One of the most common questions that new business owners ask is how long to keep accounting records for and which business documents to store. There are primarily two types of documents to keep. These are records of the company itself and its financial and accounting records. If you are running a limited company, you must adhere to the recordkeeping, accounting, and reporting guidelines laid out by the HM Revenue and Customs (HMRC), HSE, and Companies House. Failing to do so can result in a penalty. It can also have other repercussions.
Besides being a legal requirement, maintaining financial records of your business can help you streamline your business operations. It can also guide you to make more informed decisions and invest in new business opportunities based on your company’s financial health. In this article, we will review what business documents to keep and for how long. Let’s begin.
What Business Documents to Keep?
There are several types of business documents that a company must keep. These include:
General Records
As per the guidelines provided by GOV.UK, all limited companies must maintain records of the following:
- Details of all their shareholders, company directors, and secretaries.
- The results of any votes, resolutions, and decisions taken by shareholders.
- Details of the company’s financial obligations with respect to loan repayments (debentures). This includes the repayment terms, payback period, and the entity you must pay back.
- Details of the indemnities the company signs up for regarding payments to third parties and what the company plans to do if they cannot make payment and are at fault.
- Details of transactions involving sale and purchase of company shares.
- Details of any loans and mortgages obtained with the company’s assets serving as collateral.
Records of ‘People With Significant Control’ (PSC)
A Person Of Significant Control is defined as a shareholder holding over 25% of company shares or voting rights in your company. This individual can:
- Appoint or remove a majority of company directors
- Exercise significant control or influence company decisions or trust
You are required to keep a register carrying details of all PSCs. If no one in your company fits these criteria, you can keep records of all company directors, shareholders, and other persons with influence in your company.
Records of Employment
If you are employing other people for running business operations, then it is vital you understand what business documents to keep for this. All employers are required to maintain the following records:
- Details of salaries or wage payments made to employees.
- Details of deductions on salaries or wage payments. These include deductions made for income tax, National Insurance Contributions (NICs), or student loan repayments.
- Details of employee benefits and company expenses borne due to employment.
- Details of statutory payments made to terminate workers as per national guidelines.
Accounting Records Requirements
Besides knowing what business documents to keep, a limited company must also understand which accounting records they need to maintain. These include records of:
- All the money spent and received by the company. If your business has applied for a grant or received payment under a COVID-19 support scheme, then you must also carry records of this.
- All fixed and current assets owned by the company.
- All liabilities owed by the company or any debt that a third party owes it.
- The total number of shares owned by the company at the end of each financial year.
- The stocktaking carried out to verify the number of shares owned by the company.
- The goods sold and purchased throughout the year and the parties involved in these transactions (you do not need to maintain records of this if you run a retail business).
Other Financial Records
A limited company is also required to maintain financial records and information required for preparing and filing your Company Tax Returns and annual accounts. These records must carry details of the company’s expenditures and include receipts, delivery notes, orders, and petty cash books.
It must also contain details of the money received in the form of sale revenues or grants. Some of the common documents used to maintain these records include sale invoices, sales books, contracts, and till rolls.
Other financial records include bank statements, correspondence concerning financial matters, and any other documents that you find relevant.
Accounting Records To Be Kept For 6 Years or More
As mentioned earlier, it is also essential you understand how long to keep accounting records and business documents. Besides the legal issues, recordkeeping can be expensive and complex, depending on how old your business is. Being aware of the minimum length of time for recordkeeping can keep your business and financial records organized and avoid extra costs.
As per GOV.UK, limited companies are required to keep records that go back 6 years from the end of the last financial year that applies to your company. In some cases, you may have to keep records for a longer period. This depends on whether a transaction is covering more than one accounting period or if you have purchased an asset with a useful life of more than 6 years. For instance, some equipment or machinery can last for 10 years.
You will also need to maintain records of any late Company Tax Returns. If the HMRC has initiated a compliance check in the tax return filed by the company, then you will have to hold onto any records needed for this.
Penalties for Not Maintaining Proper Business and Accounting Records
If HM Revenue and Customs find your recordkeeping inadequate, then you will be required to improve it. A follow-up check will be carried out after 3 months to see if your records are up to mark. If they are not, you will have to pay a penalty as follows:
- A penalty of £500 if it is your first offence.
- A penalty of £250 if it is your first year of trading.
- A penalty of £3,000 if you have destroyed your records deliberately. This can be reduced to £1,500 if your records have been destroyed partially.
In the case of accounting records, a company can be charged with a fine of £3,000 if it fails to maintain these. If you are a company director, then the HMRC may also disqualify you from the position.
Wrapping It Up
Knowing what business documents to keep and how long to keep accounting records plays a pivotal role in running your company smoothly and avoiding any penalties. If you are interested in forming a new business or want to learn more about recordkeeping and company registration, get in touch with us at https://www.smart-formations.co.uk/.