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 2014. You record that invoice for the 2013 to 2014 tax year - even if you didn’t receive the money until the next tax year.
Cash basis accounting
Most small businesses with an income of £83,000 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 won’t need to pay Income Tax on money you haven’t yet received in your accounting period.
There are different rules on keeping records for limited companies.
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
Why you keep records
You don’t need to send in 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:
If you’re using traditional accounting
- all receipts for goods and stock
- bank statements, chequebook stubs
- sales invoices, till rolls and bank slips
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 haven’t received yet
- what you’ve committed to spend but haven’t paid out yet, eg you’ve received an invoice but haven’t 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
You’ll need to record all your business expenses for your tax return.
These can include:
- office stationery or printing costs
- staffing costs
- use of premises
You can claim some of these allowable expenses using the ‘simplified expenses’ scheme - this lets you use flat rates to reduce the amount of record-keeping you need to do.
‘When you buy a vehicle, you can claim ‘capital allowances’ for part of the cost each year. For some vehicles you can claim all of the cost in the year you buy it.
You can also claim a capital allowance if you already own a car or vehicle and start to use it in your business. You need to find out the value of the car when you start to use it for your business.
You can’t use simplified expenses and capital allowances for the same vehicle - you must choose one or the other.
If you claim capital allowances, you must keep records of:
Buying equipment, plant or machinery
- what you paid for any vehicle
- CO2 emission level (for cars bought after 6 April 2009)
- any personal use of the vehicle
- allowances claimed each year
- the remaining value of a vehicle after allowances have been deducted
- the proceeds of any vehicles sold, exchanged or given away
When you buy office equipment, furniture, machines or tools for your business, you can claim them as capital allowances. These are called ‘plant and machinery’.
Most businesses can claim an ‘annual investment allowance’ (a type of capital allowance) for the full cost of business equipment bought in a particular year.
You’ll need records of:
- the purchase price of any equipment
- the proceeds of equipment you claimed the annual investment allowance for and have sold, exchanged or given away
- any private use
If you claim the allowance over a number of years, you’ll also need a record each year of:
- allowances claimed
- the remaining value of any equipment after allowances have been deducted
HM Revenue and Customs (HMRC) has detailed guidance on capital allowances and annual investment allowances on plant and machinery.
This is dealt with under allowable expenses instead. You must keep the leasing agreement and a record of all lease payments you make.
Working from home
You can claim costs if you work from home.
If you're not using simplified expenses (flat rates) for this, you must keep all the bills you’ve paid and show what portion of each bill is due to you working at home.
If you use business assets for both personal and business use, you must:
- work out the value of your personal use
- take that away from the total amount you claim against your tax bill
You must keep records so you can work this out accurately.
You use a computer for business reasons as well as personal use at home.
Keep records which show how much time you’ve spent using the computer for business and personal use, so you can work out the right proportion to claim as a business expense.
Keep your business and personal records separate so you can accurately complete each part of the tax return.
You must keep your records for at least 5 years after 31 January of the relevant tax year.
If you send your 2013 to 2014 tax return online by 31 January 2015, you must keep your records until at least the end of January 2020.
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 can’t replace your records, you must do your best to provide figures. Tell HM Revenue and Customs when you file your tax return if you’re using:
- estimated figures - your best guess when you can’t 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)