If you’re a sole trader, in a business partnership, or you run your own limited company, it’s very important to keep your tax records stored safely for a certain period of time. Do you know how long to keep tax records? We’ve got you covered. Find out everything you need to know about how long to keep financial records in the UK, right here.
Why is good record keeping important?
Let’s start with a basic question: what’s the benefit of keeping good records? Aside from your legal obligations (we’ll come onto that shortly) there are a broad range of reasons why it’s a good thing to ensure that your paperwork is in order. For example, if you need to double-check your past transactions, you won’t be able to do that without proper recordkeeping, especially if you don’t use any type of online accounting software. Even if you do use online accounting software, it’s worth keeping the original records in a safe place so that if HMRC decides to look into your business, you can provide them with a full, comprehensive accounting of your company’s finances.
Which records do you need to keep?
Put simply, you should retain any records or documents that you received or prepared to complete your Company Tax Returns or Self Assessment Tax Returns. This includes your business’s accounting records (details of assets, liabilities, income, and expenditure), business records (bank statements and details of all purchases and expenses), and VAT records (all invoices processed and received, VAT receipts for expenses you’ve reclaimed).
How long do I need to keep tax records?
Once you know which records need to be stored securely, you need to find out exactly how long to keep financial records in the UK. To a certain extent, that depends upon the structure of your business –whether you’re a limited company or self-employed/in an unincorporated business partnership. Furthermore, there are additional responsibilities for employers, regardless of business structure. Here’s a simple guide for how long to keep tax records in the UK:
Self-employed/partnership– If you’re self-employed or running a business partnership, you should keep your records for a minimum of five years after the 31 January submission deadline for the relevant year. For example, if you sent your 2018-19 tax return by 31 January 2020, then you would need to keep those records until the end of January 2025.
Companies – If you run a limited company, the rules are a little different. In short, you should keep all of your tax records for a minimum of six years, starting from the end of your current accounting period. For example, if the accounting period ends on 31 December 2019, then you’ll need to keep the records until 31 December 2025.
So, what are the additional responsibilities for employers? Essentially, you need to retain your PAYE records for three years, starting from the end of the tax year that they relate to. This will include the salary details for all employees, as well as deductions that you’ve made – for example, Income Tax, pension contributions, NICs, and so on.
What happens if I don’t keep records properly?
If HMRC requests to see your tax records and – for whatever reason – you aren’t able to provide them, you may need to pay a penalty. It’s also possible that they’ll ask you to recreate the records. You have the right to appeal a penalty if you think it’s unjustified, but to avoid this long and potentially damaging process entirely, it’s best to simply keep your tax records for the required length of time.
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Discarding tax records too early could cause significant liability for your business.
The IRS, other taxing authorities, creditors, and investors all might demand to see a business's tax records. Without documentation, a company might have difficulty defending its deductions during a tax audit, applying for a loan, or obtaining new investors.
Knowing how long to keep tax returns and other records can help businesses respond to information requests. Additionally, owners can use this information to better understand their businesses.
Companies can safely discard most documents seven years after filing the related tax return—or seven years after the due date, if later. However, a few records require indefinite retention.
What Are Business Tax Records?
Business tax records include anything that directly or indirectly supports amounts claimed on the business's tax returns. Examples include:
- Invoices
- Cash register tapes
- Canceled checks
- Bank statements
- Receipts
- Credit card statements
- Real estate closing statements
- Bills of sale
- Tax forms
- Tax returns
Transactions usually generate these documents automatically. Businesses or their accountants then record the accounting effects of transactions and file the supporting records based on the type of transaction and when it occurred.
Digital file management systems offer many advantages, though companies must keep paper originals of some documents. Electronic files take up much less physical space, allow for easier access, and enable quick backup. As a result, many businesses manage their records almost entirely electronically.
These records allow companies to both prepare their tax returns and prove the return's accuracy during tax audits. The IRS and other tax authorities can deny deductions for unsubstantiated expenses, potentially leading to interest and penalties.
How Long Should Businesses Keep Tax Returns and Other Business Tax Records?
Fortunately, the IRS cannot assess additional tax once a certain period—called the statute of limitations—has passed. The federal income tax statute of limitations equals:
- three years from the filing date—or the due date, if later—for most tax returns
- four years after the tax becomes due—or gets paid, if later—for employment tax returns
- six years from the filing date—or the due date, if later—for tax returns that underreport gross income by more than 25%
- seven years from the filing date—or the due date, if later—of the related tax returns for losses from worthless securities or bad debt
- Forever for unfiled or fraudulent tax returns
Some state taxing authorities follow IRS rules, while others use different periods. Creditors and investors may have their own requirements.
Creating different retention policies for each possible scenario may prove impractical. Retaining tax returns and other records for seven years—starting from the later of the filing date and due date of the related tax return—offers a convenient rule of thumb. This covers almost all documents for businesses that file all required tax returns without fraud.
Many CPA firms and other tax practitioners retain tax records for seven years, though some keep them indefinitely in digital storage. Even businesses that entrust their records to a certified tax professional need to keep copies. The IRS and other taxing authorities can deny deductions that a company can't support, even if an outside professional lost the documentation. However, CPAs cannot deliberately withhold records, even for unpaid fees.
Business Tax Records to Keep Forever
Companies must keep certain tax records indefinitely. Assets usually have tax consequences upon sale, so the statute of limitations will apply to the future tax return that includes the asset sale.
Businesses also need to retain specific key documents forever. These include company formation documents and ownership records such as stock ledgers, titles, deeds, property records, and contracts.
Corporations must also keep shareholder meeting minutes. Failure to maintain corporate records could cause the corporation's owners to lose liability protection.
Missing documentation can cause substantial liability and missed opportunities. Keeping tax returns and other records for the appropriate period allows your business to respond to information requests, including tax audits.