Accounting records

At Rus­sell & Rus­sell we can advise busi­ness­es in the Lanark­shire 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 Lanark­shire area and would like advice on keep­ing finan­cial records, con­tact Rus­sell & Rus­sell.