Record keeping is key to accounting and bookkeeping practices, not just for due diligence, but for legal purposes. But how long is ‘too long’, and what is considered not long enough to keep client records?
This article will consider some rules and circumstances that apply to how long accountants should keep their client records, by looking at these areas:
- What client records should be kept?
- Tax records
- Transaction records
- Money-laundering regulations
- Client management
- What about paperless offices?
What client records should be kept?
Limited companies should be submitting yearly accounts to HMRC and Companies House, and accountants will want to hold onto the accounts they send. These account records must include:
- All money received and spent by the business, including grants.
- Listed assets owned by the company (including stocks and shares, or any inventory you hold)
- Debts the business owes and unpaid debts the business is owed
- All goods bought and sold
- Who you bought goods from and who you sold them to and from (unless you run a retail business, as this would be an excessive amount of records to keep).
The records that will apply to sole traders as well as limited companies, will also need to be kept by the business and/or the accountant. These records are more to do with specific transaction and financial statements, such as:
- Proof of money spent by the company, like receipts, petty cash books, order invoices and delivery notes.
- Proof of all money received by the company, such as customer invoices, contracts, sales books and till rolls.
- Any other relevant documents, for example, bank statements and correspondence.
The records listed above will be needed in order to submit a tax return and should be kept for reference in case any discrepancies are noted by HMRC later down the line. But how long should your accountancy firm be keeping these records for your clients? There are a few rules that apply to different scenarios.
HMRC’s official stance on keeping records is referred to as ‘the six-year rule’. They’ve stated that records relating to sole trader self-assessment tax, limited company accounts, VAT, or corporation tax should be accessible for six years after the end of the tax year they relate to.
This rule not only applies to the owners of businesses if they are doing their own tax returns but to their accountants and advisors too.
HMRC has also stated that you must keep certain records for six years or longer if they apply to certain types of transactions. These include records of:
- A transaction that covers more than one of the company’s accounting periods (for example, if a bank statement covers a period of six months which applies to two separate tax years).
- A company purchase, which is expected to last more than six years, such as equipment, a vehicle or machinery.
You should also keep client records for longer than six years if the company tax return was submitted late, if HMRC is auditing them, or HMRC has begun a compliance check on a tax return for your client.
Accounting firms also have legal responsibilities to keep certain records, under the Money Laundering Regulations (MLR) 2007 legislation. Under this law, records must be kept for five years after the working relationship with the client is over.
The records that should be kept for these purposes are:
- Any copies of the client’s proof of ID
- Information that relates to the business relationship, such as contracts or payments made where the accountants acted as an intermediary party.
- Records of ‘occasional transactions’ that the accountancy firm has managed for the client.
For good client management, you may want to keep the records that apply to certain clients for as long as your practice is employed by them. A good idea is to hand over the records to the client once your professional relationship is over so that they still have the records available to them should they need them. You could hand them over and explain that any residual records leftover will be destroyed after six years, just in case.
You might choose to keep all records for your clients, even after they leave. With more and more records becoming digital it could be a good security measure, as there are a few circumstances where records may be needed:
- HMRC can seek tax, interest or penalties from a client on matters from the previous twenty years.
- There is no expiry date on evidence that may be needed in regard to criminal offences by your practice or your client.
- You should keep files relating to any criminal cases indefinitely (such as transaction records after criminal activity has been identified, or even Suspicious Activity Reports made by your firm’s staff).
What about paperless offices?
With more and more businesses becoming remote, and offices becoming paperless, storing records digitally and securely is growing amongst accounting firms.
If you scan all records and destroy the paper copies, then you can keep them indefinitely or set deletion dates using software to keep client files safe until they are no longer required.
The Civil Evidence Act 1995 also states that electronic documentation carries the same weight as a physically signed document, so all digital records should be kept in a secure location for a minimum of six years, just like the paper records mentioned above. Once this time has passed then the digital records can be destroyed/deleted at the right date if you so choose, or kept long-term for security or legal purposes in case HMRC or the courts ever need documentation as evidence.
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