Here’s What You Need to Know
Over recent years, HMRC has ramped up tax enquiries to spot and correct errors or under-reporting in tax returns. In fact, HMRC secured a whopping £41.8 billion from all compliance activities in 2023-24. So, with the rise in tax enquiries, one question many business owners ask is: Should I dispose of old documents? Let’s break it down.
Receiving an HMRC Enquiry Letter
The first sign that HMRC is looking into your tax return is receiving an official enquiry letter. This A4-sized letter outlines the start of the enquiry and details the process, as well as your rights and obligations.
But why you’ve been chosen may not be clear. HMRC isn’t required to explain why you’re being investigated, although sometimes a phone call might provide some hints. Often, enquiries are triggered when HMRC finds inconsistencies in your return, gets third-party information you didn’t declare, or sees large or unexplained income changes.
What Information Does HMRC Ask For?
The enquiry letter will specify the documents HMRC wants to see. It’s important to know your legal obligations around document retention. For instance:
- Self-employed individuals and those with capital gains must keep records for five years from the 31 January deadline after the tax year ends.
- For businesses, the retention period extends to six years from the end of the accounting period.
It’s generally a good idea to hold onto documents for at least an extra year, just in case.
HMRC has up to four years after the tax year to issue a discovery assessment, and if dishonesty is suspected, they can go back 20 years!
What Documents Should You Keep?
If you’re running a business, you’ll need to keep various documents, including:
- Receipts and invoices
- Employment contracts to verify salary and benefits
- Property documents, such as rental agreements and mortgage statements
- Bank statements, which are crucial for supporting income and expenses
If you’re VAT-registered, make sure you’ve got a valid VAT invoice for your purchases. However, for small supplies like parking charges under £25 (including VAT), there’s no need for a detailed receipt.
Digital Records and Making Tax Digital (MTD)
With the introduction of Making Tax Digital (MTD), digital record-keeping is a must. HMRC now accepts electronic records, and these must be linked to quarterly tax submissions and kept in a format that’s complete, traceable, and legible.
There are many apps available that link your mobile phone to cloud storage and accounting software, making digital record-keeping easier. HMRC expects businesses to take full advantage of these systems under MTD.
Cash Payments
Cash payments can be a grey area for HMRC. During an enquiry, they often disallow claims for cash payments unless you have proper invoices or receipts. If you’re missing documents, try to contact the supplier for a duplicate invoice or a signed letter confirming the amount paid. It’s essential to keep accurate records of any cash payments.
HMRC and Third-Party Information
During an enquiry, HMRC can request information from third parties, such as your customers, suppliers, or banks, to verify the details you’ve reported. That’s why it’s crucial to keep comprehensive and accurate records.
Practical Tip: Keep Proper Evidence
When it comes to HMRC, you’ll need to prove that your expenses are legitimate and deductible. Inadequate evidence can lead to deductions being disallowed, and HMRC has won cases where claims were rejected simply due to a lack of supporting documentation.
Should You Get Rid of Old Documents?
While it’s tempting to clear out old paperwork, it’s vital to keep tax-related documents for the recommended timeframes. This helps ensure you’re prepared in case HMRC comes knocking. Plus, with the shift to digital records, keeping everything well-organised and easy to access is more straightforward than ever.
Need Help Navigating HMRC’s Document Rules?
Worried about an HMRC enquiry or unsure which documents to keep? At Jon Davies Accountants, we’re here to help. Get in touch with Jon and the team, and we’ll make sure your business is compliant and your records are up to scratch.
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Any questions?
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