How Long to Keep Accounting Records

Do you sometimes wonder how long you should keep those piles of invoices, receipts, and tax documents? It’s a question that many business owners struggle with, and for good reason.

Keeping financial records is essential for any business, but knowing the right time to say goodbye to those documents can be just as crucial.

At Red Fish Accountancy, we understand the importance of efficient record-keeping, so let’s see how long you should keep your accounting records and why it matters to you and your business.

The Basics of Record Keeping

First off, it’s important to know what we mean by “accounting records.” These records include everything from invoices and receipts to bank statements and tax returns. They serve as the backbone of your business’s financial health, providing evidence of your transactions, income, and expenses.

Proper record-keeping helps you keep track of your financial performance and ensures compliance with tax laws.

But just how long should you keep these records?

The answer varies depending on your location, the type of records, and your specific business circumstances. Let’s break it down.

• Tax Records

In the UK, HM Revenue and Customs (HMRC) typically recommends keeping your tax records for at least five years after the end of the relevant tax year. This includes your Self Assessment tax return, any supplementary pages, and records that support your income and expenses. If you submit a tax return late, the five-year countdown starts from the date you filed.

For example, if you submitted your 2022 tax return on 31 January 2023, you should keep all related records until at least 31 January 2028.

• Employment Records

If you have employees, you need to keep payroll records for at least three years after the end of the tax year they relate to. This includes details like pay slips, tax deductions, and any pension contributions. Keeping these records is important in case of disputes or audits regarding employment law or tax compliance.

• Business Records

For general business records, such as invoices, receipts, and bank statements, it’s a good practice to keep them for six years from the end of the financial year they relate to. This aligns with the standard time limit for claiming against an assessment for VAT.

If your financial year ends on 31 December 2023, you should keep records until at least 31 December 2029.

• Limited Companies

If you operate as a limited company, you have additional requirements. You should keep your accounting records for at least six years from the end of your financial year. This ensures compliance with both tax regulations and company law.

• Property Records

If you own property, such as rental properties, it’s wise to keep records related to these assets for at least six years after you sell or dispose of them. This can include purchase documents, maintenance costs, and any associated tax records.

• Capital Gains Tax Records

When you sell an asset and need to report it for Capital Gains Tax, you should keep relevant records for at least five years after the sale. This includes details about the asset’s purchase price, improvement costs, and any fees associated with the sale.

What If You’re Audited?

One thing to keep in mind is that if you’re ever audited by HMRC or another regulatory body, they may request records from earlier years. It’s a good idea to keep your records for a bit longer than the minimum recommendations to cover yourself in case of audits or unexpected enquiries.

The Benefits of Good Record-Keeping

Now that we’ve discussed how long to keep your accounting records, let’s talk about why proper record-keeping is beneficial for your business.

• Avoiding Fines and Penalties

Keeping records for the appropriate duration helps you avoid costly fines or penalties from tax authorities. If you’re unable to provide the necessary documentation during an audit, you may face repercussions that could impact your business financially.

• Making Informed Decisions

Good record-keeping gives you valuable insights into your business’s performance. With accurate data at your fingertips, you can make informed decisions about budgeting, forecasting, and strategic planning.

• Easier Tax Filing

When tax season rolls around, having your records organised and easily accessible can make the filing process much smoother. You’ll have all the necessary documentation ready, reducing stress and helping you avoid errors.

• Strengthening Your Business Relationships

Maintaining an organised financial record can help build trust with stakeholders, including investors, lenders, and suppliers. Clear records show that you are responsible and serious about your business.

How to Organise Your Accounting Records

Staying organised can make managing your records much more straightforward. Here are a few tips to help you keep your accounting records in order:

1. Go Digital

Consider transitioning to digital record-keeping. Using cloud-based software not only saves physical space but also makes it easier to search for documents and share them with your accountant when needed.

We can recommend various digital solutions[1]  tailored to your business needs.

Should this not link back to our website rather than someone else’s?

2. Create a Filing System

Develop a systematic filing system, both physically and digitally. Label folders clearly, and categorise records by year, type, and importance. This will help you quickly locate what you need when required.

3. Set Reminders

Set calendar reminders to review and purge old records periodically. This will help you stay on top of your record-keeping duties and ensure you’re not holding onto unnecessary documents longer than needed.

4. Involve Your Team

If you have employees, consider involving them in the record-keeping process. Assign specific tasks to team members to help maintain your records. This can create a sense of ownership and responsibility among your staff.

1. Shredding Documents

For physical records, always use a shredder to dispose of sensitive documents. This prevents any risk of identity theft or fraud.

2. Secure Digital Deletion

When deleting digital files, ensure you use software that securely wipes data from your devices, making it irretrievable.

3. Document Destruction Policy

Consider creating a document destruction policy that outlines when and how to dispose of records. This can provide clarity for your team and ensure everyone is on the same page regarding record management.

What Happens If You Don’t Keep Records?

Failure to maintain accurate records can lead to several complications for your business. HMRC requires businesses to keep specific documents, and failing to do so could result in hefty fines, penalties, or even criminal charges in severe cases.

If you don’t have records to back up your claims during an audit, HMRC may estimate your tax liabilities, often to your detriment. Also, inaccurate or missing records could lead to cash flow issues, poor business decisions, and a loss of trust with investors or lenders.

Keeping detailed records will not only help you avoid legal trouble but also ensure that your financial picture is clear and accurate. It’s a simple step that can prevent major headaches down the line.

How Long to Keep Records for Other Jurisdictions

While the focus has been on the UK, it’s important to note that retention rules can vary depending on the country in which your business operates. For example, in the United States, the IRS recommends keeping tax records for at least seven years, especially if you’ve made claims for deductions on bad debts or worthless securities. In Australia, businesses are required to keep financial records for at least five years, similar to the UK.

If your business operates internationally, make sure you’re familiar with the local regulations in each country to ensure compliance.

We can help you navigate these complexities and ensure you meet all the necessary legal requirements no matter where your business operates.

Keeping Your Records Safe

One of the most important aspects of record-keeping is ensuring that your documents are stored securely. Paper records should be stored in a safe, organised, and dry environment, away from risks like fire or water damage.

For digital records, consider using encrypted cloud storage with secure backups to avoid data loss due to hardware failure, cyberattacks, or other issues.

It’s also wise to restrict access to sensitive financial records to only trusted personnel in your organisation. Implementing a robust data security policy ensures that your financial information stays safe from potential breaches or misuse.

Red Fish Accountancy can help you establish a secure system for managing and protecting your records.

How to Handle Record-Keeping During Business Transitions

If you’re selling your business, going through a merger, or simply transitioning to a new accounting system, record-keeping can become complicated during these times. It’s essential to maintain all necessary documents throughout the transition to ensure compliance and facilitate a smooth handover.

For example, if you’re selling your business, the new owner will likely need access to several years of financial records for due diligence purposes.

Similarly, if you’re transitioning to a digital accounting system, ensure that all paper records are properly scanned and organised to prevent any gaps in your documentation.

Working with a professional accountant during these transitions can help you ensure that nothing falls through the cracks.

We can assist you with every step, making sure your records remain intact and compliant, even through significant business changes.