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Mark McLaughlin CTA (Fellow) ATT TEP, General Editor of TaxationWeb, considers a topical area of self-assessment with the 31 January filing deadline approaching.

Introduction

Sole proprietors and partners carrying on a business (including letting property) are required to keep all records relevant to a tax return for at least five years and ten months following the end of the tax year (six years following the end of the accounting period for companies). However, if HMRC enquires into a return, the records must be kept until the enquiry is completed, if later.

Business records

Record keeping for tax purposes is an important matter, because the maximum penalty for non-compliance is £3,000 per tax year. The Self Assessment system requires taxpayers to keep and preserve records for the purposes of making and delivering a complete and correct return. There is a statutory requirement to keep and preserve the following business records:

• amounts and details of all business receipts and expenses;
• all sales and purchases of goods dealt with in the course of the trade; and
• all supporting documents relating to the above items, including books, deeds, contracts, vouchers and receipts (‘documents’ includes records held on computer, and ‘supporting documents’ includes accounts, books, deeds, contracts, vouchers and receipts).

Apart from the above documentation, there is no legal requirement to keep specific business records for Self Assessment purposes. However, in practice the types of information that should be recorded and retained include:

• copy sales invoices, till rolls, order notes etc;
• purchase and expense bills or invoices;
• bank statements, cheque book stubs and paying-in slips;
• invoices for the purchase and sale of business assets;
• stock and work-in-progress records;
• lease or rental agreements;
• employer PAYE records of wages, expenses, benefits in kind etc;
• goods taken for own use or consumption and not paid for in cash;
• goods or services supplied in exchange for other goods or services; and
• in the case of assets with ‘mixed’ (ie. business and private) use (eg. as motor vehicles), adequate records to enable total expenditure and running costs to be split between business and private use.

In practice, many of the above items will form part of a manual or computerised record or bookkeeping system (eg. a cash book and petty cash book). It is important that records of business and private matters be kept as separate as possible.

HMRC’s leaflet SA/BK4 ‘Self Assessment: a general guide to keeping records’ deals with record keeping under Self Assessment for taxpayers including the self-employed, and is available at: http://www.hmrc.gov.uk/pdfs/sabk4.htm.

Expenses without supporting receipts

Whilst there is a statutory requirement for business owners to keep and preserve all supporting documents such as expense receipts, in practice this is not always possible. HMRC provides the following guidance in its leaflet
SA/BK4:

‘You should back up all your expenditure with bills or other evidence. If,exceptionally, you do not get a receipt for some small items of cash expenditure, such as taxi fares or tips, you should make a note as soon as you can of the amount you spent and what it was for.’

More recent guidance in ‘Working for yourself: The Guide’, available at http://www.hmrc.gov.uk/startingup/working-for-yourself.pdf does not deal with this particular situation but it does refer to the booklet SA/BK4. It is therefore important to obtain cash receipts wherever possible, but otherwise to keep an up-to-date record of the date and place of purchase, details of the goods or services bought, and the amount paid.

For how long must business records be retained?

For the self-employed, ie. sole traders and partners carrying on a business (including letting property), those records must normally be kept for 5 years from 31 January following the end of the tax year, and possibly longer if the HMRC enquire into the tax return.

For example, if a sole trader prepares accounts to 31 March each year, profits for the year to 31 March 2006 will be declared on the 2006 tax return, ie. for the year ended 5 April 2006. The business records must be kept until 31
January 2012, at the earliest.

However, note that the records themselves will be more than 5 years and 10 months old. In some cases, the effective record retention period is considerably longer (see ILLUSTRATION).

Illustration

Fred has operated his mail order business from home for a number of years, preparing accounts to 30 April. When Fred completes his 2006 tax return, the self-employment pages will reflect his trading results for the year ended 30 April 2005, ie. the accounting period ending in the 2005-06 tax year.

His business records for the year ended 30 April 2005 must therefore be retained until at least 31 January 2012. As this accounting period commenced on 1 May 2004, some records will relate to the period from 1 May 2004 to 31 January 2012, a period of 7 years and 9 months!

Mark McLaughlin CTA (Fellow) ATT TEP

Mark McLaughlin is the author of ‘The Smart Guide to Business Taxation 2006-07’ (price £14.99), from which the above article is adapted. For further information and ordering details for this book, visit http://www.taxationweb.co.uk/books/smart_guide_to_taxation.php