Just in case HMRC comes knocking, it’s important to keep tax records. But how do you decide which records to keep and for how long? To help you decipher what is legally required, we’ve listed out which documents you need to keep for you or your business here in the UK.

What are tax records and why keep them

Tax records are documents which provide objective evidence of financial activities of a business or person. These technical-sounding documents are usually just comprised of your payslips, invoices and receipts that you gather as part of daily operations.

The reason we need to keep records is because HM Revenue and Customs (HMRC) has the right to see details of our financial activities, to check that the correct amount of tax has been paid. If you can’t produce what is asked for, or your records inaccurately match what you paid, the penalties can be quite severe.

Penalties can be several thousand pounds for small businesses and several hundred pounds for individuals. Make sure you file on time too, to avoid late penalty fees!

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How to keep records

The good news is that there are no rules on the physical format of tax records. This applies whether you are self-employed, paying or being paid through PAYE, or running a business. You can keep your records on paper, digitally, through online software, or via an accountant. But, remember that HMRC can charge you a penalty if your records aren’t accurate, complete and readable, so it pays to give a little TLC to your accounts to ensure everything is in order.

What to keep and for how long

HMRC may ask to see records from several tax years ago so it’s important to know what to keep and for how long. The length depends on how you operate, so here’s the run-down:

Self-employed:

Whether you’re operating as a sole trader or a partner in a business, you must keep detailed records of your income and expenses.

What to keep

You’ll need to keep records of:

  • all sales and income
  • all business expenses
  • VAT records if you’re registered for VAT
  • PAYE records if you employ people
  • records of personal income
  • records of money taken out of, or invested in, the business
  • income expected but not yet received

Examples of these records might include receipts, bank statements, chequebook stubs, sales invoices and till rolls. These can be digital or printed on paper, as long as your records are clear.

How long to keep

You must keep records for at least five years after the January submission deadline of the relevant tax year. For example, if you sent your 2016 to 2017 tax return online by 31 January 2018, you must keep your records until at least the end of January 2023.

If your figures turn out to be wrong, the penalties vary, including interest on any unpaid tax or a one-off payment.

Limited companies:

For limited companies, there are a couple of nuances that you must pay attention to.

Firstly, if your business has an annual income of over £150,000, you must use the traditional accounting method. This means you record income and expenses by the date you were invoiced or billed. For businesses earning less than £150,000, you can choose either the traditional or cash basis methods.

Secondly, you must tell Companies House, the UK registrar of companies, if you keep the records somewhere other than the company’s registered office address.

What to keep

You must keep accounting records that include:

  • all money received and spent
  • all goods bought and sold and who you bought/sold them to/from (except for retail businesses)
  • a separate VAT account for VAT-registered businesses
  • details of assets owned by the company
  • loans or mortgages secured against the company’s assets
  • debts the company owes or is owed, including debentures and indemnities
  • stock the company owns
  • calculations used to work out the stock values
  • results of shareholder votes and transactions

Examples of records will include receipts, petty cash books, invoices and contracts. Make sure to also keep other financial information that you need to prepare and file your tax return, like bank statements or correspondence letters.

How long to keep

Small businesses must keep records for six years from the end of the last company financial year. This time-frame increases if transactions cover multiple accounting years. Note that if you’re using the VAT MOSS service, records must be kept at least ten years!

You can be fined £3,000 by HMRC or disqualified as a company director if you don’t keep accurate records.

PAYE for employers:

What to keep

Employers with employees on payroll or paid through PAYE must keep records of:

  • Amounts paid to employees including any deductions
  • Payments made to HMRC
  • Employee leave and sickness absences
  • Tax code notices
  • Taxable expenses or benefits
  • Payroll Giving Scheme documents, including the agency contract and employee authorisation forms

How long to keep

Records must be kept for 3 years from the end of the tax year they relate to. If the numbers don’t match up, HMRC may estimate what you have to pay and charge you a penalty of up to £3,000.

PAYE for employees:

What to keep

For employees, documents to keep include:

  • your P45s and P60s
  • form P11D, which shows company-given expenses and benefits
  • Taxed Award Schemes certificates
  • any redundancy or termination payment information
  • tips, employer benefits or one-off payments not on P60 or P45
  • If you’ve claimed expenses for work-related items such as tools, travel or specialist clothing, you’ll need to keep a record of these.

How long to keep

You should keep your records for at least twenty-two months after the end of the tax year the tax return is for.
 

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