You must keep records of your business income and expenses for your tax return if you’re self-employed as a:
- sole trader
- partner in a business partnership
You’ll also need to keep records of your personal income.
If you’re the nominated partner in a partnership, you must also keep records for the partnership.
There are different rules on keeping records for limited companies.
You’ll need to choose an accounting method.
Many businesses use traditional accounting where you record income and expenses by the date you invoiced or were billed.
You invoiced a customer on 28 March 2021. You record that invoice for the 2020 to 2021 tax year – even if you did not receive the money until the next tax year.
Cash basis accounting
Most small businesses with an income of £150,000 or less can use cash basis reporting.
With this method, you only record income or expenses when you receive money or pay a bill. This means you will not need to pay Income Tax on money you have not yet received in your accounting period.
You invoiced someone on 15 March 2021 but did not receive the money until 30 April 2021. Record this income for the 2021 to 2022 tax year.
What records to keep
You’ll need to keep records of:
- all sales and income
- all business expenses
- VAT records if you’re registered for VAT
- PAYE records if you employ people
- records about your personal income
- your grants, if you claimed through the Self-Employment Income Support Scheme – check how much you were paid if you made a claim
Why you keep records
You do not need to send your records in when you submit your tax return but you need to keep them so you can:
- work out your profit or loss for your tax return
- show them to HM Revenue and Customs (HMRC) if asked
You must make sure your records are accurate.
Types of proof include:
- all receipts for goods and stock
- bank statements, chequebook stubs
- sales invoices, till rolls and bank slips
If you’re using traditional accounting
As well as the standard records, you’ll also need to keep further records so that your tax return includes:
- what you’re owed but have not received yet
- what you’ve committed to spend but have not paid out yet, for example you’ve received an invoice but have not paid it yet
- the value of stock and work in progress at the end of your accounting period
- your year end bank balances
- how much you’ve invested in the business in the year
- how much money you’ve taken out for your own use
How long to keep your records
You must keep your records for at least 5 years after the 31 January submission deadline of the relevant tax year. HM Revenue and Customs (HMRC) may check your records to make sure you’re paying the right amount of tax.
If you sent your 2020 to 2021 tax return online by 31 January 2022, you must keep your records until at least the end of January 2027.
Very late returns
If you send your tax return more than 4 years after the deadline, you’ll need to keep your records for 15 months after you send your tax return.
If your records are lost, stolen or destroyed
If you cannot replace your records, you must do your best to provide figures. Tell HMRC when you file your tax return if you’re using:
- estimated figures – your best guess when you cannot provide the actual figures
- provisional figures – your temporary estimated figures while you wait for actual figures (you’ll also need to submit actual figures when available)