Every business must keep business records.
HMRC may wish to inspect your business records to ensure that the business is paying sufficient tax, staff are being paid appropriate wages and National Insurance contributions are being properly made. They will also want to check that the business is not being used for money laundering purposes.
Why do I need to keep records?
The key requirement of an accounting system is permanence. You should not make business records in a form where they can be erased or changed.
All accounting and bookkeeping rules are based on a systemic requirement to:
record transactions when they happen
classify and reconcile transactions to show how much the business has received for each and every recorded transaction during that accounting period, during the relevant accounting period
If the business can be shown to be making a profit within that accounting period, then it may have to pay tax on the accumulated profit earned.
Distinguish records from audited accounts
Certain companies (eg small companies and micro-entities) do not need to have an audit - but only if they’re eligible and want to take advantage of this exemption. A company may qualify for an audit exemption if at least two of the following apply:
an annual turnover of less than £10.2 million
assets worth less than £5.1 million
on average fewer than 50 employees
However, these regulations do not remove the requirement for the keeping of business records in permanent form within a proper and organised accounting system for a period of years and you will still need to do this. However, when a company relies on an audit exemption, it must include an audit exemption statement on the balance sheet of its accounts.
Even if a company is usually exempt from an audit, company accounts must be audited if shareholders who own at least 10% of shares (by number or value) request this. Such a request must be made in writing, at least one month before the end of the financial year the audit relates to, and sent to the company’s registered office address.
You can find out more information about auditing, accounting and reporting requirements on the Government’s website.
What about annual accounts?
Every financial year, a company must file a set of accounts at Companies House (even if it does not trade). If the company is trading, it must file statutory accounts. Statutory accounts usually relate to the 12-month period up to the company’s last accounting reference date and include, amongst other things, a profit and loss account and a balance sheet signed by a director on behalf of the board. If any tax is due, it must send a tax return to HMRC and pay corporation tax. For more information, read Annual accounts and tax return.