Documents That You Must Keep
Introduction All businesses, no matter what their size, must keep certain records and documents to ensure they are operating legally. This includes, for example, tax, employee and health and safety records.
Certain documents must be retained as soon as you start a business, and some documents must be kept on an ongoing basis. Proper tax records, in particular, must be retained. Failure to keep the right documents can cost time and money and can, in some circumstances, lead to a fine or imprisonment.
Here we detail the essential records business owners should keep. It is not an exhaustive list of all the records that should be retained, but it highlights the rules that affect most firms.
Tax records that must be kept All firms, whether sole traders, partnerships, limited companies or unincorporated associations, must keep records of all receipts and expenditure for tax purposes. HM Revenue & Customs (HMRC) does not have any rules about how these records must be kept. You can keep them on paper or digitally. However, from April 2024, certain tax records will need to be stored digitally as part of the Making Tax Digital (MTD) scheme.
All sales and other business receipts should be recorded as they come in. The exact records you must keep will depend on the type and size of your business, but whatever method you use must be adequate to complete a precise and accurate tax return.
In most cases, HMRC expects you to have:
A record of all business income.
Bank statements and paying-in slips.
Invoices for purchases and other expenses.
A record of all purchases and sales of business assets.
A record of all monies taken from the business account for personal use and paid in from personal funds.
Many small business owners rely on a cash book to document all the money that flows into and out of their business. To keep a cash book, you need to retain cheque stubs, cancelled cheques, bank paying-in books, copies of your own and your suppliers' invoices, bank statements, receipts and delivery notes, and receipts for all cash purchases and till rolls.
HM Revenue & Customs (HMRC) makes specific recommendations for certain types of business. Records kept by a shop, for example, are expected to include till rolls or electronic point of sale (EPOS) sales records.
Tax records relating to self-employment must be kept for five years from the 31 January following the end of the tax year. Limited companies must keep their tax records for six years from the end of the accounting period they cover, or in some cases for longer. If HMRC launches an enquiry into a filed tax return, the records relating to that return must be kept until the enquiry ends.
Employers must keep records of wages and other payments to employees and HMRC may inspect Pay As You Earn (PAYE) records.
Each failure to keep adequate tax records can be penalised by a fine of up to £3,000.
VAT documents If your business is registered for VAT you must keep records of all the supplies and sales you make and receive, and a summary of VAT for each period covered by your VAT return. VAT records must be kept for six years after the end of the current year.
Many of the documents will be the same as those you keep for general tax and accounting purposes, but you must also keep specific VAT accounts detailing all VAT transactions in each accounting period and documents or certificates supporting special VAT treatment. Requirements differ slightly depending on the nature of your business and whether you use a special accounting scheme.
VAT-registered businesses with a taxable turnover of more than £85,000 must keep certain records in digital format.
Record-keeping requirements for limited companies All limited companies must keep accounting records, which must also be filed with Companies House. Depending on the size of the company, there are various exemptions that determine the contents of the statutory accounts that must be filed with Companies House. Most accounts must contain a directors' report, a profit and loss account, and a balance sheet. For larger companies, submitted accounts must also include an audit report, notes and consolidated group accounts.
Limited companies also have specific record-keeping responsibilities. Not only must they keep certain documents, some of the documents must be open to inspection. Any member of the public is entitled to see a copy of the company's register of members. Members of the company are also entitled to inspect the minutes of the company's general meetings and to have copies of these minutes.
Employment records There are many records that employers are legally required to keep. Key examples include the following.
PAYE and payroll records must be kept for three years.
Records proving that employees have been paid at least the National Minimum Wage or the National Living Wage (such as a record of hours worked and total pay) must be kept for at least six years.
Records of pension scheme payments must be kept for at least six years.
Records of accidents must be kept for at least three years.
Depending on how many employees you have and the type of work your business carries out, you may be required to keep a range of health and safety records, such as medical records relating to exposure to certain hazardous substances.
In addition to the records you are legally required to keep as an employer, you should, as a matter of good practice, keep certain documentation to protect yourself from legal action by employees and prospective employees. For instance:
Failure to keep interview notes and other documents relating to an unsuccessful job application is not an offence, but it may damage your chance of defending an action for discrimination at an employment tribunal.
The Acas Code of Practice advises employers to keep a written record of all disciplinary and grievance cases.
Employment records contain personal data, and must comply with the General Data Protection Regulation (GDPR) and the Data Protection Act 2018.
Contact Ashored for help and support with your Business and Record Keeping.
