT sales and purchases as well as details of how much VAT is owed to HMRC and how much you may be able to reclaim, as well as a summary of VAT. PAYE records must show how much your employees get paid and what deductions are made on their behalf, as well as details of any annual leave or sickness absence, any taxable expenses or benefits they receive and details of PAYE reports and payments your company makes to HMRC. Redfern said: "PAYE records must be kept for a minimum of 3 years and VAT records at least 6 years, 10 years if your company uses the VAT MOSS system. Again, the penalties can be costly if you fail to do so".
However, it isn't just businesses who need to keep good pay and tax records. Employees are also required to keep certain information such as P45s, P60s and P11Ds as well as details of any benefits received or business expenses they may incur. Redfern concluded: "Failure to keep personal financial records may cause you problems when moving between jobs or claiming a refund on overpaid tax as well as situations such as applying for mortgages and loans. Financial records don't have to be time-consuming or complicated, especially now so many records are sent and held electronically - it can take less than half an hour a month just ensuring that all receipts and bank statements received that month are stored in an organised manner for easy retrieval".