Small business owners tend to focus on building their companies and sometimes neglect keeping business records, such as expenses and invoices.
But record keeping is not just an important discipline to help you comply with tax and regulatory requirements. Knowing how to keep good business records is an essential discipline that will help your company become more efficient and grow.
This is especially the case since digital and cloud-based accounting software have transformed the record-keeping environment for small firms.
This article will look at what information you need to record, how to do it and for how long for. It will also show you how good record keeping can make your business grow and run more smoothly and profitably.
Why do businesses need to keep financial records?
Your company must keep records to meet Companies Act regulations and tax regulations.
If, as a company director, you fail to meet your business record-keeping requirements, you could be disqualified.
Many directors of limited companies are also employees of their company, which means they must fill out a Self Assessment tax return and keep related records correctly.
But record keeping should also play a positive role in the health of your company.
Catherine Livingstone, director at chartered accountants Wylie & Bisset, says: “As well as ticking all of the tax and legal boxes, up to date and accurate financial records show the position of a business at any time. This means that directors have the financial information they need to make better management decisions.
“This enables you to plan for future tax liabilities, rein in costs in an area where you are over budget, and spend any surplus on expanding your business.”
Andy Carey, partner at McBrides Chartered Accountants, warns you can be hit with penalties by HMRC if you fail to produce business and accounting records when requested – these fines can run into tens of thousands of pounds.
But if you do not keep accurate accounts, you could be in danger of under or overpaying tax – which no business or individual wants to do.
“Also, it is essential to have clear, up-to-date records if you want to obtain credit, funding or investment from banks or other lenders,” says Carey. “To secure funding, you must be able to show your income and explain your cash flow and what you pay out.”
Clear, up-to-date records are also important if you are looking to be acquired by another firm.
What business records do I need to keep?
Limited companies must keep records about the company and its finance and accounting.
You must keep any minutes of board meetings and resolutions, and your company’s registers will need to be held for the time the company is trading.
You must keep details of:
- Directors, shareholders and company secretaries
- The results of any shareholder votes and resolutions
- Debentures, which are promises for the company to repay loans at a specific date in the future, and to whom they must be repaid
- Promises the company makes for payments if something goes wrong and it’s the company’s fault, known as indemnities
- Transactions of any shares bought in the company
- Loans or mortgages secured against the company’s assets.
You must tell Companies House if you keep the records somewhere other than the company’s registered office address.
You must also keep a register of ‘people with significant control’. This includes details of anyone who has more than 25% shares or voting rights in your company, can appoint or remove a majority of directors or can influence or control your company or trust.
If there are no people with significant control, you also need to record that.
You will need to keep accounting records. These should include:
- All money the company has received and spent
- Details of assets the company owns
- Debts the company owes or is owed.
HMRC can fine you £3,000, or you could be disqualified as a company director if you do fail to keep accounting records.
You should keep details of stock that your company owns at the end of the financial year. In addition, record:
- The stock takings you used to work out the stock figure
- All goods bought and sold
- Who you bought and sold your goods to and from – unless you run a retail business.
Additional financial records
You must keep any other financial records, information and calculations you need to file your annual accounts and company tax return. This includes:
- Records of all money the company has spent, such as receipts, petty cash books, orders and delivery notes
- All money it has received, via invoices, contracts, sales books and till rolls
- Any other relevant documents, such as bank statements and correspondence.
You also need to keep records of any income you’ve made personally, check stubs and up-to-date bank statements.
Limited company directors can be employed or self-employed, depending on their terms.
If you are employed, you should keep records of income from employment. You should keep documents about your pay, tax and pensions, including your P45, P60 and P11D and P160. Also, keep any other details of a pension, including state pension, and the tax deducted from it.
Directors should keep certificates for any taxed award schemes and information about any redundancy or termination payment.
You should also keep details of any other income or benefits from your job. This includes any tips received, unless your ’employer’ pays them through the ‘tronc’ system, which means it will have deducted tax already.
Keep records of any benefits you get in connection with your job and any lump sum payments not included on your P60 or P45, such as incentive payments or ‘golden hellos’.
If you’ve paid for things such as tools, travel or specialist clothing for work, you may be able to claim for these to reduce your tax bill. So keep a record of them, so you can include them in your tax return.
