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The term paper trail is used regularly in a business context and is a fundamental requirement when submitting returns to HMRC.
Although, many small companies aren’t clear about the rules, why they need a paper trail for the tax office, and how to generate an appropriate paper trail from mobile banking services.
This guide explains what ‘paper trail’ means, where it originates, and how the modern equivalent looks slightly different. Read on or skip to the section to discover answers to these common questions:
- What does paper trail mean?
- Does a paper trail refer to physical paper documents?
- Why do you need a paper trail for business purposes?
- How is a digital paper trail better for your company?
- Which software provides the most reliable paper trail?
What does paper trail mean?
A paper trail simply means the collection of records documenting actions over time – usually, a paper trail traces financial transactions.
A paper trail usually refers to things like receipts, invoices, expense records, or purchase orders within a business setting. It can also include minutes or notes recording meetings with your accountant, solicitor, directors or shareholders.
Good paper trails are organised, detailed, and include dates, so it’s clear when every event occurred.
Organising a business paper trail doesn’t necessarily mean that every document or digital record needs to be stored in the same place. But you’ll usually keep everyday records such as invoices and receipts together to track down your paper trail easily.
Does a paper trail refer to physical paper documents?
The term paper trail doesn’t mean that every transaction needs to be printed out onto physical paper!
It’s an old term that businesses used when they recorded all their finances in ledger books.
These days, most companies issue invoices via email, record purchases digitally, and track events via spreadsheets. So you’re still creating a paper trail, regardless of how you record your business transactions.
Also known as an audit trail, you can use a paper trail to trace chronological transactions, verify published trading figures and research any agreements or decisions made in a formal business meeting.
Why do you need a paper trail for business purposes?
There are multiple reasons a paper trail is crucial for businesses.
You might need this to clear up discrepancies, check how much you’ve invoiced a customer, total up your spending, or support any submitted returns to HMRC.
What are the HMRC paper trail requirements??
If you’re a sole trader, you must maintain a record of your business finances for at least five years. If you run a limited company, this requirement extends to six years.
Minimum retention periods exist because HMRC reserves the right to conduct an audit and verify the details in your financial statements and tax returns.
The tax office can backdate inspections for several years to allow enough time to catch up with assessments related to any of the six million businesses in the UK (as of early 2020).
If you are selected for an audit, it would be impossible for HMRC to check your figures and calculate whether you have overpaid or underpaid your taxes, with potentially heavy penalties for non-compliance.
Why are paper trails good business practices?
Beyond avoiding legal trouble for not keeping the records you’re supposed to, a paper trail allows you to evaluate performance, assess different types of transactions, and track trading trends.
Without any records of past transactions, it is very difficult to create a precise and organised business strategy. Paper trails, however recorded, are crucial for managers to identify ways to improve efficiency and profitability.
How is a digital paper trail better for your company?
Digital record-keeping is hugely beneficial for businesses, and fully paperless offices are becoming more commonplace.
There are several advantages:
- Digital paper trails are accepted by HMRC for legal compliance and avoid any potential for loss or damage that are a risk for manual records.
- Companies can retain paper trails stored through the cloud, archived and backed up for immediate access to records even if they relate to several years ago.
- Fully paperless businesses benefit from reduced costs on resources such as printers, paper and postage, and can demonstrate environmental friendly approaches by avoiding unnecessary wastage.
Another reason to consider digital paper trails is that the information included in historical records is much easier to manipulate if you need to analyse your transactions or work out how spending has changed.
A digital paper trail is tamper-proof with advanced cyber security measures and usually requires significantly less admin time to update bookkeeping records.
Which software provides the most reliable paper trail?
The accounting software you choose to create a digital paper trail should include several features that meet your business needs.
Countingup is the business current account and accounting software in one app, automating the time-consuming aspects of your bookkeeping admin.
Thousands of company owners and finance managers use Countingup to reduce the time spent on financial admin and digitalise their paper trails for seamless storage.
The system is Making Tax Digital compatible, allowing flawless HMRC integrations and one-click tax submissions to simplify even onerous tasks.
Automatic expense categorisation and receipt capture tools generate exact paper trails in a fraction of the time.
Countingup is a current account and accounting software merged into one user-friendly app. You can enjoy automated invoicing and real-time cash flow insights to keep on top of your business. Countingup’s fast functionality helps you analyse performance and make prompt decisions.
Gain confidence in your business bookkeeping and upgrade your paper trail to a comprehensive paperless solution – find out more here and sign up for free today.