Business records for the self-employed

Our team of experts explain what records you need to keep for HMRC purposes

Our experts at DSR Tax Claims know how hard it is to find good, quality information about HMRC’s tax regulations that is easy to understand, and that’s why we have created these handy guides to tell you everything you need to know. Our aim is to make life easier for our clients and that is why we want to share our expertise with you. You can also call our friendly team on 0330 122 9972 – we’re the tax experts you can trust.

What do you need to know about business records?

If you are self-employed, you need to keep records of your business income and your expenses because you will need them to fill in your Self Assessment tax return. This is the same for sole traders as well as those in business partnerships. You will also need to keep records of your personal income because this will all need to be accounted for under the Self Assessment tax system.

If you are part of a business partnership, you might be classed as the ‘nominated partner’ which means that you are also responsible for keeping the business records for the partnership and filing the Self Assessment tax return on behalf of the partnership.

Limited companies are subject to different accounting rules to sole traders and business partnerships.

What about accounting methods?

When setting up a system to keep your business records in good order, you will also need to decide which accounting method you are going to use. There are two methods – traditional accounting and cash basis accounting.

If you use traditional accounting, you record the income or expenses in your accounts on the date you invoiced a customer or were billed. So, for example, if you invoiced a customer for £1500 on 29th March, that is the date you would enter the £1500 in to your accounts, even if you didn’t receive the money from your customer until 17th April, which would be into the next tax year.

Most small businesses use the cash basis accounting method instead. In this method, you would only record the money received or expense paid for on the date that you actually receive or pay out the money. This means that you won’t have to account for any money you haven’t yet received in your business account yet nor will you be expected to pay tax on any money you haven’t received in that accounting period. So, if we look at the above example again, if you invoiced your customer on 29th March under the cash accounting system and the money wasn’t received until 17th April, you wouldn’t record this in your accounts until it was received – which would be in the following tax year in this example.

Most small businesses with an income of less than £150,000 can use the cash basis accounting method.

What business records do you need to keep?

You need to be able to account for all the financial incomings and outgoings of your business, so this means that you will need to keep records of the following:

  • All sales and income records
  • Records of business expenses – receipts and invoices received and so on
  • VAT records, if you are registered for VAT
  • PAYE records, if you employ other people
  • Records about your own personal income, such as bank statements.

Although you are not required to send them to HMRC along with your Self Assessment tax return, you need to keep them so that you can work out your profit and loss for each tax year. You might need to show these records to HMRC if they ask to see them – they are your proof that your tax return is correct and that you’re not underpaying or overpaying income tax. Your business records need to be complete and accurate for these reasons. The kinds of records you need to keep as proof to support your Self Assessment tax return include all your receipts for goods, stock and expenses; bank statements and other records like chequebook stubs as well as sales invoices, till rolls and bank slips.

If you are using traditional accounting methods, you will also need to keep additional records to show the other monies which aren’t included in your accounts yet. These include:

  • What money you have invoiced and are owed but you haven’t received yet
  • What you are committed to spend but haven’t yet paid for – so, what you have received an invoice for but haven’t yet paid out
  • The value of any stock your business holds or work your business is in the progress of completing at the end of the accounting period
  • Your financial year end bank balances
  • How much money you have invested in the business and/ or taken out of the company for your own use.

How long do you need to keep these records for?

You need to keep your records for at least 5 years after the submission deadline for your Self Assessment tax return (currently set at 31st January). You need to keep them because HMRC could check your records at any point during that point to ensure that you’re paying the right amount of tax.

For example, if you sent your 2015/16 Self Assessment tax return to HMRC by 31st January 2017, you need to keep those records until at least 31st January 2022.

If your tax return has been submitted very late, by which HMRC means more than 4 years after the deadline, you need to keep your records for 15 months after you send your Self Assessment tax return.

What if your records are lost, stolen or destroyed?

If disaster strikes and your business records are unobtainable for some reason, you need to do your best to provide replacement figures for HMRC. This might include obtaining replacement documents or using estimated figures. You need to tell HMRC if you are using any of the following in your tax return:

  • Estimated figures, where you are providing your best guess at what the figures should be because you can’t provide HMRC with the actual figures
  • Provisional figures, where you are providing HMRC with temporary estimates while you wait for the actual figures to be provided to you. You will be expected to provide those actual figures to HMRC once you receive them – the provisional figures are only intended to be temporary.

How can DSR Tax Claims help?

We aim to make life as simple as possible for our clients and that includes giving you the information you need to make your taxes (and your life) simpler and less stressful.  Our team of experts at DSR Tax Claims are always on hand to help our clients and our excellent standing with HMRC means that we can make sure you don’t fall foul of their regulations, while claiming your maximum tax relief. We can even take care of all that paperwork and deal with HMRC on your behalf too. Call our friendly team on 0330 122 9972 – we’re the tax experts you can trust.

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