Business Record Keeping

Both sole traders and limited companies must keep accurate records of all financial transactions. At a minimum, your records should include:

• Sales and income: Invoices raised, receipts, till rolls, bank transfers received
• Purchases and expenses: Supplier invoices, receipts for business expenditure, expense claims
• Bank statements: For all business accounts, including credit card accounts used for business
• Payroll records: If you employ staff — see our Employment Records guide for detail
• VAT records: If you are VAT-registered — VAT returns, VAT account, import/export records
• Stock records: If applicable — stock valuation at year-end, movements in and out

Limited companies must also maintain:

• Statutory registers (directors, shareholders, PSC register)
• Minutes of board meetings and shareholder meetings
• Copies of resolutions passed
• Share certificates and transfer forms

The retention period depends on your business structure and the type of record:

• Limited company accounting records: 6 years from the end of the financial year (Companies Act 2006)
• Self Assessment (sole traders and partnerships): 5 years after the 31 January deadline for the relevant tax year — so records for 2023/24 must be kept until 31 January 2030
• VAT records: 6 years (or 10 years if you use the VAT MOSS scheme)
• Payroll records: 3 years after the tax year to which they relate (but best practice is 6 years)
• Statutory registers (limited companies): Must be kept at the registered office indefinitely and made available for inspection

If HMRC has opened a formal tax investigation, you must keep all relevant records until the enquiry is formally closed — do not destroy records during an open enquiry.

Making Tax Digital (MTD) is HMRC's programme requiring businesses to keep digital records and submit tax information digitally. The current timetable:

• MTD for VAT: Already mandatory for all VAT-registered businesses — digital records and digital submission required
• MTD for Income Tax Self Assessment (ITSA): Mandatory from April 2026 for sole traders and landlords with income above £50,000; from April 2027 for those with income above £30,000

MTD for ITSA requires you to keep digital records and make quarterly updates to HMRC rather than a single annual tax return. You will need compatible software (such as QuickBooks, Xero, FreeAgent, or Sage) to comply.

Even before MTD becomes mandatory for your business, keeping digital records using accounting software offers significant advantages: real-time visibility of your financial position, automatic bank feeds that reduce manual data entry, and easier preparation of accounts and tax returns.

HMRC has the power to open a compliance check (tax enquiry) into any tax return within certain time limits — typically 12 months from the filing date for straightforward enquiries, or up to 20 years if fraud is suspected. During a compliance check, HMRC can require you to produce your business records for inspection.

Signs of poor record keeping that can trigger an investigation include:

• Significant discrepancies between reported income and lifestyle
• Large or unexplained cash transactions
• Implausible expense claims relative to turnover
• Figures that are inconsistent with industry benchmarks

If HMRC finds your records are inadequate, they can issue a penalty of up to £3,000 per tax year for failing to keep proper records, in addition to any tax, interest, and penalties arising from the underlying error. Keeping complete, organised records is your best protection.