Record Keeping - Specific Requirements
In Record Keeping, Part 1 [INSERT Link], we discussed the general rules and framework why businesses must keep and maintain complete and up to date records.
In this article, we shall look at specific record keeping requirements for:
- Capital Gains Tax
- Construction Industry Scheme
- Corporation Tax
- Benefits and Expenses
- Self Employed
(You can jump directly to each section. Just click the bullet point.)
First, let’s recap the fundamentals from Part 1:
All businesses need to keep records of their transactions, namely receipts for sales and for business expenses.
For sales receipts, records would include sales invoices, credit card statements, bank statements, Paypal statements, paying in slips, till rolls and cash receipts issued.
Records for business expenses would include receipts for cash and other payments made, purchase invoices, credit card statements, bank statements, Paypal statements and cheque book stubs.
In addition, businesses also have to keep tax related records like business tax returns. These will vary depending on whether the company employs staff or pays VAT and on the legal form of company, which in turn may also require additional documentation.
Let’s now look at each of the groups listed above.
Capital Gains Tax
Capital Gains Tax (CGT) is the tax you pay on the difference in value between purchasing and ‘disposing of’ an asset if the difference is a profit or gain. ‘Disposing of’ an asset includes:
- Selling it
- Transferring it to another person
- Exchanging it
- Giving it away
- Receiving compensation, such as an insurance payment in case of loss.
The law requires owners of assets to ‘keep and retain records that will enable them to make a correct and complete return of the capital gain or capital loss.’ Here, all records are relevant that relate to the value of the asset and to the cost of acquiring or disposing of it.
An important date for your records is March 31, 1982. The value of all assets owned before that date, and therefore also Capital Gains Tax, was `rebased' to March 31, 1982. This means that not the actual cost of acquiring the asset but its value on March 31, 1982 has to be established as the basis for CGT calculation.
Records that need to be kept include all those that:
- Show the original cost or market value if the purchase or receipt of the asset took place after March 31, 1982;
- Show the market value on March 31, 1982, if they were acquired before that date.
In addition, records relevant for the calculation of CGT are also those that specify additional costs related to
- Acquiring or disposing of an asset, including:
- Fees paid for professional advice
- Stamp duty
- Conveyance fees
- Valuation fees
- Costs of transfer
These records should normally be kept for one year after 31 January following the end of the tax year for which CGT was calculated. This period is extended to five years for people who are self employed or in a partnership.
Construction Industry Scheme
As a contractor in the construction industry under the Construction Industry Scheme (CIS) you have to keep records of:
- The gross amount paid to a subcontractor but exclusive of VAT
- Deductions made from any payments to the subcontractor
- Any materials costs included in the deductions but again exclusive of VAT
These records have to be kept for three years after the end of the tax year to which they apply.
HMRC specifies that full size copies must be kept either in paper form or as images. Images must not be altered.
Returns under CIS have to be made monthly either electronically or on paper. Electronic returns must use either HMRC’s free online service, commercial software or Electronic Data Interchange and appropriate systems. Registration for the CIS Online Service is necessary. Paper returns have to use form CIS300.
Company records kept for the purposes of Corporation Tax are the same as the records showing a company’s transactions and financial position listed in the introduction to this article. They include records of a company’s
- Income and expenditure
- Assets and capital expenditure
- Stock in hand at the end of the financial year.
As we saw in Record Keeping (Part 1) [INSERT Link], these records have to be complete, up to date and easily accessible on demand.
Most records do not have to be kept in their >original format. However, they must be legible or easily be produced in a readable format. Exceptions where original documents must be kept are:
- Dividend vouchers,
- Bank interest certificates, and
- Construction Industry Scheme (CIS) vouchers (used before April 2007).
If not otherwise specified in writing by HMRC, records must be kept for at least six years from the end of the company’s Corporation Tax accounting period. This period could be extended for records that
- Relate to transactions covering more than one accounting period; in this case, they must be kept to the end of the latest Corporation Tax accounting period to which they relate.
- Cover capital expenditure, in which case they must be kept from the date an asset was purchased until at least six years after its disposal.
- Support Corporation Tax returns filed late, in which case the deadline for HMRC to commence an enquiry has to be added to the six years.
- Are required for an enquiry commenced by HMRC; in this case they have to be retained until the enquiry has been completed.
If a company violates any of the rules governing record keeping for Corporation Tax purposes, it may face a penalty of up to £3,000.
Benefits and Expenses
Employers are required by law to keep a number of PAYE related records such as payments to employees, National Insurance (NI) payments, benefits and expenses payments made to employees, statutory payments such as sick leave and maternity leave, tax deductions as well as student loan payment deductions from wages. (See also the section on PAYE, below.)
These records need to be kept with the detail required by each type of payment. They are needed to calculate the correct amount of tax and NI contributions and for the information on forms P11D, P9D and P11D(b) that employers have to complete at the end of the tax year.
