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By operating through a limited company, you have the option to take a salary and dividends as a means of paying yourself, an aspect which differs from traditional employment.

The option to work on a self-employed basis via a limited company or umbrella company is becoming increasingly popular. In addition, working on a self-employed basis offers a greater ability to earn as a contractor and offers increased flexibility of employment to suit individual lifestyles.

However, with this increasing choice to function as a self-employed contractor comes a necessity for greater understanding of UK tax legislation, in order to ensure that the business is not only compliant but also tax efficient to ultimately ensure that company profits are maximised.

For contractors, it can be difficult to understand how to keep your UK tax records and how long for. With this in mind, we have compiled a brief summary of information surrounding this issue by responding to frequently asked questions.

What are tax records?

Tax records are documents providing evidence of the financial activities of a business, usually consisting of invoices, payslips and company receipts generated during the daily operations of a business or self-employed contractor.

Why do we need tax records?

Tax records are required by HMRC to track the financial activities of any company registered in England and Wales. This is to ensure that the appropriate amount of tax has been paid (this can often be estimated by using tax calculator services, but it is best to consult with a registered professional accountant if you are unsure).

What happens if tax records are not kept?

If you are unable to produce accurate paperwork related to the financial status of the business then the government has the right to issue penalties, which could be quite severe. Paperwork must also be provided on time to avoid late penalty charges.

How do I keep records?

There are few rules related to the physical format that tax records must be provided in. This is the same if you are self-employed, being paid via a PAYE scheme or operating via a limited company. You may maintain records on paper, online or via an accountant. It is often worth considering, that due to the necessity for the accuracy of submitted paperwork, using a specialist accountant may be a better approach.

What should I keep and for how long?

If you are self-employed, it is advised that you must keep accurate records of all income and expenses related to your business. Precisely what to keep includes:

  • All income and invoices
  • A record of business expenditure
  • Records of any VAT you are registered for
  • PAYE records of any employees related to the business
  • Up to date records of personal income
  • Records of investments
  • Any expected income should be included

Examples of records can include receipts, bank statements, cheques and company invoices. As mentioned previously, these may be archived physically on paper or using online platforms, such as FreeAgent. The most important consideration is that your records are clear and accurate.

How long should I keep records?

As a general rule, you must keep records for at least six years plus the current year. If any figures are incorrect, the penalties incurred vary, including interest on any unpaid tax.

Is it different for limited companies?

For limited companies, the accounting method (traditional or cash basis) required is dictated by the annual income of the business. In addition, you are required to inform Companies House if the records related to the company are kept elsewhere (other than the companies registered office address).

Items to keep as a limited company include:

  • Money received and expenditure
  • Records of any goods bought and sold (and who to)
  • Separate VAT accounts must be maintained for a VAT-registered business
  • Details of any assets owned by the company
  • Information related to loans or mortgages secured against the limited company
  • Lists of debts owed by the company, or debts that are owed to the company
  • Any stock owned by the company
  • Summary of tax calculations or calculations used to work out stock values

The format of these items may be receipts, cash books, invoice records and contracts. Ensure that you maintain financial information and file details such as tax returns, bank statements and any other relevant correspondence using a logical system

Small businesses are required to keep records for six years following submission during the last company financial year.

What would you advise?

If there is any uncertainty regarding maintaining and submitting the appropriate paperwork we advise seeking consultation with your accountants. Accountancy agencies may also completely take control of maintaining the business accounts and tax calculations, which may take a lot of administrative stress away from you. Registered accountants can organise liaising with HMRC and Companies House, minimising the stress related to this and enabling you to focus on other elements of your self-employment or small business.

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