You are required to keep records of your business income and expenses if you are a Sole Trader, Self Employed or a Partnership for completing your Self Assessment. You may also need to keep records of any personal income.
There are different rules if you operate a Limited Company.
There are two main types of recording business income and expenses, and depending on which you choose will determine how your records are kept.
Traditional accounting is when you record your income and expenses on the date they are issued, this won't always be the date you receive or pay for those invoices.
For example, if you issue an invoice on 1st March 2020 , but you do not receive payment until 6th April 2020, your records must show the invoice as part of your income for the 2019-2020 tax year. You will pay tax based on the date the invoice is issued and not when payment is received or paid.
Cash basis accounting
Small businesses with a turnover below £150,000 can use the cash basis accounting method. This method lets you only record income or expenses when a payment has been received or paid.
The advantage of this method is, you will only pay tax on the amounts received or paid instead of when the invoice has been issued.
With the above example, if you issue an invoice on 1st March 2020 but you do not receive payment until 6th April 2020, your records must show the invoice as part of your income for the 2020-2021 tax year.
What records must I keep?
Whether you use either the traditional accounting or the cash basis accounting method, the records you must keep will largely be the same.
You'll need to keep records for the following:
- All sales invoices
- All receipts for goods and stock
- Till rolls and bank slips
- Bank statements
- Chequebook Stubs
- If you are registered for VAT, all VAT records
- If you employ people, all PAYE records
- Details regarding any personal income
- SEISS (Self Employed Income Support Scheme) Payments
- Any other Grants Received
You do not need to send these records to anyone, but you must keep them in order to complete your Self Assessment, as well as, in case you ever receive an enquiry in to your business by HMRC.
Some additional records may be required to be kept if you use the traditional accounting method, these include:
- Income you are owed but not yet received
- Expenses that are due but have not yet paid
- Value of stock and work in progress at your accounting year end
- Year end bank balances
- Details of any money you have invested in to the business
- How much money you have drawn from the business
How long should I keep the records for?
You must keep all records for at least 5 years from the deadline to submit your Self Assessment, for example if your Self Assessment deadline was by 31st January 2020, you must keep your records until 31st January 2025.
If your Self Assessment submission is more than four years late, you must keep the records for a further 15 months after submission.
What if I lose my records?
If you lose your records you must inform HMRC by declaring that your figures on your Self Assessment are either estimated or provisional.
Estimated means its your best guess at determining your income and expenses.
Provisional means you are awaiting the actual figures and are simply submitting your Self Assessment on time, until you are able to submit an amendment with the actual figures.