4 – Paperwork, record keeping and digital reporting

Last Updated on 23 July 2020

Things to keep

If you’re paid PAYE it’s a good idea to hold on to the following bits of paper:

  • pay slips
  • P60 (each tax year if you’re employed on 5th April)
  • P45 (on leaving employment, though not all freelancers get one)
  • Bank statements
  • Contracts and other agreements

Sole traders and people running companies need to keep hold of:

  • Proof of purchase for business-related expenses
  • Invoices
  • Bank statements
  • Contracts and other agreements
  • A record of income and expenses for the business

These are a minimum, and you should keep them for at least 6 years. This is in case you are audited by the tax office, or you have a query about tax.

Everyone hates filing, so…

Set up a filing system that’s easy to top up as you go along, and easy to understand if you need to look something up later.

‘Making Tax Digital’ – a big change for sole traders and other businesses

HMRC is introducing a new system of tax reporting. Every business will have to:

  • begin reporting income and expenses every 3 months
  • subscribe to special ‘cloud accounting’ software to do it

The exact date for reporting income tax and corporation tax in this way has still not been confirmed, but it won’t be before April 2023.

Meanwhile, any business with turnover above the VAT threshold (£85,000 in 2019- 20) has had to report VAT using the new system since April 2019. All business that are VAT registered for VAT will have to use MTD software for VAT reporting from April 2022.

HMRC will approve commercial software that works with Making Tax Digital. We’ve listed a few likely contenders below. Note: HMRC have not yet authorised anything much, and we have no idea if they’re any good!

Find out more:
www.gov.uk/…-making-tax-digital – loads of MTD info

Commercial ‘cloud-accounting’ software:
www.freeagent.com – targeting itself mainly at small businesses and freelancers
www.xero.com – focussed on limited companies and sole traders www.quickbooks.co.uk – long established accounting software
www.sage.co.uk – well-established and used by large businesses too

HMRC list of MTD-compatible software:
www.gov.uk/guidance/software-for-sending-income-tax-updates

Disclaimer: We’re not saying any of these software providers are good or bad. Check them out at your own risk. If you have an accountant they should recommend the most appropriate.

We’re not pushing FreeAgent in particular, but it’s the one David Thomas Media uses. If you decide to go for it, you can get 10% off by clicking this button:

FreeAgent Small Business Online Accounting

Income tax example – Sole Traders:

Before Making Tax Digital:

After Making Tax Digital:

Posted on 28 January 2020