HMRC may check your records to make sure you’re paying the right amount of tax. In fact, they have a policy of checking a certain number of businesses each year. So every business needs to keep appropriate records.
But what records do you actually need to keep? (We get asked this question all the time, so that’s what this blog is all about).
There’s a difference between VAT registered and non VAT registered businesses. So if you’re being serious and businesslike in how you operate, even the smallest non VAT registered business should be following the rules HMRC set out as most appropriate. And those are the VAT rules.
Here’s what proper VAT record keeping looks like.
What records must you keep?
To reclaim VAT from HMRC, you must retain valid documentary evidence that proves the purchase was for business use and that VAT was actually charged.
- The primary evidence is a full, valid VAT invoice. This is required for every payment of £250 or more.
- For items under £250, HMRC will normally accept a less detailed receipt, like a till receipt, providing it shows the VAT number of the retailer and the amount of VAT charged.
Non VAT registered businesses can’t reclaim VAT, but they still need to keep proof of expenditure and proof that it’s a valid business expense. In practice, that means keeping a copy of the purchase invoice in the same way a VAT registered business would.
Whether VAT registered or not, both types of business need to retain bank statements as proof of receipt and payment.
Need help with your record keeping? Get in touch, we can sort it for you! From cleaning up your books to maintaining them and filing, we can take the full financial burden off your shoulders. |
What about items under £25?
There’s a special rule for items under £25 where no VAT invoice is required by HMRC. But this rule only applies to four very specific situations:
- Phone calls from public or private telephones.
- Purchases through coin operated machines.
- Car park charges (note that on street parking meters are not subject to VAT).
- A single or return toll charge paid at the tollbooth.
Everything else beyond these four instances? You need a VAT invoice.
Basically, get VAT invoices whenever you spend business money! It’s simpler that way.
How must you keep the records?
You must keep some VAT records digitally, also known as an electronic account, unless you’re exempt from following Making Tax Digital for VAT rules. The digital records cover everything you sell and everything you buy, including reverse charge transactions.
You must keep your digital records using compatible software, like Xero, that connects to HMRC’s system. Spreadsheets alone won’t cut it anymore for VAT record keeping.
| Want to know more about MTD compatible software? Read our blog: What software for Making Tax Digital actually works? |
How long must you retain records?
This is where it gets a bit complicated, because different taxes have different rules.
For VAT: You must keep business records for at least 6 years. This increases to 10 years if you’re using either the VAT One Stop Shop (OSS) or Mini One Stop Shop (MOSS).
For Corporation Tax: You must keep business records for 6 years from the end of the last financial year they relate to.
For Income Tax: You must keep business records for 5 years from the 31 January following the 5th April they relate to. (I know, it’s complicated! Why can’t they just say 5 years and 10 months from the end of the last financial year? But there we are).
Always keep your books in order
Good VAT record keeping isn’t just about staying compliant; it’s about being able to prove your position if HMRC ever comes knocking. And they do come knocking. (Often when completely unexpected and at the worst of times. Classic).
Our advice? Keep your invoices. Keep your bank statements. Keep everything digital and connected. And when in doubt, keep records for longer rather than shorter.
Got a tricky question about the VAT rules? Get in touch and we’ll answer it. |
