Keeping proper tax records makes it much easier to manage your finances and taxes. Providing your accountant with clear, well-organised tax records will help minimise the time it takes to complete your tax return — and the fees you are charged. Tax records are also a legal requirement.
Tax records for self-employment
You must keep tax records that will allow you to complete your self-assessment tax return. These tax records need to include details of all your business income and outgoings, and of any purchases or sales of business assets.
A well-planned book-keeping system will help ensure that you are keeping the tax records you need. These will typically include copies of all the invoices you issue or receive, bank statements and so on. You’ll want to be sure that you are keeping full tax records of any costs for which you can claim income tax allowances and relief.
Since 2013-14, some self employed people and partnerships have been able to opt to use the 'Cash basis' and 'Simplified expenses' income tax schemes to work out their income and expenses. This can help simplify the calculations and record keeping that is required for self assessment.
A computerised accounting system is generally the best way to deal with book-keeping and makes it easier to handle end-of-year tax paperwork. Your accountant can advise on what tax records to keep and what accounting software to use.
Other tax records
You need to keep tax records for any employment income. Normally your employer will provide records of amounts you have been paid through PAYE and any taxable benefits. You should also keep tax records of any other employment income such as tips or if you are given share options. You’ll also want to keep records of any expenses that you are allowed to claim against tax.
Other tax records you may need depend on what other forms of income you have. You may need tax records for any pension income, state benefits, savings or investment income, property income and so on. Even if the income is not taxable, you should keep details of any large amounts received with your tax records in case you later need to explain them.
You should also keep details if you buy or sell any assets such as investments and property, in case you need to work out and declare any capital gains.
How long to keep tax records
You should keep business tax records relating to a particular tax year for at least five years after that year’s tax return deadline (31 January following the end of the tax year).
For example, suppose you have chosen the calendar year (to 31 December) as the accounting period used for working out your annual profits. Your tax records for the accounting period ending on 31 December 2011 are used in the tax return for the tax year ending 5 April 2012. The tax return deadline is 31 January 2013 and the tax records should be kept until at least 31 January 2018.
Non-business tax records should be kept for at least a year after the tax deadline. If you file your tax return late, the tax records should be kept for at least 15 months after the date of filing. This 15-month period also applies to business tax records if, exceptionally, you file your tax return several years late.
If at any stage you are notified that HMRC is investigating your tax return, you should keep your tax records at least until they tell you that the investigation is completed.
Related articles and resources
You may find the following articles and resources useful: