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Keeping financial records for the taxman

Keeping financial records for the taxman

Many taxpayers fall down on providing accurate information for tax because they have failed to keep track of their money by keeping good financial records.

Keeping financial records is not only necessary for tax, but has other benefits as well, like helping a family to budget or confirming income and expenditure when applying for loans or credit.

The problem for many taxpayers is they do not know what records to keep or why, so here are some tips that explain the rules.

How to keep financial records

The law says anyone who submits a tax or VAT return must keep track of their income and spending, but it does not say how to keep the records.

There are no specific rules on how you must keep records. You can keep them on paper, digitally or as part of a software program (like book-keeping software) but bare in mind HMRC can charge you a penalty if your records are not accurate, complete and readable.

Retaining financial records

Different categories of taxpayer have to keep records for varying times:

  • Employers should store PAYE records for three years after the end of the current tax year
  • Individuals completing a tax return (not the self-employed, partners or directors) need to keep them for 22 months after the end of the tax year to which they relate
  • Construction industry contractors should keep CIS records for three years after the end of the current tax year

Everyone else should keep their financial documents for a minimum of five years after the end of the current tax year.

The financial records to keep

These are what accountants would call the ‘primary’ business documents – invoices, bank statements, bank paying in books, cheque books, receipts for expenses and details of any payments made to business owners.

The principle is the taxman will want to see what came in, what went out and especially what any individuals connected with a business earned.

If the taxpayer is employed, keep any tax-related documents like payslips, P60 and P11d expenses.

Savers and investors should retain passbooks, share certificates and dividend vouchers.

This list is by no means exhaustive, so check with an accountant if you are in business or with a financial adviser if you are an investor.

Why taxpayers have to keep financial records

The taxman may want to see the documents that detail the amounts entered on a tax return, and he has various time limits in which he can request the information.

The rule here is to keep a journal (breakdown) of any aggregate amounts entered on a tax return and cross-reference the journal to the appropriate financial records.

Penalties for taxpayers failing to keep good records

Taxpayers and businesses face fines for failing to keep financial records or failing to store them for the correct period of time.

Submitting inaccurate tax returns can also attract a penalty and proving the right financial records were kept helps prove figures are accurate.

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