Keeping business records when your accounts are in the cloud

Most small businesses now keep their books in cloud software. That is convenient, but it raises a question that is easy to ignore until it matters: if you stop paying, change supplier or close the business, do you still have the records HMRC expects you to hold? This post sets out what the official guidance says, and a short plan you can finish this week.

How long you must keep business records

The answer depends on how your business is set up. The figures below come from GOV.UK.

• Limited companies: "You must keep records for 6 years from the end of the last company financial year they relate to." That covers accounting records (money received and spent, assets, debts, stock) and the paperwork behind your accounts and Company Tax Return, such as receipts, invoices, bank statements and correspondence.
• Sole traders and partners: keep records for at least 5 years after the 31 January submission deadline for the tax year. GOV.UK gives an example: for a 2022 to 2023 return sent online by 31 January 2024, keep records until at least the end of January 2029.
• VAT registered businesses: "Generally, you must keep all your business records for VAT purposes for at least 6 years." You may keep some records for less time only if HMRC agrees.

Some situations extend the limited company period. GOV.UK lists a transaction that spans more than one accounting period, an asset you expect to last more than 6 years, a late Company Tax Return, or HMRC starting a compliance check.

What is at stake if you cannot produce them

For limited companies, GOV.UK says you can be fined £3,000 by HMRC for not keeping accounting records, and you can also be disqualified as a company director. For sole traders, the guidance is gentler but still practical: if you cannot replace lost records, you should provide your best figures, tell HMRC when you file that they are estimated or provisional, and later update provisional figures with actual ones.

In other words, a missing set of records does not end the world, but it turns a routine filing into an exercise in guesswork. It is far better to avoid the gap.

What digital record keeping adds

If you are VAT registered, GOV.UK says all VAT registered businesses "must keep and preserve certain records digitally", and the VAT account records must be kept in functional compatible software. A few details matter:

• You must keep a copy of every VAT invoice you issue.
• Invoices you receive are your evidence for reclaiming input VAT, so keep them where you can find them easily.
• Scanned invoices can replace originals if the image holds all the detail needed for VAT, unless another purpose requires the original.
• Some items must stay in original form. GOV.UK gives the example of a C79 import VAT certificate.
• Exemptions exist, for example where digital record keeping is not practical because of location or disability, or where a business is in insolvency. You have to ask HMRC for one.

Sole traders and landlords moving to Making Tax Digital for Income Tax have a similar duty. HMRC's guidance says self-employment and property income and expenses must be recorded digitally, with the amount, the date and a category for each record. You should create them as close to the date of the transaction as possible, and it is your responsibility to check they are accurate before sending a quarterly update. You can use spreadsheets or other record keeping software, but they must be linked to your submission software. HMRC also says you still need to keep original records or supporting documents (or copies of them), such as bank statements and invoices, and that digital records follow the same 5 year rule.

Notice what is not said. The HMRC guidance on digital records does not tell you how to back them up. That part is left to you.

Where cloud accounting can catch you out

This is the gap worth thinking about. Your legal duty to keep records does not end when your software subscription does. What happens to your data after cancellation varies by supplier, so it is worth finding out before you need to know.

Public accounting forums show the same worry coming up again and again: people finding out only after cancelling that they could no longer reach everything they expected, or that reports they had downloaded did not include every invoice and attachment. Practices differ between suppliers and change over time, so read your own supplier's current terms rather than relying on forum posts. The sensible habit is to export the underlying transactions, attachments and categories, not just summary reports.

A practical plan for this week

• Find your retention period. Use the list above: 6 years for a limited company or VAT records, at least 5 years after 31 January for a sole trader.
• Check your software terms. Look for what happens to your data if you cancel, miss a payment or close the business, and how long you can still download it.
• Export a full copy now. Download transactions, invoices, receipts and any attachments, along with the category list, not just summary reports. Do this at least once a year, ideally after each year end.
• Store the copy somewhere you control. Keep it separate from the software supplier, in a place more than one trusted person can reach, and make sure it is backed up.
• Test it. Open an exported file and check that you can find a specific invoice from a past year.
• Keep scanned paper records legible. If you scan invoices, check the image shows every detail that matters for VAT.
• Write down who has access. If the person who set up the account leaves, you need to still be able to get in.

When your records are part of a bigger system

If your orders, bookings and payments flow through a website or an ordering platform, those systems also hold records you may need for your accounts. It is worth knowing how they can export data, and whether they connect cleanly to your accounting software. If you are weighing up that kind of set up, our page on process automation explains how systems can be joined up so figures are entered once rather than retyped.

The bottom line

Cloud accounting is a good tool, but the legal responsibility to keep records stays with you, not the software company. Know your retention period, take a full export regularly, keep it somewhere you control, and check it opens. It is an hour or two of work that could save you a great deal of trouble if HMRC ever asks to see something from five or six years ago.