After the end of the tax year to which these benefits and expenses records relate, they should be kept for another three complete tax years. This also holds for any documentation and correspondence received from HMRC especially if employers operate a Dispensation Scheme or PAYE Settlement Agreement.
In April 2013, filing PAYE forms changed from annual at year end (forms P35 and P14) to Real Time Information (RTI), that is, each time an employee is paid. Employees will still receive their P45 on leaving employment but employers will no longer have to submit forms P45 or P46 to HMRC. This information is now integrated in the RTI process.
The change in filing PAYE forms will not affect the record keeping fundamentals. PAYE remains the same using RTI, only the reporting method changes.
Employers are required by law to keep full and accurate payroll records for each employee including
- Personal details,
- Payments to employees,
- National Insurance payments,
- Benefits and expenses payments to employees,
- Statutory payments such as sick leave and maternity leave,
- Pension payments,
- Tax deductions as well as student loan payment deductions from wages.
PAYE records including all supporting documentation must be kept for the current and previous three tax years. They may be kept in either electronic or paper format.
For record keeping, the best starting point for the self employed is to follow the general rules set out in Part 1 of this article or the summary above.
In addition to the usual records and receipts, keeping records for the following is particularly important for self employed:
- Money taken out for personal or family use
- Private money (funds) introduced to the business
- Products taken out for personal use
If for any reason receipts for income or expenses were lost, HMRC admits in exceptional circumstances a personal note for small payments. These self-issued records should list all the relevant details (amount, date, place, what goods or services).
Not all expenses are allowable against income. The purchase and sale of capital assets such as tools, equipment, computers etc. are treated separately under Capital Allowances. The cost of such purchases is not set against income in one period but written off over a number of years. Records for capital assets should be kept from purchase until disposal of the item.
Self employed workers in the construction industry need to keep records of all payments made and received and the appropriate verification numbers for higher rate deductions.
Self employed with more than one business need to keep separate records for each business.
Records should normally be kept for five years after the Self Assessment filing deadline (31 January). If HMRC has started an investigation, records need to be kept until the date specified by HMRC.
Trustees must keep records of the trust’s income and expenses. These will vary depending on the nature of the trust but they will include the following documents:
- bank statements for current and deposit accounts even for online accounts that don’t send out paper statements
- confirmation of interest paid into bank or building society accounts
- national savings bonds or certificates
- certificates issued by life assurance companies
- dividend vouchers from companies and unit trusts
- stockbroker reports and record of dividends
- details of expenses paid by the trustees
- details of all taxes paid by the trust
- records of capital and income payments to beneficiaries
If trustees make payments to beneficiaries, they need to keep records of all payments made and copies of all forms R185 given to beneficiaries.
If the trust sells or buys assets during the year, records include:
- completion statements for property transactions
- contract notes for stocks or shares
- receipts for sale or purchase expenses such as estate agents and solicitors charges and Stamp Duty paid.
If the trust owns property to let records should include:
- receipts for expenses connected with the property - including any mortgage interest
- annual bills such as business or water rates
- licence or rent agreements showing the rent payable.
If the trust has received additional assets the records must show:
- the amount or market value of the asset received on the date of transfer into the trust
- the date the additional money or asset was received
- details of who made the payment or who put the asset into trust.
In addition, the following records should be kept:
- minutes of meetings
- deeds of appointment
- any decisions that affect the distribution of capital or income.
Trusts with business income need to keep their records for five years after the normal filing deadline (31 January).
Trusts that don’t have business income need to keep their records for one year after the normal filing deadline (31 January).
If trusts file their tax returns late, records must be kept for the latest of either 15 months after the date the return was filed, or five years after the normal filing deadline.
VAT related records include VAT sales and purchase invoices, all export and import documents and a VAT account. In addition, VAT registered businesses must submit quarterly VAT returns, which must also be kept.
The following VAT accounting schemes may require different records to be kept:
- Annual Accounting Scheme (VAT return completed once a year)
- Cash Accounting Scheme (VAT is paid only when your customers pay)
- Flat Rate Scheme (a fixed percentage of turnover is paid as VAT)
- Retail Schemes (for selling direct to the public)
- Second-Hand Goods Scheme (VAT is only due on the margin of goods bought and sold)
In general, HMRC requires businesses to keep the following records for VAT purposes:
Records for VAT returns must generally be kept for at least six years. If originals are not kept, paper or electronic copies must be readable and easily accessible. In case of electronic copies, they must remain easily accessible if the storage technology changes over time. If this is not possible, paper copies must be kept.
Businesses trading internationally must also keep the following records for their VAT returns:
- documentation relating to foreign sales or purchases of goods or services, imports or exports outside the European Union (EU) or selling or buying within the EU
- VAT due on certain postal imports and imported services
In addition, VAT records need to be kept for Intrastat when trading with businesses in other EU countries and the EU trade is above certain levels.
For further information or if you need help with or advice on keeping records in any of the specific areas discussed above, call us on 020 7148 0638