How long should you keep business records for HMRC?

Expert help can go a long way.

Keeping records for HMRC inspections for at least 5 years

If you are self employed or have some part of your income which is self employment then you are required to send or submit a tax return to HM Revenue & Customs (HMRC) for any relevant tax years applicable. This also means that you will have to keep all the records that aided you in completing the tax return accurately and correctly. Because HMRC can decide to double check your accounts and tax return at any time, without reason, and ask you to present all your records relevant to that year at one of their offices.

And if the investigation officer feels that you have not kept sufficiently detailed records, then he or she may apply a penalty and further taxes based on their estimate for the period. As you can imagine this can be very stressful and difficult time for anybody.

However, you won’t have to pay a penalty or extra tax if you can clearly demonstrate that you took reasonable care to get your information and therefore tax return right and any errors if present were unintentional. This can be demonstrated by being as helpful and available as possible to the HMRC staff. Below are some of the ways in which you can show you have tried your best to have the correct information and have taken reasonable care for the tax return to be correct:

• You tried to make sure to keep as full and accurate records as far as was possible.
• You regularly were updating your records in the year with new and relevant information.
• You were trying your best to keep all your records safely and securely from damage or loss.
• You were actively speaking with either HMRC directly or an accountant or tax adviser to try to make sure that information was correct.
• You were actively speaking with either HMRC directly or an accountant or tax adviser if there was something that you do not understand.

Keep five to ten years worth of records at least.

HMRC guidance states that if you are self employed or in a partnership, then you are required to keep all your records for at least five years from the 31st January following a tax year (a tax year run from 6th April to 5th April each year).

And corporation tax (company tax) records will normally have to be kept for at least six years from the end of the companies annul accounting period (as stated on your Companies House records). But if the submission is overdue or is required to be double checked by HMRC then the records need to be kept for longer and there is no specific guideline as to how many years this can go back. And to complicate things further, the exact time you need to keep your records will fluctuate depending on your situation and the opinions of HMRC’s investigating staff’s opinions. So it is highly recommended to keep at least 10 years worth of records if not all of them from the start.

Don’t forget the filing.

If you do not have a safe and accurate record keeping system in place, it can very rapidly descend into in whole lot of stress and trouble with HMRC.

Relying on excel spreadsheets or pen and paper records to do your accounts are not always reliable either. As paper can get damaged or lost, ink can fade, spreadsheets can unintentionally be altered, formulas can become corrupted and before you know it your books could be in a right old mess. And when you come back to look at them 4 years down the line, it’s highly likely you won’t remember what the figures relate to or what the formula was.

Recent research carried out by as software provider of 500 small business owners found that a huge 75% rely on pen and paper or spreadsheets to track their finances. And of that amount, 31% have made errors with HMRC returns which for 14% resulted in a fine - worrying statistics indeed.

How can you avoid problems?

So what can you do now to help yourself? - Well below are some of the records you will need to keep:

• Keep a diary of the day to day running of your business- a diary is an excellent way of organising and proving what happened on what day. The paper version is admissible in court as evidence as electronic diary’s can be altered retrospectively.
• Keep and save all Bank statements from all relevant accounts including credit cards
• Keeping records of all cash transactions via Cashbooks
• Keeping Invoices both in and out of the business
• Keep all the original receipts for purchases, try to get VAT receipts even if your not VAT registered
• Keep a record of all payroll activity and wages paid to staff and contractors in a Wages book
• Keep track of your business mileage ie a Mileage Log using a book and pen in the van or car

Clients often ask how long they should keep their records for expecting us to say for at least a year or two. And are surprised when we say at least 5 years and up to 10 years because we have seen firsthand HMRC amend tax liabilities due for up to 9 years in the past. And, that if the client has not kept the evidence to argue against the charges they have little chance in getting HMRC to change their mind. So it’s not worth the risk.

An experienced and qualified firm of accountants, such as Tax Affinity Accountants, will also securely hold their own records for your accounts also and this can lead to a safety net in case of any investigations or tax amendments further down the line as the precise type of records required will depend on the type of business that you run and the type of tax that you need to pay. HMRC won’t accept excuses for why you have not kept the precise records but when it’s you and your accountant against the tax man – two against one will always have a better outcome.

By Tahir Malik and Andrew at Tax Affinity Accountants.

Tax Affinity Accountants are experts in Tax and Accountancy. Based in Kingston upon Thames they are considered in the industry to be experts in tax and HMRC tax investigations. They regularly help and support members of the public through tax investigations and tax queries and problems and provide valuable ongoing support.

For more information visit www.taxaffinity.com. To read more interesting articles like this visit www.taxaffinity.com/blog. Please feel free to comment and share this with your friends.