What records you need to keep
Money in – Estimates, invoices, remittance advice, bank interest, grant income paperwork, loan paperwork.
Money out - Receipts and purchase invoices making sure that you’re requesting VAT invoices if you’re VAT registered.
Bank statements – Despite most of us having access to online banking, it’s always a good idea to download statements or keep paper statements because there’s usually a limit to how far you can go back in online banking and charges for requesting old statements.
Employment records – P45, P60, P11D, certificates for any taxed award schemes or information about any redundancy or termination payment (for you and anyone you employ).
VAT records – If you’re VAT registered, you’ll need to also keep account of total VAT sales, VAT purchases, VAT you reclaim from and pay to HMRC. You’ll also need to keep a record of any transactions involving the EU and turnover if you use flat rate VAT.
How you should keep records
There are no rules on how to keep records as a contractor but HMRC can charge you a penalty if your records are not accurate, complete and readable. You can keep them on paper, digitally or as part of a software program (like FreeAgent) and each of these has its benefits and drawbacks but whichever you choose, stick to it. Having some paper records, some digital and some in software will make things much more difficult to find.
Paper records
This can seem very outdated and unreliable but if you receive lots of paper invoices or have lots of receipts for your purchases, it’s usually the quickest and cheapest option. It does, however, leave you with a higher risk of losing or damaging your records so we’d usually recommend keeping digital records whenever practicable. If you’re registered for VAT under MTD, you can’t just keep paper records (see the end of the article for more info).
Digital records
For small businesses, this is usually the most appropriate option. Keeping paper records would take less time but isn't very reliable or secure, using bookkeeping software would be more secure but take up a lot of time so digital records is usually the happy middle ground that doesn’t take too much time and is fairly secure and reliable. We often recommend to our contractor clients to simply set up a folder system for their digital records by month and financial year then whenever someone emails you an invoice save it to the folder and at the end of the month scan in any paper receipts for the period.
Bookkeeping software
Most bookkeeping software like FreeAgent will allow you to attach a file to a transaction and this can be very helpful if you’re looking for a receipt, 6 months down the line. It’s almost always more reliable than the other options but will also take more time so if your business has 200 expense transactions per month that have individual receipts and invoices, this option is unlikely to be worth the admin time. If however, like most contractors you have less than 30 expense transactions per month and many of these are small paper receipts that are easy to lose then using software might be very quick and easy. FreeAgent has an app that will allow you to add an expense from your phone, take a photo of the receipt and upload it directly into the software so you don’t have to worry about losing or scanning awkward receipts.
How long to keep records
HMRC have different rules for keeping different records for different circumstances so there isn’t a general rule for how long you need to keep your records but unless you’re using the VAT MOSS service then keeping records for 7 years will keep you covered. The individual rules are as follows:
If you run a limited company, you need to keep your records for 6 years after the end of the financial period.
If you’re self-employed you must keep your records for at least 5 years after the 31 January submission deadline of the relevant tax year. So for the 2018/19 tax year, the deadline is 31/01/2020 meaning you need to keep the records until 31/01/2025.
If you’re VAT registered, you need to keep your records for 6 years after the end of the VAT return period.
Making tax digital
If your business has signed up for Making Tax Digital for VAT, you must keep digital records. You don’t need to scan the invoices and receipts but there needs to be a digital record of the transitional data, so the amount of VAT, ‘time of supply’ and ‘value of supply’ (value excluding VAT) for everything you buy and sell.