This is part of Merchant Money’s Business Growth Blogpost Series.
Keeping accurate records is not just good practice for any business, it is a legal requirement. While ensuring that your organisation’s records are up to date and in an easy-to-understand format will mean that you are always on top of all of its KPIs, it will also mean that you are able to file tax returns accurately and respond to any queries from HMRC quickly and clearly.
Just as importantly for those running smaller and medium sized companies, maintaining accurate records can help prevent you paying more tax than you are obliged to and improve your cashflow. Good record keeping will also help you to reduce fees if you use the services of an accountant. If your business is VAT registered, then accurate records will mean that completing your annual or quarterly VAT return will be more straightforward.
What are good records?
Maintaining good records means keeping records and copies of everything – all income and all expenses including invoices, salaries, dividends and income as well as all evidence, usually receipts, of allowable business expenses – for a minimum of six years.
Remember, too, that if you fail to keep accurate records or complete your tax return correctly or on time you may have to pay a penalty to HMRC. That means cashbooks, bank statements and all receipts that you are claiming because you could be fined up to £3,000 if HMRC decides that your records are inadequate.
What records should be kept?
Invoices – Detailed invoices are a must because they should be a record of all of a business’s income. Ensure that your invoices include all the relevant information about the nature of the work undertaken or goods supplied, the date this work was completed, the fee paid as well as the amount of VAT charged. Also include the correct company address, registration number and VAT registration number. Ensure that you have a clear and easy-to-understand naming convention for your invoices and number them in sequential order.
Receipts – Any receipts that are gathered in the course of carrying out company business should be kept, entered into record keeping and filed as soon as possible. This article is not long enough to list all of HMRC’s allowable business expenses but in general they include all trading expenses that have been incurred wholly and exclusively for the purposes of the business including travel costs, rental of office space, business supplies, professional subscriptions, salaries, executive pensions, training costs and phone and internet fees.
It isn’t mandatory to keep physical copies of everything. Storing records electronically is acceptable – including scans of receipts – and will make it much easier to monitor your income and outgoings as well as filing tax returns. Using one of the many online accounting packages will also get you into the habit of recording income and expenses as they happen.
You should make sure that your records are backed up and stored securely off premises because HMRC will not accept a computer failure as a reason for not keeping accurate records. Using an online accounting service will ensure that your records are always kept somewhere else.
What is not allowable
HMRC has tightened up on the definition of allowable expenses in recent years meaning that it is more important than ever that your keep personal and business expenses separate. If you are just starting out in business, it’s good practice to have a separate business account and also use this when incurring business expenses.
You can read more posts within our business growth series here.