Tax Doctor:
Mark McLaughlin
ATII ATT TEP

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May 2003

Q:

I want to start a small business buying items at car boot sales and selling them over the internet, i.e. via a website or auction site. However, it is simply not practical to ask 'car booters' for receipts in respect of trivial amounts, and many do not carry receipt books anyway. How do I prove to the tax man how much I paid, or is there a way around this? How long must I keep any receipts I do manage to obtain?

A:

The question of record keeping for tax purposes is an important one, because the maximum penalty for non-compliance is £3,000 per tax year. The self assessment system requires taxpayers to keep and preserve records for the purposes of making and delivering a complete and correct return. There is a statutory requirement to keep and preserve records of the following in respect of the business:

• Amounts and details of all business receipts and expenses;
• All sales and purchases of goods dealt with in the course of the trade; and
• All supporting documents relating to the above items, including books, deeds, contracts, vouchers and receipts ('documents' includes records held on computer, and 'supporting documents' includes accounts, books, deeds, contracts, vouchers and receipts).

Apart from the above documentation, there is no legal requirement to keep specific business records for self assessment purposes. However, in practice the types of information which should be recorded and retained include:

• Copy sales invoices, till rolls, order notes etc;
• Purchase and expense bills or invoices;
• Bank statements, cheque book stubs and paying-in slips;
• Invoices for the purchase and sale of business assets;
• Stock and work-in-progress records;
• Lease or rental agreements;
• Employer PAYE records of wages, expenses, benefits in kind etc;
• Goods taken for own use or consumption and not paid for in cash;
• Goods or services supplied in exchange for other goods or services; and
• In the case of assets with 'mixed' (i.e. business and private) use (e.g. as motor vehicles), adequate records to enable total expenditure and running costs to be split between business and private use.

In practice, many of the above items will form part of a manual or computerised record or bookkeeping system (e.g. a cash book and petty cash book). It is important that records of business and private matters be kept as separate as possible.

Inland Revenue leaflet SA/BK3 'Self Assessment: a guide to keeping records for the self-employed' contains some examples of records recommended for different types of businesses. This useful leaflet can be downloaded from the Revenue's website (www.inlandrevenue.gov.uk/pdfs/sabk3.htm). Other leaflets dealing with general record keeping under self assessment are SA/BK4 'Self Assessment: a general guide to keeping records' and IR2013 'Record-keeping for self assessment'.

Expenses without supporting receipts

Whilst there is a statutory requirement for business owners to keep and preserve all supporting documents such as expense receipts, in practice the Inland Revenue recognise that this is not always possible. In their booklet the 'Starting up in Business Guide', (which can be downloaded from http://www.inlandrevenue.gov.uk/startingup/pages.pdf), the Revenue give the following guidance to the self-employed in those circumstances:

"Sometimes you may not get evidence, such as a receipt, for cash expenses, especially where the amounts are small. If this happens make a brief note as soon as you can of the amount you spent, when you spent it and what it was for. We don't expect you to keep photocopies of bills, although you may find them useful".

The answer to your query in my view is therefore to obtain cash receipts wherever possible, but otherwise to keep an up-to-date record of the date and place of purchase, details of the goods acquired, and the amount paid.

For how long must business records be retained?

For the self-employed, i.e. sole traders and partners carrying on a business (including letting property), those records must normally be kept for 5 years from 31 January following the end of the tax year, and possibly longer if the Revenue enquire into the tax return.

For example, if a sole trader prepares accounts to 31 March each year, profits for the year ended 31 March 2003 will be declared on the 2003 tax return, i.e. for the year ended 5 April 2003. The business records must be kept until 31 January 2009, at the earliest.

However, note that the records themselves will be more than 5 years and 10 months old. In some cases, the effective record retention period is considerably longer (see Example).

Mark McLaughlin

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