It is the responsibility of business owners and managers to keep and maintain accurate and up-to-date records of their financial transactions and other relevant business information. This includes maintaining records such as invoices, receipts, bank statements, and other financial documents that are necessary for the proper functioning and management of the business.
Failure to keep and maintain accurate records can lead to a number of problems for the business, including difficulty in managing cash flow, difficulty in preparing accurate financial statements, and difficulty in meeting legal and regulatory requirements.
It is also important to note that in the UK, businesses are required by law to keep certain records for specific periods of time. For example, under the Companies Act 2006, companies are required to keep financial records for a minimum of six years, while under the Value Added Tax Act 1994, businesses are required to keep records for a minimum of six years.
Failure to follow these legal standards may lead to penalties, fines, and even criminal charges. It is crucial that business owners and managers comprehend their legal responsibilities for maintaining records and put procedures in place to ensure that they are fulfilled.
What business records do I need to keep?
It is important for businesses to keep accurate and up-to-date records for various reasons, including tax compliance and financial reporting. Some important business records to keep include financial statements, invoices, receipts, bank statements, and records of all financial transactions. Additionally, it is important to keep records of any transactions with employees, such as payroll and tax documents, as well as records of any contracts or agreements with vendors or customers.
It is also recommended to keep records of any inventory and assets, including the purchase and disposal of any assets. It is important to consult with a tax professional or accountant to ensure that all necessary records are being kept and that they are in compliance with UK laws and regulations. It is also important to keep records of VAT transactions and to submit VAT returns to HM Revenue and Customs (HMRC) regularly.
Additionally, all UK companies are legally required to keep certain records, such as minutes of meetings and financial statements, as well as register certain information with Companies House.
How long do you have to keep records for HMRC
Six years, businesses are required by law to keep records for a specific period of time as specified by Her Majesty’s Revenue and Customs (HMRC). The length of time that records must be kept will vary depending on the type of record and the purpose for which it is used.
For example, under the Value Added Tax Act 1994, businesses are required to keep records for a minimum of six years, while under the Corporation Tax Act 2009, records must be kept for a minimum of six years from the end of the accounting period to which they relate. For income tax purposes, records must be kept for at least 22 months from the end of the tax year to which they relate.
Additionally, records related to payroll and employee taxes, such as P45s and P60s, must be kept for a minimum of three years. It is important for business owners and managers to understand these legal requirements and to ensure that records are kept for the required period of time.
If you’re self-employed
If you operate a business as a sole trader or in a partnership, it’s crucial to maintain your records for at least five years after the January 31st of the relevant tax year. These records comprise all sales documents, expenses, personal income, money withdrawn and paid into the business, along with VAT and PAYE information if relevant.
It’s essential to note that during an investigation by HMRC, you’ll need to keep the records until you receive further instructions from them. In any case, the necessary records typically include bank statements, sales receipts, purchase invoices, cheque book stubs, and VAT documentation.
Additionally, if your business has received a government grant, it’s advisable to keep the documentation for a period of four years from the date of receiving the grant.
Limited companies have different regulations and require more documentation to be kept. Along with the records previously mentioned, limited company directors need to retain additional documents including but not limited to, details of business assets, liabilities, loans secured against the company’s assets, and shareholder transactions.
In general, company records must be retained for about six years from the end of the accounting period. However, some documentation needs to be kept for a longer period of time, such as 10 years, which includes:
- The company’s statutory books (company registers need to be retained for the time the company is in business)
- VAT MOSS (Mini One Stop Shop) records
- The minutes of board meetings and resolutions It’s essential for limited company directors to understand and comply with these regulations to ensure they meet their legal obligations.
If you’re an employer
It’s crucial to maintain PAYE records for a period of three years from the end of the tax year they relate to. These records include notices of tax codes, payments to employees and to HMRC, details of employee sickness and leave, and any taxable expenses or taxable benefits. It is essential to comply with these regulations to ensure compliance with legal requirements and avoid penalties.
What happens if business records aren’t retained?
If a business does not retain its records as required by law, it can face a number of consequences. For example, if records are not kept for the required period of time, the business may be unable to provide the necessary documentation to prove that it has paid the correct amount of taxes, or that it has met other legal and regulatory requirements. This can lead to penalties and fines from the government, such as the Her Majesty’s Revenue and Customs (HMRC) and other regulatory bodies.
Additionally, a lack of records can make it difficult for the business to manage its cash flow, prepare accurate financial statements, or make informed business decisions. Furthermore, if a business is subject to an HMRC compliance check and unable to provide the necessary records, it could result in criminal prosecution. Therefore, it is essential for business owners and managers to understand their legal obligations regarding record-keeping and to put systems in place to ensure that these obligations are met.
What are the penalties for keeping inadequate business records?
Not keeping adequate business records can result in penalties and fines. In the UK, if a business fails to keep proper records, it can face penalties from HMRC. These penalties can range from fines to criminal charges. For example, if a business fails to keep proper records of VAT transactions, it can be fined up to £3,000.
If a business submits inaccurate VAT returns, it can be fined up to 30% of the tax due. In addition, failure to keep proper records can also result in a business being unable to claim certain expenses or deductions on its tax return, which can result in additional tax liability.
Failure to keep proper records can also lead to difficulties in proving compliance with other regulations, such as labor laws, health and safety laws, and environmental laws, which can result in additional fines and penalties
In conclusion, maintaining accurate and up-to-date business records is essential for compliance with legal and regulatory requirements. Failure to retain records for the required period of time can result in penalties, fines, and even criminal prosecution. Business owners and managers must understand their legal obligations regarding record-keeping.
These include the requirement to keep records for a certain period of time as specified by acts like the Value Added Tax Act 1994, the Corporation Tax Act 2009, the Companies Act 2006, and the Income Tax Act 2007. It is important to put systems in place to ensure that these obligations are met, to avoid any legal issues, and to make informed business decisions.
With over three decades of experience in the business and turnaround sector, Steve Jones is one of the founders of Business Insolvency Helpline. With specialist knowledge of Insolvency, Liquidations, Administration, Pre-packs, CVA, MVL, Restructuring Advice and Company investment.