At Kelley & Lowe Limited we can advise businesses in the Dartford
area on keeping financial, tax, accounting and other records. Here are some of the key
points.
One of the most commonly asked questions faced by accountants is what accounting records
a business must keep, and for how long. This is not surprising, as record keeping can
represent a significant administrative burden with associated costs. It can also result
in penalties should a business fail to keep the records that it is required to retain.
This factsheet will give you an indication of what accounting records a business must
keep and for how long.
Limited companies
All companies are required to keep records that are sufficient to show and explain the
transactions that have been entered into, that enable the financial position of the
company to be determined with reasonable accuracy at any time, and that enable the
directors to ensure that the company’s accounts are compliant with the
requirements of the Companies Act.
The accounting records are required to contain entries from day to day of all sums of
money received and expended by the company and the matters to which they relate, and a
record of the assets and liabilities of the company.
Additional requirements exist for those companies whose business involves dealing in
goods, namely to retain a statement of the stock held at the end of the financial year
that includes supporting stocktaking records. Unless a retail operation, there is also a
requirement to maintain records of all goods sold and purchased that includes identifies
the buyers and sellers.
A parent undertaking is obliged to ensure that any subsidiary undertaking also maintains
adequate accounting records.
Company law requires records to be retained for a minimum period of three years (six
years for a public company). As we shall see in a moment though, companies will usually
be required for other reasons to retain their records for a longer period than this.
A failure to maintain adequate accounting records is considered to be a criminal offence
committed by every officer of the company in default, potentially punishable by way of
imprisonment of up to two years and/or a fine.
The requirements for limited liability partnerships (LLPs) mirror those for companies.
HMRC requirements
Companies
The Company law requirements for record keeping are primarily designed to enable
directors to meet their obligation to prepare accounts each year for distribution to the
company’s shareholders and filing with Companies House. Additional requirements
exist for all taxpayers, not just companies and LLPs, that enable them to demonstrate
that their tax liabilities have been correctly calculated.
For businesses that fail to keep adequate records HMRC have the power to issue civil
penalties of up to £3,000.
In addition to meeting the Company law requirements, HMRC require companies to retain any
other financial records, information and calculations that were used to prepare the
annual accounts and its corporation tax return. This goes further than the Company law
requirements and will include items such as bank statements, invoices and contracts. It
will also include details of judgements and estimates made when preparing the accounts
that impact upon the calculation of the company’s tax liability, such as
provisions for stock obsolescence and bad debts, accruals and prepayments, and the
measurement of financial instruments. It can be particularly important to retain records
such as these, as these are likely to form the basis of any HMRC enquiry into the
company’s tax affairs.
Companies are required to keep their accounting records for a minimum of 6 years from the
end of the financial year to which they relate. It may be necessary to retain them for
longer than this in certain situations, such as where the company has bought fixed
assets that it expects to last more than 6 years, or in respect of transactions that
span more than one accounting period. The retention period is also extended when tax
returns are filed late or where HMRC has started a compliance check into a tax return,
in which case the records cannot be destroyed until that enquiry has been concluded.
Individuals and partnerships
The requirements for individuals, whether they operate as self-employed individuals or in
partnership with others, mirror those for companies. The accounting records they are
required to retain will be the same, although they are also required to retain records
in support of other aspects of their self-assessment tax return such as dividend
vouchers or interest statements.
For partnerships the accounting records will be shared by all the partners of the
business. A nominated partner should be appointed, and it will be their responsibility
for managing the partnership’s tax returns and keeping business records.
The period that records need to be retained for differs slightly when compared to
companies. Instead they should be kept for at least five years after the 31 January
submission deadline of the relevant tax year. If the tax return is submitted more than
four years after the normal filing deadline, then records must be kept for 15 months
after the tax return is filed.
For individuals who are not self-employed or operating through a partnership, records
should be kept for at least 22 months after the end of the tax year or for at least 15
months after the return was submitted if this is after the statutory deadline.
Value Added Tax
All VAT registered businesses are required to keep records of sales and purchases. This
will include the following:
- All invoices issued
- All invoices received
- Self-billing agreements
- Name, address and VAT number of any self-billing suppliers
- Debit or credit notes
- Import and export documents
- Items you cannot reclaim VAT on
- Goods given away or taken from stock for private use.
In addition some VAT records must be kept digitally as an 'electronic account' unless
the business is exempt from Making Tax Digital for VAT:
- the VAT on goods and services supplied
- the VAT on goods and services received
- the 'time of supply' and 'value of supply' (value excluding VAT) for everything
bought and sold
- any adjustments made to a return
- reverse charge transactions
- any VAT accounting schemes used
- your total daily gross takings if you use a retail scheme
- items you can reclaim VAT on if you use the Flat Rate Scheme
- your total sales, and the VAT on those sales, if you trade in gold and use the Gold
Accounting Scheme
Generally VAT records must be kept for six years (ten years if using the VAT One Stop
Shop or Mini One Stop Shop Schemes), although supporting records for bad debt relief
claimed are only required to be kept for four years.
Employers
All employers are required to keep payroll records in support of the amounts paid to
staff. This will include the following:
- Amounts paid to employees and the deductions made. As well as PAYE and national
insurance this will include student loan repayments, pension contributions, payroll
giving donations and child maintenance payments.
- Employee leave and sickness absences
- Tax code notices
- Taxable expenses or benefits
- Payroll giving scheme documents, including the agency contract and employee
authorisation forms
- Reports and payments made to HMRC.
It would also be sensible to retain other records in support of the operation of your
payroll, such as employment status determinations, compliance with national minimum wage
requirements and the checks you undertake to ensure that your employees have a right to
work in the UK.
Payroll records must be kept for three years from the end of the tax year to which they
relate.
Other
- Documents relating to government grants must generally be kept for four years from
receipt of the grant. Where grant aid is still being received, no documents should
be destroyed without consulting the relevant government department.
- The Limitation Act 1980 allows an action to be brought on a contract for up to six
years from the event (e.g. breach) that gave rise to the claim. Where a contract is
under seal (or deed), the time limit is twelve years. These periods govern how long
invoices and other documents should be retained as evidence in case of a claim by,
or against, another party.
Format of records
Accounting records can be kept in physical form, electronically or as part of a software
program such as accounting software. Whatever format is used, records must be easy to
retrieve in a readable format. Where software is required to retrieve records it is
important to remember to retain access to that software for the minimum period for
keeping records, for example ensuring that any necessary licence fees are paid.
Increasingly though certain records must be retained in digital format, to support HMRC
initiatives such as Making Tax Digital. To date this only applies to VAT, and requires
VAT registered businesses that have adopted Making Tax Digital to retain the records
used to prepare the VAT return for filing in digital form.
However they are stored though accounting records should be kept in an orderly fashion
that helps to ensure that records are complete and accurate, and capable of timely
retrieval. Also it is imperative that you follow the rules on data protection wherever
personal information forms part of your accounting records.
How we can help
We will be very pleased to discuss with you the impact these record-keeping requirements
may have on your business.
If you are in the Dartford area and would like advice on keeping
financial records, contact Kelley
& Lowe Limited.