(HMRC may charge a penalty of up to £3,000 per tax year for a failure to keep records or for keeping inadequate records)
If you’re self-employed in the United Kingdom, it is imperative to maintain accurate records of your business income and expenses for tax purposes. This applies to sole traders, partners in a business partnership, and individuals nominated as partners in a partnership. Additionally, records of personal income need to be kept.
(For limited companies, there are distinct rules regarding record-keeping).
Accounting Methods
There are two Accounting Methods you can use. Traditional accounting method and cash basis accounting method.
Traditional Accounting:
The traditional accounting method involves recording income and expenses based on the date of invoicing or billing. For instance, if you invoiced a customer on 15 March 2023, you record that transaction for the 2023 to 2024 tax year, even if the payment is received in the subsequent tax year.
Cash Basis Accounting:
Most small businesses with an income of £150,000 or less can opt for cash basis reporting. This method only records income or expenses when money is received or bills are paid. This eliminates the need to pay Income Tax on money not yet received in the accounting period. For example, if you invoiced someone on 20 March 2023 but did not receive the payment until 30 April 2023, you would record this income for the 2023 to 2024 tax year.
Records to Keep
You must maintain records of:
· All sales and income
· Business expenses
· VAT records (if registered for VAT)
· PAYE records (if employing people)
· Personal income records
· Grants received through the Self-Employment Income Support Scheme, including the amount claimed.
Why Keep Records
Although there is no requirement to submit records with your tax return, it is crucial to keep them to:
· Calculate your profit or loss for tax returns.
· Present them to HM Revenue and Customs (HMRC) if requested.
· Ensuring the accuracy of your records is paramount.
Keeping Proof
Proof includes:
· Receipts for goods and stock
· Bank statements, chequebook stubs
· Sales invoices, till rolls, and bank slips
· For those using traditional accounting, additional records are necessary, such as amounts owed but not received, committed spending not yet paid, the value of stock and work in progress, year-end bank balances, business investments, and personal withdrawals.
How Long to Keep Records
Records must be retained for at least 5 years after the 31 January submission deadline of the relevant tax year. In case of very late returns (more than 4 years after the deadline), records should be kept for 15 months after filing.
Loss, Theft, or Destruction of Records
If records are lost, stolen, or destroyed, individuals must inform HMRC and provide figures, either as estimated or provisional figures. When available, individuals should submit actual figures.
Lucricious Accounatnts, Accountants & Tax Advisers for Small Businesses