You should keep any documents relating to benefits records such as:
- Social security benefits
- Statutory sick pay
- Statutory maternity
- Paternity pay
- Adoption pay
- Jobseeker’s Allowance.
You should keep records of income from employee share schemes or share-related benefits.
This includes copies of share option certificates and exercise notices, letters about any changes to your options, information about what you paid for your shares and the relevant dates, and details of any benefits you’ve received as a shareholder.
You should keep all information about savings and investments. These include:
- Bank or building society statements and passbooks
- Statements of interest and income
- Tax deduction certificates from your bank
- Dividend vouchers from UK companies
- Unit trust tax vouchers.
You should also keep documents that show the profits you’ve made from life insurance policies (called chargeable event certificates), details of income from a trust, and details of any out-of-the ordinary income you’ve received, such as an inheritance.
If you receive rental income, you should keep details of:
- The dates when you let out your property
- All rent you receive
- Any income from services you give to tenants, for example if you charge for maintenance or repairs
- Rent books
- Bank statements
- Details of allowable expenses to run your property such as for cleaning or gardening.
There are rules about what you can and cannot claim as expenses on your tax return.
You may have to pay capital gains tax if you sell or dispose of certain assets that have increased in value since you got them. You must therefore keep the correct records relating to any gains.
You must also keep any records relating to overseas income, such as payslips, bank statements or payment confirmations.
Keep receipts for any overseas expenses you want to claim to reduce your tax bill, dividend certificates from overseas companies and certificates or other proof of the tax you’ve already paid – either in the UK or overseas.
How long to keep business records, including tax records and receipts
Limited companies must keep records for six years from the end of the last company financial year they relate to (if you set up your business structure to be a sole trader or unincorporated, you’d need to keep records for five years after 31 January following the relevant tax year).
Or they may have to keep them for longer if:
- They show a transaction that covers multiple accounting periods
- The company has bought something that it expects to last more than six years, such as equipment or machinery
- You sent your company tax return late
- HMRC has started a compliance check into your company tax return.
Making Tax Digital, the UK government’s new scheme that aims to simplify the tax system, started in April 2019 for VAT registered businesses. While tax is being moved online, it won’t remove the need to keep your own backups.
You must keep this information saved and backed up in case of data corruption, damage, loss or theft.
If you don’t keep your records for the required period, HMRC could penalize you. Penalties increase based on the seriousness of the offense, from £250 for a business in its first year to £3,000 for deliberate destruction of records.
HMRC may also check your records to make sure you’re paying the right amount of tax.
If your records are lost, stolen or destroyed
If you cannot replace your records after they were lost, stolen or destroyed, tell your corporation tax office straight away, do your best to recreate the records and include this information in your company tax return.
You can use provisional or estimated figures if you cannot recreate all your records. You must use the ‘Any other information’ box on the tax return to say that this is what you’re doing.
‘Provisional’ means you’ll be able to get paperwork to confirm your figures later. ‘Estimated’ means you will not be able to confirm the figures.
You may have to pay interest and penalties if your figures turn out to be wrong and you have not paid enough tax.
How should you keep business records?
There are no rules on how you must keep records. You can keep them on paper, digitally or as part of a software program, such as bookkeeping software.
However, HMRC can charge you a penalty if your records are not accurate, complete and readable.
With the advancement of technology, company records can now be digitized, making it easier and cheaper to store.
For example, you can use accounting software to store a digital copy of an invoice with the accounting transaction, and this is an acceptable way to keep the record.
If you use an accountant, you can work with them to create financial reports, balance sheets and cash flow projections using records – or you can outsource the task completely to them so you can focus on your business.
It’s best to keep your records simple, clear and accurate but with the appropriate level of detail, so other people can use them. Digital record keeping makes it easier to share information and keep it in order.
How does accounting software help with keeping business records?
Andy Carey from McBrides Chartered Accountants says companies have increasingly moved to digital accounting platforms and his firm is helping all businesses to embrace cloud accounting, which is accounting software hosted on remote servers.
“Cloud accounting is the most revolutionary thing to happen in the accountancy world for some time,” he says. “With good cloud software, your accountant is effectively on hand 24/7.
“They can appraise and format balance sheets, cash flow projections, financial statements, etc, at the touch of a button because the information and record keeping are to hand in the cloud.
