Statutory retention periods for business records

Le­gis­la­tion sets deadlines for business document retention ob­lig­a­tions for business owners that meet certain criteria. The statutory retention periods are mainly there for the purpose of verifying trans­ac­tions relevant to tax and com­mer­cial law. Cor­res­pond­ing re­quire­ments emerge from various le­gis­lat­ive rulings.

We’ll give you an overview of the legal bases for retention ob­lig­a­tions, break down who is obliged to keep business records, under what con­di­tions, and provide you with a list of documents subject to retention of their re­spect­ive deadlines.

In the UK, both Her Majesty’s Revenue & Customs (HMRC) and Companies House, as well as many local councils require busi­nesses to retain records for taxation and civil com­pli­ance.

• The HMRC requires busi­nesses to keep financial records in the case of a tax audit
• Companies House­re­quires busi­nesses to keep business records and employee records
• The Public Records Act (FLSA) requires busi­nesses to keep records
• Com­pli­ance with GDPR and ISO 15489 is necessary for busi­nesses
• Depending on the type and size of your business, different local re­quire­ments may exist

All merchants are required to keep business records. The legal form of your company may also dictate ad­di­tion­al details for business document retention.

As­so­ci­ations, charities and clubs also have document retention periods that they must comply with in order to provide tax or income status.

While it can sometimes be unclear who is ul­ti­mately re­spons­ible for book­keep­ing within a business or or­gan­isa­tion, tax retention periods are the re­spons­ib­il­ity of everyone who handles and creates business records within a company. Anyone re­spons­ible for the man­age­ment of the books should have a company-wide re­cord­keep­ing procedure in place.

Any business or entity who vol­un­tar­ily choose to make tax-relevant records available despite not being obligated to do so, are also required to follow document retention periods.

Le­gis­lat­ors often provide guidelines for the orderly storage of documents relevant to tax law or com­mer­cial codes. The principle of order ap­plic­able, and the location where the documents are stored are left up to the business owner, provided that they ensure that the documents are available within a reas­on­able time, should there be an audit.

Le­gis­la­tion usually only requires retention of the document’s original form on paper for opening balance sheets and financial state­ments (in­di­vidu­al and con­sol­id­ated financial state­ments including notes), as well as for certain customs documents. These must be printed and signed, even if they have been created using elec­tron­ic data pro­cessing (EDP) pro­ced­ures. For all other documents subject to retention, elec­tron­ic storage is usually suf­fi­cient, provided that the re­pro­duc­tion is con­sist­ent with the prin­ciples of proper ac­count­ing and that the following pre­requis­ites are filled:

• The data must cor­res­pond fig­ur­at­ively with business letters, booking documents and all other documents in terms of content.
• In the case of tests, the documents on image and data carriers must be readable and evaluated by a machine within an ap­pro­pri­ate amount of time.

Image carriers include all media that allow a pictorial image of the original (for example, pho­to­graphs, pho­to­cop­ies or microfilm re­cord­ings).

Various elec­tron­ic storage media (CDs, hard drives, magnetic tape, etc.) are available as data carriers for business document contents.

Retention periods in place for taxation purposes also enforce the afore­men­tioned policy. Although there is no le­gis­la­tion that dictates a par­tic­u­lar type of computer ac­count­ing software or re­cord­keep­ing software, any and all software used to record tax documents, books, records and business documents must comply with the following con­di­tions:

• The documents must be kept in such a way that an expert third party will be able to examine the documents within a reas­on­able time frame.
• Documents created or received in elec­tron­ic format must be kept elec­tron­ic­ally. You cannot delete the file and simply keep a print out.
• If paper documents are trans­ferred to elec­tron­ic form, the re­spect­ive procedure must be doc­u­mented in an or­gan­isa­tion­al in­struc­tion. This, too, is subject to retention.

