Record-Keeping Requirements for Sole Traders

As a sole trader, you may find the phrases ‘record-keeping’ and ‘self-assessment’ daunting. Unfortunately, as a result, many self-employed people ignore the task, which can lead to a backlog of work near the tax return deadline. However, understanding your record-keeping obligations can bring you a step closer to a hassle-free tax year. This article explores record-keeping requirements for sole traders.

What Types of Records Do I Need to Keep as a Sole Trader?

As a sole trader, you must keep records showing your: 

• business income;
• business expenses; and 
• personal income. 

You need to keep these records so you can complete your annual Self-Assessment tax return. 

You must keep:

• records of sales; 
• records of all business income; 
• records of money you have introduced into the business; 
• records of your personal income; 
• records of the sale and purchase of business assets; and
• VAT records (if you are registered to pay VAT).

Specific types of records you should keep include, but are not limited to:

• receipts; 
• relevant bank or building society statements; 
• records of business costs such as equipment, phone bills, and details of business-related mileage;
• details of stock and inventory; and
• if you have employees, you will need to keep payment records and their PAYE and national insurance details. 

Where Should I Keep My Records as a Sole Trader?

You have the flexibility to decide where to keep your records, but they need to be clear and accessible. Consider factors such as security and ease of retrieval. For example, you might store your records on a computer. You should be able to access them for your tax return and if HM Revenue & Customs (HMRC) requests to view your records. Ensure that you keep separate records showing your business and personal income. 

How Long Should I Keep the Records For?

When you submit a tax return, you must keep your business records for five years from the 31st of January submission deadline. So, for example, you will keep the records for the 2023/24 Self-Assessment from the 31st January 2025 until the 31st January 2030. 

Five years is the minimum. Under some circumstances, you must keep records for a longer period. Such circumstances include:

• if you were late submitting your tax return; or 
• if you or your business are subject to an HMRC tax investigation. 

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Record Keeping Best Practices 

1. Keep on Top of Records

Avoid waiting until later in the tax year to keep track of your records. Prioritise record-keeping and managing your accounts by apportioning a short amount of time each week or fortnight to handle the records. This way, you can spread your efforts across a long period. You might spend this time logging invoices, business expenses, or receipts. 

2. Separate Bank Accounts

To keep your personal and business records separate, you should open a bank account that you use exclusively for your business. Having separate bank accounts can help you get more organised and easily keep track of income, business expenses and other outgoings. 

3. Seek Professional Advice 

Sole traders are not legally required to hire an accountant. However, tax returns can sometimes be complex depending on your abilities and the size of your business’s operations. An accountant can ensure your accounts are in order and prepare your tax return. This investment can also allow you to spend your time on other areas of your business. 

Key Takeaways 

Maintaining accurate and sufficiently detailed records is an integral part of operating as a sole trader. Failure to keep proper records can lead to consequences for which you will be personally liable. HMRC can impose fines of up to £3,000 per tax year for inadequate record-keeping. Therefore, sole traders need to maintain records of all their business transactions to avoid any legal or financial issues in the future.

Keep records for five years following the 31st January tax return deadline. Ensure that they are secure but easy to access should you need them. Record-keeping best practices include:

• prioritising working on your record-keeping little and often;
• having separate personal and business bank accounts; and
• seeking professional advice if you need it. 

If you are a sole trader who needs advice on your record-keeping requirements, our experienced startup lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 0808 196 8584 or visit our membership page.