What are “business records”? (And why you should be keeping them)
18th March 2020
As a business owner, you may feel that keeping up with administration is one of the largest parts of your job – and we all know that it’s important to keep records “just in case”.
But why do we need to hold onto them, and for how long?
Knowing which records to keep and which ones you can dispose of can help to stop the papers endlessly piling up. It can range from good practice with general accountancy, to needing them to present to HMRC when requested to step up to the tax man.
Read on for a guide to what you should be keeping (and when it’s safe to throw it away).
What is a business record?
“Business records” is a catch-all term; it can refer to documents like VAT records, invoices, PAYE records of employees, receipts for goods or stock, bank statements, till rolls and bank slips.
It’s mandatory to keep business records for a five-year period after the tax year which the documents relate to. This is a taxation requirement, but you can keep them for longer for your own peace of mind.
Who should keep business records?
Anyone who is self-employed – either as a sole trader or as a partner in a business relationship – is obligated to keep records of business income and expenses for tax return purposes.
This is also true for those who are the nominated partner in a business partnership.
What type of accounting do you do?
The method of accounting that you use will have implications for your record-keeping. If you operate with traditional accounting – recording your income and expenses by invoice or billing date – you will need to keep extensive records.
Alternatively, cash basis accounting – recording your income or outgoings when the money arrives or leaves, as opposed to when receiving the invoice or bill – will suit some smaller businesses with annual income under £150,000.
Regardless of which accounting system you use, you will need to keep records relating to all sales and income, all business expenses, VAT records (if applicable), PAYE records about employees, and anything relating to personal income.
These are essential to demonstrate your tax liability and supporting proof – receipts, bank statements, cheque-book stubs, bank slips, and till rolls – should all be kept.
In the case of traditional accounting, you should also keep records which indicate what you’re owed and haven’t received yet, what you committed to spend but haven’t yet paid out, the value of any stock and work in progress at the end of your accounting period, year-end bank balances, and any money you’ve taken for your own use.
Whatever you need to keep, you should make sure it’s kept securely and not in danger of being lost or destroyed.
Should I keep paper records or digital?
For some business, recording digitally is easy and takes up less physical space than folders and filing cabinets. If you opt for digital records, ensure that you keep a back-up – and then ensure that you keep a back-up of the back-up.
It’s easy to be complacent about backing-up electronic data, but it pays to be proactive, especially with new data protection standards to keep up with.
Whether you opt for paper or digital records, making separately stored copies is always recommended, and keep them organised – by client, by date, or whichever method works best for you. That way, if the taxman comes calling for verification, you will have everything in order.
Why should I keep business records?
There are three core reasons. We’ve already mentioned that they will be needed if HMRC request to see them in the case of auditing your business – which can happen at any time and with no cited reason.
Additionally, keeping track of all records is good for housekeeping purposes – with all income and expenditure tracked, you can easily work out your profit or loss for your tax return.
Finally, but not exhaustively, it’s good practice if you have a business that involves working with clients. While you should keep records for around six years for HMRC, there is no statute of limitations when it comes to criminal offences. Those carefully kept records could protect you should any matters arise, whether around yourself, your business or your clients.
As with many business matters, erring on the side of caution is recommended. We hope this guide has been helpful, but for an exhaustive list of information, see the Government’s reference for self-employed business records by clicking here.