If documents have been com­pletely converted to an elec­tron­ic form with all the ap­pro­pri­ate metadata created, then the original paper document may be destroyed. Be careful though, as once a paper document is destroyed, there’s often no getting them back. If you are unsure what you should be keeping as a paper file, or what can be kept only in digital format, please consult a legal pro­fes­sion­al to ensure you are def­in­itely compliant. In general, we recommend keeping hard copies of the following types of documents:

• Proof of tax re­mu­ner­a­tion
• Proof of re­gis­tra­tion with Companies House
• Any certified or notarised documents
• Powers of attorney
• Paper documents with a signature
• Ad­mis­sions of guilt
• Findings of guilt
• Guar­an­tees
• In­her­it­ance cer­ti­fic­ates
• I-O-Us
• Donation cer­ti­fic­ates
• Tax cer­ti­fic­ates

Business owners must grant HMRC access to all computer systems used to process tax-relevant documents in the event of an external audit. Al­tern­at­ively, HMRC may require business owners to provide this data at their own expense on a machine-evaluable data carrier.

Documents that are subject to retention ob­lig­a­tions are generally divided into four groupings:

1. Business books, in­vent­or­ies, balance sheets, annual financial state­ments, man­age­ment reports, con­sol­id­ated financial state­ments, group man­age­ment reports, as well as all work in­struc­tions and other or­gan­iz­a­tion­al documents
    
2. Business letters received
    
3. Copies of business letters sent
    
4. Ac­count­ing documents

The retention periods for retaining a document depends on the category. Periods can range between 3-10 years for documents relevant to HMRC and Companies House; any records required by local authority licensing should be kept in ac­cord­ance with their guidelines. Contact your local authority or license issuer for in­form­a­tion on retention periods.

The following table gives you an overview of the most important business documents and their retention periods (in al­pha­bet­ic­al order). Ensuring that you follow these should keep you in line with your federal retention ob­lig­a­tions:

Table: Retention periods for business records

Emails can be con­sidered to be business letters: Whenever trans­ac­tions are prepared, concluded, carried out or cancelled via email, the elec­tron­ic message is then con­sidered a business letter and cannot simply be deleted. Emails are therefore also subject to retention periods. As a rule, emails must be kept in the corporate context for 6 years. However, the rule only applies to business emails. If employees write personal emails to one another, these do not need to be archived.

Correct Email archiving is therefore an important aspect of document retention. Since manual archiving is very tedious, there is special software that can assist with legally compliant email archiving. Ap­pro­pri­ate programs ensure that emails are stored correctly. Elec­tron­ic archiving also ensures that the stored emails can be searched by a machine. This way, all in­form­a­tion is being kept available, both for the company and any in­vest­ig­at­ing au­thor­it­ies.

The retention period generally begins at the end of the calendar year when the documents were created or amended. In certain cases, the retention period may end up taking longer than the law requires. Documents should be kept longer than the legally mandated period if:

• An audit is currently being carried out
• Tax has only been pro­vi­sion­ally assessed
• Criminal pro­sec­u­tion or fine pro­ceed­ings are pending
• The company still requires the documents for an ap­plic­a­tion

Business owners who destroy documents that are subject to retention before the deadline risk massive dis­ad­vant­ages in civil pro­ceed­ings, since the probative value of the documents are lost in their de­struc­tion.

In the worst-case scenario, any breaching of document retention is also con­sidered to be a violation of ac­count­ing or recording ob­lig­a­tions, which can have serious con­sequences. If the tax office questions the account’s probative power due to a lack of doc­u­ment­a­tion, the authority may be entitled to estimate the taxable amount based on previous figures which may be a problem if numbers have drastic­ally changed within a year. In addition, under certain con­di­tions, a breach of retention ob­lig­a­tions may be pun­ish­able by tax evasion charges or a tax penalty for neg­li­gence. HMRC will fine £3,000 pounds and remove an in­di­vidu­al from the position of company director if they are found to be negligent with documents.

Des­troy­ing documents subject to retention periods can have criminal con­sequences – es­pe­cially in the context of impending over-in­debted­ness or in­solv­ency. Anyone who destroys, conceals or damages evidence can be found guilty. In the event of a bank­ruptcy offence, this could be up to five years prison time.

Please note the legal dis­claim­er relating to this article.