Keeping records explained for self-employed

If you are thinking of becoming self-employed or have just embarked on a journey of working for yourself, you might feel a bit confused about what records exactly are you required to keep and how to do it. In this post, I will explain what is required by HMRC as well as all options available for you to help you comply with regulations and use your financial records to help you grow your business.

As anyone who has any income, you should keep records of your business income and expenses for tax purposes.

What do you mean by records?

There is no exact definition of what a record of income or expense is. It simply means, that you should keep track of it in an organised and orderly manner, that makes it possible for you as well as for HMRC ( if they choose to check you) to read and understand the information within, for example, to see your total income for a particular month or year in your trading history or check details of a single transaction (purchase or sale you have made). In its simplest form, a record might be a paper notebook that you update regularly. Another, a bit more popular option is using a spreadsheet program. The most modern way of keeping records is using a cloud-based bookkeeping program like Xero or Quickbooks. If you have passed the threshold of £85,000.00 taxable turnover and you have to register for VAT, you will need to keep all your records digitally, according to new Making Tax Digital rules. Read more about MTD here: MTD for self employed

Is that all really? Just a paper notebook?

You also need to keep all the proof of the transactions you have recorded for tax purposes, for example, invoices you issue to your clients or your till rolls, receipts you get for purchases you have made, your bank statements, everything really that will prove that you really earned the money you are saying you did, and - most importantly - everything that proves you really have spent the money you are saying you did.

Your records should consist of your notes (on paper or digital notes in a spreadsheet or bookkeeping software) and all the proof of transactions (invoices, receipts, till rolls etc.)

Why do I need to keep the records?

A single most important reason is that you are required to do so by HMRC. They require sole traders to keep their records so that it is possible to check them ( this records) in case HMRC finds some irregularities in the self-employed tax return. Another good reason you should keep your records is that if you decide you want to apply for a loan to grow your business, a bank might want to see your records to make sure you are reliable.

What do I need to keep records of?

What records you need to keep depends on the characteristic of your business. There are some records that all sole traders need to keep. These are business' takings and other income, and expenses, as well as owners personal income. On top of that, if you are VAT registered, you need to keep a VAT record, where you keep track off all the VAT you have charged, as well as all VAT you have paid with your purchases. If you decide to have employees, you also need to keep your payroll records. Most recently, if you have claimed a grant through Self-Employment Income Support Scheme because of coronavirus, you also need to keep a proof of that.

There are some additional records that you are required to keep if you have chosen the traditional accounting method. Your records in this case should include:

• what you’re owed but have not received yet,

• what you’ve committed to spend but have not paid out yet, for example, you’ve received an invoice but have not paid it yet

• the value of stock and work in progress at the end of your accounting period

• your year-end bank balances

• how much you’ve invested in the business in the year

• how much money you’ve taken out for your own use

How long do I need to keep my records for?

I would say keep your records for 7 years after the date of the transaction they relate to if you keep your records stored by month, or keep all your documents for any financial year together and discard them 6 years after that year-end. Here is why.

According to HMRC rules, you have to keep your records for 5 years after the 31st of January submission deadline for the relevant year. (For the simplicity of this example I assume, that your year-end is same as financial year-end in the UK, defined by HMRC)

Let's say you have started trading as a sole trader in June 2017. All the records of the transactions you have made from the beginning of your business activity until 5th of April 2018 (end of the financial year in the UK) have to be held for 5 years after 31st January 2019 (deadline for tax self-assessment submission), that is until January 2024. If you just assume the safe 7 year period for holding records, your records form June 2017 will be ready to be discarded on June 2024 - 5 months after the end of period required by HMRC. 6 years after the year-end gives us a date of disposal of 5th of April 2024 for all records relating to your first year of trading - that's three months after the period required by HMRC. 7 years after the transaction date or 6 years after the year-end will always work and is much simpler to remember than HMRC's rule.

What if I've lost my records?

If you have lost your records, or they have been stolen or destroyed, you have to do your best to recover them. If you have lost the records that relate to the Self Assessment tax return that you are about to submit, you have to inform HMRC that you are using estimated figures.

OK, so what about that loan? What do I need to do to convince the bank that I am reliable?

Of course, there is a lot to it, but speaking about the records, it is really important to have a good quality, well-kept records. It will not only clearly show your business' current financial position but will also show that you treat your finances seriously and are a responsible business owner.

Is that all that keeping records will be useful for?

The simple answer is no. Well kept business records will give you insights about your business and how to improve your financial position. Using a well-designed bookkeeping software or services of a good bookkeeper or accountant might help you get the kind of perspective on your business performance, that you could not get otherwise.

You can find more information here: https://www.gov.uk/set-up-self-employed