The accounting records you need to keep to satisfy the tax authorities

The accounting records you need to keep to satisfy the tax authorities

Posted: Tue 24th Oct 2017

Legally you have to keep records for your business and for any other income you get. This is so you can fill in your tax return and show the figures are right. You'll need to keep at least invoices for sales and purchases, receipts for business expenses and bank records.

Good records will also save you time and help you run your business more efficiently.

The remainder of this article from Clive Lewis, head of enterprise at ICAEW, focuses on the accounting records to satisfy the tax authorities.

HMRC compliance checks

If HM Revenue & Customs (HMRC) has reason to suspect a self-assessment, corporation tax return or VAT return is incorrect, they will carry out a compliance check.

Generally something will have triggered a check. For example, when figures entered on a return appear to be wrong or when a small business suddenly makes a very large claim for VAT, or one with a large turnover declares a very small amount of tax.

The only way HMRC can find out whether the return is correct is by carrying out a check.

Ifthe check shows there is nothing wrong, HMRC will bring it quickly to an end.

If the check shows that something is wrong, HMRC will work with the taxpayer and their accountant (if one is in place) to put things right.

If any tax has been overpaid, it will be repaid with any interest that is due. But interest may be charged on tax that is underpaid.

HMRC may also issue an assessment, or amend the relevant return, depending on the type of tax involved, to collect any unpaid tax.

In some instances, an error that relates to one tax will mean another tax also has to be corrected. For example, an error in charging excise duty on goods sold generally means the VAT charged on the sale may also be wrong.

You can ask for a review of, or appeal against, most of HMRC's decisions.

The decision notice issued by HMRC explains what you can appeal against and what you can’t. In most cases your appeal will be settled by reaching an agreement with HMRC.

But if you can't agree, you can ask for either of the following:

  • A review by HMRC

  • Your appeal to be heard by an independent tribunal

HMRC decords checks

HMRC also carry out checks on how businesses keep their records.

If HMRC decide to look at your business records they will usually contact you by telephone.

Businesses need to keep records to complete their tax returns correctly, and pay the right amount of tax at the right time to avoid interest and penalties.

When they telephone they will ask you questions to help them work out if you are keeping the business records you need to meet your legal responsibilities. The call should take between 10 and 15 minutes.

From the replies you give, the HMRC officer:

  • Will assess whether you are likely to be able to submit an accurate tax return from your records

  • Will tell you during the call, and will confirm it in writing, if no further action will be taken at this stage

  • May feel you could do with some additional help and support. If so they will tell you on the call and pass your details to HMRC's Business Education and Support Team who will contact you with information about self-help guidance and training

  • May decide you are at risk of keeping inadequate records in which case you would need a face-to-face visit – they will tell you this on the call

  • May pass your details to the visiting booking team who will contact you to arrange a suitable date and time for the visit, and confirm that in writing

When HMRC visit your business

If HMRC think you need a face to face visit, they;ll contact you to agree a date and time. The visit will usually take around two hours.

On the visit, the HMRC officer will:

  • ask you to explain how you run your business

  • note how you keep your business records

  • check a sample of your current business records, usually for the last four months

  • arrive at a decision about whether your business records are adequate or not

  • If your records are adequate, the visiting officer will tell you at the visit and then confirm it in writing a few days later. This will be the end of your business records check

If the visiting officer finds your record keeping needs improving, they'll discuss this with you and your agent (if they're at the meeting).

The officer will advise what you need to do to make your records adequate and what will happen next.

The consequence of a compliance check or a business records check may be the business having to pay additional tax as well as facing penalties.

For more information, go here.

Records for VAT

Every business registered for VAT is required to maintain financial records that comply with the guidelines provided by HMRC.

Similarly, it is a requirement of the Companies Act that every company should keep proper accounting records of money received and paid, of all sales and purchases, and of assets and liabilities.

For more information, go here.

Records for employers

HMRC requires every business that employs staff to keep proper records for pay as you earn (PAYE) and for the calculation of tax liabilities.

In some types of business, additional records have to be kept to satisfy government requirements. Since the introduction of real time information (RTI), employers must advise HMRC of their payroll at the same time as making payment to employees.

For more information, go here.

You can arrange a free meeting with an ICAEW BAS firm to discuss your recordkeeping and whether it meets your business information needs and HM Revenue & Customs requirements.

Go to the Business Advice Service and click on 'Find a Chartered Accountant'. Insert your postcode and find the firms in your area offering a free session.

Enterprise Nation has helped thousands of people start and grow their businesses. Led by founder, Emma Jones CBE, Enterprise Nation connects you to the resources and expertise to help you succeed.

You might also like…

Get business support right to your inbox

Subscribe to our newsletter to receive business tips, learn about new funding programmes, join upcoming events, take e-learning courses, and more.