So you have set up your business, you have decided on the trading style and started to make those first all-important sales. You may now be concerned about what is needed to ensure you comply with reporting and record keeping obligations?
Self employed sole trader
HMRC require you to keep records of your business income and expenses for your tax return. The records you keep must cover:
- All sales and income;
- All business expenses;
- VAT records if you are registered for VAT including VAT returns submitted and workings to calculate the figures recorded;
- PAYE records if you employ people.
When submitting your tax return you are not required to submit these records but you will need them so you can calculate the profit or loss made by your business whether this is done by yourself or by your professional adviser. Also if you are unlucky enough to be selected by HMRC to have your tax return checked they can ask for proof of the figures supplied and this will require you to be able to supply proof of your return calculations to them.
Form of records
The records you will need to keep will include:
- Copies of all sales invoices and or till rolls for all sales made to customers including sales of any business assets;
- Copies of all purchase invoices and receipts received for all goods, stock and services received from suppliers;
- Bank statements;
- Cheque book stubs;
- Paying in books and stubs.
At the end of your business accounting period you will also need a record of:
- Monies as yet not paid to you for sales made but not invoiced – this figure represents the sum that your customers owe you at the end of the financial period – known as trade debtors;
- The value of invoices or services ordered and supplied to the business but not paid for at the date of your year end – known as trade creditors;
- A list detailing any items you held at the year end for resale or use in the business that has not been sold;
- You also need to record the costs of works undertaken where you have completed work but not invoiced it at the year end to your customer – this information will be used to assist in the calculation of your work in progress figure;
- Trading year end bank statements for all business accounts;
- Trading year end credit card statements for all business credit cards;
- Details of any money you have invested into your business in the trading period;
- Details of all money you have drawn from the business in the trading period;
- Details of all fixed assets held by your business.
Retention of records
Records relating to your self assessment tax return submissions should be kept for at least 5 years after the submission deadline for that tax return which will be 31st January.
For instance if you complete trading accounts to 31st March 2017 these will be included in your tax return for the tax year to 5th April 2017 and this must be filed by 31st January 2018. You would need to hold records in relation to this accounting period until at least 31st January 2023.
Limited companies face very similar requirements regarding record keeping and the records they must maintain will mirror those required to be kept for a sole trader or partnership.
Ultimately it is the responsibility of the directors of the company to ensure these records are maintained and this is enforceable under company law with failure to do so resulting in significant fines and potential disqualification of the directors for failure to comply.
You are not able to delegate this responsibility as directors but you can of course utilise the services of a professional, such as an accountant or book keeper, to assist with maintaining your compliance.
Limited Company Record Retention
HMRC are able to look into company tax returns, known as a CT600 returns, in much the same way as looking into a personal tax return. Likewise they may ask for support to confirm the figures entered in the accounts and reported on the tax return and in order to do this you will need to be able to supply copies of the documentation.
Records therefore are required to be held for 6 years from the end of the last company financial year they relate to.
Depending on the size and complexity of the business you operate the number of records may be relatively small or potentially could prove to be quite significant. In maintaining your records it is always sensible to seek professional guidance from your professional adviser albeit that the format of record keeping is not specified and can be anything from manual ledgers to bespoke computerised accounting packages.
If using an accountant the better the quality of the records you maintain the lower the cost of the work they will need to undertake. Most firms will be happy to advise you on setting up a record keeping system which will allow you to comply with your obligations and assist in completing tax returns and financial reporting requirements.
In recent times there are various computerised accounting packages available on the market which can assist you with maintaining the records. However they are only as good as the quality of the information you are able to enter and again I would stress you discuss your options with your advisor before jumping in and purchasing what can be expensive packages as you may be able to utilise a much simpler and more cost effective approach.
So what can I claim?
So you know what you need to keep but what can you claim for in relation to expenses incurred on your business? The key phrase is “wholly and exclusively for the purpose of trade”. In effect is the expense incurred purely for the business or is it in effect potentially multiple use.
An example of this is if you take a pair of jeans purchased by a plumber to wear at work. They would not be claimable because a pair of jeans could be worn for work or outside work. However protective work trousers with knee inserts etc would be allowable. Likewise a plain shirt would not be allowable while the same shirt that contains the company branding and logo is allowable as an expense. The line can at times be grey but your adviser will be able to confirm specific cases for you. Generally however following the wholly and exclusive statement will assist you in identifying what can and can’t be claimed.
Common expenses that are sometimes overlooked however which can be claimed include things such as mobile phones and use of home as office where you use your home to undertake record keeping etc in the evenings.
A complex area involves vehicles and treatment will depend on your business type however where use is made of your own personal vehicle for business purposes you are able to make a mileage claim against your business under HMRC guidance. Rates for this claim start at 45p per mile for the first 10,000 business miles in a year and drop to 25p per mile over 10,000 miles claimed.
” If using an accountant the better the quality of the records you maintain the lower the cost of the work they will need to undertake “
You do have the option to operate cars within the business and this can be something to consider in sole trader and partnerships as can prove tax efficient. Limited companies are more complex as although car expenses may be claimed through the business individuals will face tax consequences personally for the provision of such vehicles and so as ever advice from your professional adviser should always be sought.
It is impossible to cover in one article all the potential expenses that can be claimed and much will depend on the business and its activities as to what is and is not able to be offset against trading income. The golden rule is always ask if you’re unsure.