Whether you run your own business, or operate in a partnership or as a sole trader, keeping accurate tax records is a crucial part of day-to-day admin.

But what is the best practice? How long should you keep records? What methods can you use to minimise the time this takes?

How long should I keep tax records?

If you are self-employed then you are required to keep tax records for a period of five years following the tax deadline of that particular financial year.

If you operate as a limited company then the requirements are a little more complex, with rules and regulations to adhere to, while accounting records must be preserved for six years instead of five.

There are also instances where tax records may need to be kept for an even longer period.

  • they show a transaction covering more than one of the company’s accounting periods
  • the company has purchased something that should last more than six years
  • you sent the company tax return late

What tactics can I employ to stay organised?

There are several methods you can use to stay on top of your tax records.

Here are some top tips:

1. Choose an accounting method

There are two accounting methods the self-employed can use – traditional and cash basis accounting.

Using traditional accounting:

  • you record income and expenses by the date you invoiced or were billed
  • so if you’re billed on 25 March 2020 and don’t make the payment until the end of April 2020, you record the expense for the 2019-20 tax year rather than 2020-21
  • this is more suited to larger businesses, or businesses that expect fast growth (you can only use cash basis accounting if your turnover is £150,000 or less a year)

Using cash basis accounting:

  • you record income and expenses by the date you receive a payment or pay a bill
  • so if you invoice a customer on 27 March 2020 and don’t get the payment until the end of April 2020, you record the income for the 2020-21 tax year
  • you only use this method if your turnover is £150,000 or less a year, and it’s useful for smaller businesses because you won’t be taxed on income you haven’t received

2. What business records to keep

HMRC lists the records that sole traders need to keep. They include:

  • sales and income
  • self-employed expenses
  • VAT records (if you’re VAT registered)
  • PAYE records if you have employees
  • details of personal income (for example from savings, investments and rental income)
  • coronavirus grant details

3. How to keep business records

As established, there’s lots of information you need to keep – HMRC says you should also keep proof alongside your records, including all receipts (for goods, stock, and expenses), bank statements, cheque stubs, sales invoices, till rolls and bank slips.

So it’s really important to have an effective filing system for all your business records. This should make everything easier when it comes to the tax-year end.

Record keeping for limited companies

1. Company records

While limited company directors will need to file a Self Assessment tax return, as described above, they’ll have more responsibilities than sole traders when it comes to record keeping.

That’s because the limited company legal structure is more complex, as it’s a separate entity.

This means you need to keep records of the company itself (not just financial records). These include:

  • directors, shareholders and company secretaries
  • shareholder votes and resolutions
  • debentures (promises to repay a loan at a future date)
  • indemnities (payments to make when things go wrong and it’s the company’s fault)
  • transactions when people buy shares
  • loans and mortgages secured against the company’s assets

You should also have a register of ‘people with significant control’ (PSCs). PSCs are likely to be people who have:

  • more than 25% of shares in the company
  • more than 25% of voting rights in the company
  • the right to appoint or remove the majority of the board of directors

If you don’t keep your records in the same place as your registered address, you have to tell Companies House.

2. Accounting records

If you don’t keep accounting records, you can be fined £3,000 and disqualified as a company director, so it’s important you do this correctly.

As well as information about the company, you need to keep financial and accounting records. These include:

  • money spent and received by the company
  • details of assets owned
  • details of debts the company owes or is owed
  • stock the company owns at the end of the financial year
  • stock-takings used to work out that figure
  • all goods bought and sold (and who from and to)

You should have all the records needed to file your company tax return, including:

  • turnover
  • income (including profits, trading losses brought forward, property income)
  • chargeable gains
  • profits before other deductions and reliefs
  • deductions and reliefs
  • tax reliefs and reductions
  • tax reconciliation
  • losses

3. How to keep limited company records

With the breadth of business records that limited companies need to keep, it’s important to have an effective system in place.

Cooper Accounting can free up your time so you can focus on running your business. We can also advise on record-keeping and your overall tax liabilities.

Get in touch for an informal chat.