“Clients are becoming much better informed and involved in their accounting when they understand how easy it is to upload their receipts and records to the cloud.
“This saves time, enabling us to spend our time better with clients and to provide a full spectrum of business advisory services. This has paid dividends for those clients embracing digital accounting.”
Using cloud accounting can also allow business owners to stay ‘hands off’ and leave the entire task to their accountants if they wish. Providing they upload accurate, timely information, the only thing left for them to do is invoice clients.
Further advantages of keeping records digitally
Catherine Livingstone, from Wylie & Bisset, says: “I recommend that all businesses consider storing their records digitally as this can have many advantages.
“It saves storage of paper records. It makes accounting process more efficient.
“For example, if a customer or supplier calls, you can find the invoice in seconds, rather than searching for it in a paper filing system. It also saves hunting for that lost invoice that someone has taken out of a folder and not returned.”
Accounting software also makes your year-end accounting process more efficient, as you do not need to pass your accountant huge boxes of records. They can access your digital system and records at the click of a button.
“I recommend that your invoices are coded with a unique reference number to allow an easier link from your accounting system to the financial records.”
Alan Becker, manager at chartered accountants Price Bailey, says accounting software can also help reduce the cost of record keeping.
“Data entry is simplified and rationalized, processes are generally much faster – for example, the delay between making a sale and issuing an invoice is minimized – and reports can be produced easily,” he says.
“All the information required for producing accurate financial records is collated by the software, and the risk of errors and omissions is minimized.”
Another advantage of accounting software is that you can integrate it with external systems, such as digital banking and electronic filing of tax returns, Becker adds.
Helping growth, profitability and cash flow
Carl Roberts, managing director of RTS Financial Planning, says his firm keeps all its financial reports, client invoices, supplier bills and all its client files, no matter how far back.
“It helps track the progress of the business, to see where we have been and where we are now,” he says. “I am always keen to move forward, so want to know I am making progress.
“Also, when joining professional bodies or entering awards, often we will be asked for historic records going back some time to show progress.”
RTS uses cloud accounting software and a cloud-based suite of business applications.
“Everything is cloud-based and I have access to all my business records at the click of a button,” says Roberts. “I can run my business on my phone. Cloud software makes it much easier to keep records indefinitely.
“In the past, you would have needed massive amounts of space to keep documents indefinitely but now the cloud is endless. It’s also better for security and avoiding hazard risks, as your documents are backed up securely.”
Roberts advises making sure you have clear procedures for record keeping and that your filing system is consistent. Everyone in your team should be storing records in the same way to make things easy to reference and quickly accessible.
Another financial adviser, Chapters Financial, introduced cloud accounting software three years ago.
Director Keith Churchouse says: “We wanted a more instant handle on the numbers and our accountant has a log in to the system, so if we have an accounting question, we can log in together and discuss it.
“We moved to cloud accounting because we wanted to study the growth of the business going back over 10 years and the expenses and profitability. Without cloud accounting software, that becomes untenable.
“Looking back that far allows you to compare years with more growth and years with less, to see if there are any patterns and correlations and to anticipate future growth.”
Cloud accounting software also gives the firm more instant detail about its profit and loss and cash position.
“That’s important because cash at bank could be vital in the next few months as we exit the European Union,” says Churchouse.
His tip for any business new to cloud accounting is to use it regularly and pay attention to the analysis it gives you.
“Review it once every two weeks or once a month,” he says. “Younger businesses rely on their cash flow and profitability, so interrogating the accounts quickly is vital. If you don’t, you could end up with no money in the bank.
“It’s not just a tool for the accountant to look at and advise the business. It is for the business owner to use.”
Conclusion on keeping business records
Companies do need to keep lots of records – there is no avoiding it. But by now, you should be feeling more positive about the benefits of keeping accurate, up to date and comprehensive records, and not just seeing it as a compliance exercise.
Keeping records digitally and in the cloud is having ground-breaking benefits for many companies. But however you choose to keep your records, you should make sure they are up-to-date, accurate and also meaningful.
Meaningful financial records will help your advisers help you, and also allow you to run your business better as you have the information to make the best decisions and plans.
Editor’s note: This article was first published in September 2019 and has been updated for relevance.