Becoming self employed can be a terrific think; you can choose to do something that you love, pick your own working hours and enjoy reaping the rewards of your hard work, but it also requires a lot of admin. Running your own business means that you need to consider a lot of things when it comes to paperwork, so what do you keep, and what can be thrown away?
When it is time to do your taxes, you can either find yourself drowning in receipts or desperately scrabbling around one little thing. If a customer gets in touch, do you have a record of everything you’ve ever done with them, or has it all gone to recycling heaven? With so much involved in running a business, and the amount of space that it can take up, it can be hard to know what to do when it comes to document retention; what records you need to keep and which ones you don’t.
As a sole trader, you can claim a lot of expenses, but you need to have a record of them. Travel and accommodation are often one of the biggest, so keep records of any hotel bookings, business trip meals and train tickets. You can also claim tax relief on mileage, so make a note of exactly how many miles you do on each trip.
Many self-employed people hire the services of an accountant to help with their finances, but did you know that this can also be claimed as an expense? Many professional services are considered expenses, so make sure your accountant is including their own invoices.
You can also make claims for things such as marketing, PPR, uniform, utility bills and subscriptions so make sure that you keep records of all quotes, bills and invoices for these.
If you are looking to claim tax relief, HMRC is likely to ask you to present a number of different records. This will not only be your receipts but also records of all of your sales and income, all business expenses, your VAT records if you are registered, records of your personal income and any COVID 19 support grants that you may have claimed. These are not always needed when you submit your Self Assessment tax return, but it may be required if HMRC decide to launch an investigation, so it is important to have it all on hand.
You will need to make sure that you log all of your sales and income information, including bank statements and paying-in slips, plus details of your personal income. This should show whether you have put any of your own money into the business and whether you have taken any drawings for personal use. PAYE records should also be kept if you employ people, and should include details of employee leave and absences, tax code notices, expenses, benefits, and anything relating to any Payroll Giving schemes.
When it comes to keeping records, you might think you just need to store things you have already completed, but it can also include money that you are owed, invoices you have not yet paid, the value of your stock and work in progress and year-end bank balances.
Many people wonder how long to keep these records for, as they can soon start to mount up. Many businesses are required to store their receipts for six years, but as a sole trader the rules are different. You will only be required to keep your records for five years after the 31st of January submission deadline for the relevant tax year.
This is because HMRC may want to go back over a long period of time if they decide to investigate. Therefore, I your 2020/21 tax return was submitted by 31st January 2022, you will need to keep that year’s records until January 2027. If your tax return is more than four years after your deadline, you will be expected to keep your records for an additional 15 months.
Storing your records
Keeping all of your records can seem like a headache, so make sure as much of it as possible is done electronically. Download anything from portals and keep it in your own files to avoid losing access to them. You can even scan or photograph some of the fiddlier items such as paper receipts and travel tickets, as these are easily lost or damaged.
If you do lose any of your documents, you will need to provide estimated figures instead, but this could prove harmful as HMRC can perceive carelessness as an under-declaration of profit, so storing them properly from the start is important.
Many forms of tax software allow you to upload your documents directly so that everything can be kept where it is needed, and your accountant will be able to have access to everything when they need it.
Keeping on top of uploading your records can make the whole process much easier too. If you save something as soon as you receive it, you can avoid the inevitable panic when you approach the tax deadline and need to find everything.
It is important to remember that there are a few documents, such as your P60, which HMRC expect you to keep in their original, physical form, so make sure you still have a folder for some of your actual paperwork.
Penalties for failing to keep your records properly and for the appropriate amount of time can result in penalties of as much as £3000 from HMRC, so it is important to stay on top of this. Poor record keeping can also lead to you being taxed the wrong amount, so you could find that you are paying more than you should, simply because your paperwork is not in order.
Record keeping should become a good habit that you do on a regular basis. It will make life easier for both you and your accountant, allowing you to keep accurate financial records, and stands you in good stead in the event of any investigations.
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