Lesson 1: Why Records Matter and What HMRC Requires

Before you start

This course gives general information about UK bookkeeping. It is not accounting or tax advice. Rules change and every business is different, so check the GOV.UK pages named in each lesson, and speak to a qualified accountant before making decisions that affect your tax.

This course uses two example businesses:

• Bean There, a small cafe run by Sam as a sole trader.
• Priya Designs Ltd, a freelance graphic designer trading through a limited company.

Why records matter

Your business records are the evidence behind every figure you give HMRC. Good records protect you in four ways:

1. You pay the right tax. HMRC may check your records to make sure you are paying the right amount of tax. If you can't back up a figure, you may not be able to claim an expense you really paid.
2. You avoid penalties. GOV.UK says a limited company that does not keep proper accounting records can be fined £3,000 by HMRC, and its directors can be disqualified.
3. You can see how the business is doing. Without records, Sam can't tell whether the cafe's new lunch menu makes money.
4. Your accountant's work is quicker and cheaper. Tidy records mean fewer questions and lower fees.

What records to keep

GOV.UK's page "What records to keep" says self-employed people must keep records of:

• all sales and income
• all business expenses
• VAT records, if you're registered for VAT
• PAYE records, if you employ people
• records about your personal income

For a limited company, GOV.UK's "Company and accounting records" page lists:

• all money received and spent by the company
• details of assets, debts and stock
• information about goods bought and sold
• supporting documents such as receipts, invoices, bank statements and delivery notes

Worked example: Sam's cafe records

• Sales: daily till reports and card-machine statements
• Purchases: supplier invoices for coffee beans, milk and cakes
• Bank: monthly business bank statements
• Payroll: payslips and PAYE records for the two part-time staff

Priya's records: sales invoices sent to clients, receipts for software subscriptions and a new laptop, company bank statements, and payroll records for the salary she pays herself.

Do this: Write down every kind of record your business produces. Sort each one under Sales, Purchases, Bank or Payroll.

How long to keep records

The rule depends on how your business is set up.

Sole traders

Keep records for at least 5 years after the 31 January submission deadline of the relevant tax year.

• Example: Sam's 2025 to 2026 tax return is due by 31 January 2027. Sam must keep the records for that year until at least the end of January 2032.
• Exception: if you send a return more than 4 years after the deadline, keep the records for 15 months after you send it.

Check against: GOV.UK, "Business records if you're self-employed: How long to keep your records".

Limited companies

Keep records for 6 years from the end of the last company financial year they relate to. Sometimes you must keep them longer, for example when:

• a transaction covers more than one accounting period
• the company bought equipment or machinery expected to last more than 6 years
• the Company Tax Return was sent late
• HMRC has started a compliance check on the return

Example: Priya Designs Ltd's financial year ended on 31 March 2026. Keep those records until at least 31 March 2032. Keep the laptop receipt for as long as the laptop is still in use and being claimed for, if that is longer.

Check against: GOV.UK, "Running a limited company: Company and accounting records".

If records are lost

• Sole trader: do your best to provide figures. Tell HMRC if your return uses estimated or provisional figures.
• Limited company: try to recreate the records, tell your Corporation Tax office straight away, and report it in your Company Tax Return.

Do this: Write down which rule applies to you. Then work out the earliest date you could safely delete last year's records.

Task: set up a dated folder structure

You can keep records digitally, as scans or photos of paper receipts, as long as they are clear and complete. Set up your storage now, before Level 2.

1. Create a top-level folder in your cloud drive (Google Drive, OneDrive or Dropbox) named after the business, e.g. Bean There - Records.
2. Create one folder for each financial year, named by the year it covers, e.g. 2026-27 (6 Apr 2026 - 5 Apr 2027) for a sole trader using the tax year, or FY ending 2027-03-31 for a company.
3. Inside each year, add four subfolders: 01 Sales, 02 Purchases, 03 Bank, 04 Payroll. Numbering keeps them in order.
4. Name files date-first so they sort in order: 2026-10-19 Smiths Dairy invoice 4471.pdf.
5. Create a spreadsheet named Records index in the top-level folder with these columns: Year, Folder, Earliest delete date, Notes. Fill in the earliest delete date using the rule above.
6. Scan or photograph paper receipts every week and file them straight away.
7. Back up. Make sure the drive syncs, or export a copy every month.

Check: Find one supplier receipt from last week. Save it with a date-first name in the correct Purchases folder.

Key takeaways

• Records are your evidence. They help you pay the right tax, avoid penalties and understand your business.
• Keep records of sales, purchases, bank statements and payroll, plus VAT records if you are registered.
• Sole traders: keep records for at least 5 years after the 31 January submission deadline.
• Limited companies: keep records for 6 years from the end of the financial year, and longer in some cases.
• Check the rules against GOV.UK's "How long to keep your records" page (self-employed) and its "Company and accounting records" page (companies).
• A dated, numbered folder structure with date-first file names makes records easy to find.
• This course is general information, not accounting or tax advice.