Wooden filing cabinets

What records do I need to keep as a sole trader?

December 23, 2021
Starting a sole trader business is tough. Not only are you trying to get a new business off the ground, but you’re now responsible for managing the business admin that any former employers would have taken care of for you.
At the top of the list of these responsibilities is record-keeping. As well as being a legal requirement, meticulously managing your records makes filling out your Self Assessment tax return much simpler, as well as making sure you can seize every opportunity to claim back on capital allowances.

Not only will we be delving into the different records you need to keep, but we’ll be exploring why you need to hang onto these records, how long to keep them for and where you can safely store them.

What records do I need to keep as a sole trader?

As a sole trader you are responsible for keeping the following records:
    All sales and income records, including invoices, bank statements and paying-in slips Evidence of business expenses, for example receipts VAT records if you’re registered for VAT National Insurance contributions (NICs), payroll and PAYE records if you employ people Records about your personal income Any grant you’ve claimed through the Self-Employment Income Support Scheme (SEISS)

Why do I need to keep business records?

It all boils down to making sure your Income Tax bill is as accurate as possible.When filing your Self Assessment tax return, you’ll need to report your taxable income, which can be worked out by subtracting the business expenses you’ve accrued throughout the year from your total income.
Tax equation
However, to ensure that your calculations are correct, you’ll need to make sure that the information you have to hand is too. This means meticulous recording of every transaction you’ve made through the business, from sales and personal income to payslips and expenses.

What happens if I don’t keep my business records?

As it is a legal requirement for sole traders to keep accurate business records, failing to do so could see you facing fines of up to £3,000 per tax year from HM Revenue and Customs (HMRC).Without the right records to hand, it’s also highly likely that the information submitted on your Self Assessment tax return is inaccurate, subsequently leading to an incorrect tax bill and paying the wrong amount of tax.If HMRC suspects this is the case, they’re within their rights to launch an investigation into the way your business keeps its financial records, which if deemed inadequate can lead to additional fines.
Failing to keep accurate financial records doesn’t just risk having to shell out to pay for penalties — it also means you risk missing out on tax deductions. Without records to back up the business expenses you’ve incurred across the year, you won’t be able to claim them back on your Self Assessment tax return. As a result, you could be missing out on deductions worth thousands of pounds — tenure that would otherwise could have been used to propel your business forward.

How can I keep records as a sole trader?

To back up the information you plan to submit in your Self Assessment tax return, you’ll need to keep the following as proof:
    All receipts for goods and stockBank statements and chequebook stubsSales invoices, till rolls and bank slips
Small business owners have historically relied on spreadsheets and shoeboxes to maintain their records, manually logging their cash inflows and outflows in a spreadsheet while storing evidence of their transactions in the form of paper invoices and receipts in shelves upon shelves of boxes. Not only is this terrible for the planet, but it means your records are at risk of being lost, stolen or destroyed.Alternatively, you can digitally store your records using Making Tax Digital (MTD)-ready software, such as Ember.
With our snap-and-capture technology, you can safely store your receipts as soon as you spend, and our auto-generated invoices mean you have a reliable archive of every invoice you’ve issued to your clients through us. You can also manually input any invoices issued or receipts collected outside of the app, ensuring that everything you need to submit your tax return stays in one place. Did we also mention that it’s free?

Desk setup

Choosing your accounting method

While it’s wise to keep meticulous records of your business finances, the accounting method you choose can determine the point you record your income and expenses.

Cash basis accounting

Traditional accounting

If you are using the traditional method of accounting, you’ll need to record your income and expenses by the date you were invoiced or billed.This means you’ll need to keep records of:
    What you’re owed by have not yet received, e.g. invoices you’ve sent to clients that have not yet been paidWhat you’ve committed to spend but have not paid for yet, e.g. invoices you’ve received but have not yet paid

How long do I need to keep my records for?

According to HMRC, sole traders need to keep their records for a minimum of five years after the 31st January submission deadline of the relevant tax year. For instance, with the 2019/20 tax year deadline just around the corner (due 31st January 2022), you’ll need to hold onto your records until at least the end of January 2026.

If you send your tax return more than four years after the deadline, you’ll need to keep your returns for 15 months after you’ve finally sent it off to HMRC.

What do I do if my business records are lost, stolen or destroyed?

Even with the best intentions, sometimes things don’t go according to plan, and you might find yourself in the situation where the business records you’ve so carefully kept are lost, stolen or destroyed.In this instance, you’ll need to inform HMRC that your records have been lost, stolen or destroyed when filing your Self Assessment and provide either estimated or provisional figures in place of those lost. Estimated figures are your best guess at what your figures would be if there’s no certainty you’ll be able to replace your records, while provisional figures are your temporary estimates which are used on your return while you wait for your actual figures to come through. These will need to be submitted as soon as possible when available.

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