HMRC Business Record Checks are back – Record-keeping FAQs answered

by Jake Martin, Title Text

3 min read

There are two big surprises for people starting in business – firstly, how hard it can be to get paid and secondly, the quantity of “stuff” you need to administer, and by stuff I mean paperwork.  Blink and, despite email, you will soon have three or four lever arch files full of it.

You need to be aware that when you run a business you have a legal duty to keep good records. You can be fined if you can’t produce records in a tax inspection and HMRC has recently announced it is stepping up its investigations.

In this article I can’t cover everything but I will focus on some of the most common questions I get asked.   If in doubt, visit the HMRC website – they have a good guide.

What records need to be kept?

Rather than giving a long exhaustive list, the principle is you need to keep everything that supports or relates to an entry in your accounts – e.g.:

  • bank statements
  •  invoices
  • end-of-year stock records
  • details of goods you have taken from the business for your own use
  • records of mileage if you are claiming mileage allowance
  • till rolls
  • certificates of interest

Essentially, you should keep everything that gives rise to a benefit or a cost to you or the business.  If in doubt, keep it.

You also need to keep the accounts themselves and the individual entries in each line of your accounts – e.g. for office expenses, you need the total for the year and then details of each individual item that makes up the total.  This “audit trail”, as it is called, is much easier if you use accounting software.

How long should records be kept?

Assume you need to keep them all for at least six years after the end of the financial year to which they relate.

Note, too, that invoices for equipment need to be kept for six years after you dispose of/sell/scrap the equipment.

What about employee records?

Technically, you only need to keep employee records for the current and previous three years but I would stick to six to be on the safe side.  No one now should be running their payroll using paper, so in this case an electronic version is ideal – but make sure you back up.

Electronic or paper records?

Electronic records are OK but you need to scan both sides of the document and you must ensure you have secure and reliable online backup procedures in place in case of any technical problems.

I believe that most small businesses are better off keeping paper hard copies.  I spoke to the FD of an £8 million turnover media business recently – they believe paper is more cost-efficient and reliable.

Does it make a difference if I am a sole trader or limited company?

No, the principles are the same as is the time period.  However, there are additional records and time requirements for a limited company’s legal records.

As a limited company, you need to keep legal records of things such as board meetings, share registers etc.  These need to be kept forever so I suggest in this case they do go online – using an online Company Secretarial service can help.

How should I file purchase invoices?

Many startup businesses file purchase invoices by date paid – I feel this makes it harder to deal with queries and to check what you paid last time.  Filing them in alphabetical order with the most recent on top can make things easier.  And do remember that you can’t claim any kind of expense without proof, i.e. your voucher/receipt.

What if I am VAT-registered?

If you are VAT-registered, you are more likely to get an inspection.  The principles are the same but you also need to have a separate account in your accounts for output (sales) VAT and input (purchase) VAT.  This happens automatically with accounting software.

My top tip

Use a separate bank account for your business. Don’t run your business through your personal account -it makes the tax position much  more confusing, and potentially makes it harder to justify costs as business expenses.

Do you have any questions about record-keeping?

Information may be abridged and therefore incomplete. This document/information does not constitute, and should not be considered a substitute for, legal or financial advice. Each financial situation is different, the advice provided is intended to be general. Please contact your financial or legal advisors for information specific to your situation.

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