A guide to keeping business records

Gone are the days of dust encased, paper-stuffed filing cabinets, banished to the storeroom at the back of your office (hopefully). But this doesn’t mean keeping records is a thing of the past. Keeping records is just as important - if not more important - than ever before.

Why is it important to keep records?

A key reason for keeping records is tax. Although it’s unlikely that you’ll have to provide all your records to HM Revenue and Customs (HMRC), you - or your accountant - will need access to them in order to prepare your tax return accurately, in order to calculate your profit or loss.

So keeping records is a little like taking notes. Many of your notes (or records) won’t see the light of day again, but it can really pay off to keep them in order. Particularly when it comes to making your tax returns process easier, if you ever need to make an insurance claim, or if HMRC ever decide to perform a tax compliance check on your business.

Apart from the practical reasons for doing so, HMRC may fine you £3,000 per tax year, or even disqualify you as a company director, if you fail to keep required records.

Keeping records for tax purposes

When it comes to keeping records for tax purposes, there are slightly different rules to follow, depending on the type of business.

Sole trader or partnership

If you’re self-employed or in a business partnership, the records you’re required to keep for tax purposes will vary depending on whether you use cash accounting or accrual accounting.

While larger companies have to use traditional accounting, small businesses are sometimes eligible for ‘cash basis’ accounting, which is simply based on money moving in or out of your company account.

Traditional accounting, on the other hand, works on an accrual basis, meaning that profits are calculated based on invoices sent and received - regardless of whether payment has been made. It requires slightly more complex record keeping, particularly as certain expenses may have to be allocated across different tax years (e.g. if you make a payment for a two-year contract, you’ll need to spread this cost across each year’s account). You’ll need to keep records of:

• All your sales and income
• All purchases and expenses

Limited company

For limited companies, the requirements are slightly different. At minimum, you’ll need to keep: detailed records about the company itself, and financial and accounting records. You also need to keep a register of ‘people with significant control’ (PSC). This register must include information about those who:

• Have more than 25% ownership or voting rights in the company
• Have the ability to appoint or remove a majority of directors
• Have the power to influence or control your company

Even if none of these points apply to your company, you still need to keep a register.

What are company records?

Company records are details associated with the running of a company. They should, by default, be stored at your company’s registered office address. If they’re not, it’s important that you tell Companies House. They include records of:

• Your directors, shareholders and company secretaries
• A record of results of any shareholder votes and resolutions
• Detailed information about any loans, including their timelines and the lender
• The company’s indemnities and guarantors
• Transactions relating to company shares
• Any loans secured against the company’s assets

Other records to keep

Other records you’ll want to keep include those associated with insurance, tax deductions and VAT records, if you’re a VAT-registered business.

Keeping records for tax deductions

Certain expenses are tax-deductible for businesses and you’ll file these each year with your tax return. For this reason, it’s super important to keep track of any expenses you make that can be deducted from your tax payments. Good news: business insurance is tax-deductible!

Keeping records for insurance purposes

Records can be especially important when it comes to making an insurance claim. Business contents claims and professional indemnity claims are good examples of this.

For example:

• A software engineer, with an expensive custom-built computer, covered by business contents insurance, would need to keep records of their machine’s value in order to make a successful claim if it were stolen or damaged.
• A consultant, with professional indemnity insurance, would need to keep records to provide proof of services, in order to be covered.

If you’re not sure what’s required when making a claim on your business insurance, it’s worth checking with your insurance provider to make sure that you’re keeping everything you need to ensure that if it comes to making a claim, everything’s in your favour.

Records for VAT-registered businesses

In addition to following the standard record keeping requirements for all businesses, VAT-registered business must also keep records associated with VAT, for at least six years. This is subject to change and is a process being updated by the Government, so if you’re a VAT registered business, it’s worth keeping up-to-date with the latest related news, to find out what the requirements are.

How to store business records

You have a few options when it comes to storing your business records. You can store them on paper, digitally, or within a software program (e.g. book-keeping software). The most important thing for HMRC is that they’re accurate, complete and readable.

The Government is, however, making headway to help businesses use digital records for tax, through the Making Tax Digital plan, which aims to make tax administration more effective, efficient, and easier for taxpayers to get right. This will impact the way in which UK businesses are required to store their tax records.

How to store business data compliantly

Regardless of how you choose to store your business records, it’s important that they’re secure.

The General Data Protection Regulation (GDPR), which came into effect into 2016, adds another layer to the process of storing business data. It applies to any information you process or store that contains personally identifiable information (PII) - basically, any information that reveals the identity of a specific individual.

The GDPR makes it all the more important to ensure that you have sufficient security measures in place to protect any customer records, as a breach could trigger a €20 million fine (about £18 million) or 4% of annual global turnover – whichever is greater. Cyber insurance is available to protect you if the worst were to happen.

How long should I store my business records for?

HMRC states that for self-employed professionals, any tax-related records should be kept for at least five years after the January submission deadline for the relevant tax year. For example, if you were to send your 2019 to 2020 tax return online by 31st January 2021, you would need to keep the relevant records until the end of January 2026.

For limited companies, it’s a slightly longer six years, or longer if any of the following apply:

• Your records show transactions that cover a further back accounting period
• It related to a purchase (e.g. equipment) than is expected to last more than six years
• Your tax return was sent late
• HMRC has started a compliance check

Financial advice note

The information contained in this article is provided for informational purposes only and should not be construed as financial advice on any matter. You should not rely on the information published in this article. The information in this article does not take account of individual circumstances and may not reflect recent changes in the law. Do not act or refrain from acting upon this information without seeking professional financial advice.