Accounting records might be the lifeblood of your organisation, providing financial clarity and guiding strategic decisions, but if you are handling a high number of physical documents, you might face an important dilemma - how long to keep accounting records before you dispose of them.
Some organisations and individuals incorrectly assume that because the information is no longer critical to business operations, it is obsolete and can be safely discarded. That assumption can be a disruptive oversight at best, and a damaging one at worst, often leading to legal action, financial penalties and reputational harm. On the other side of the coin, you might choose to adopt a ‘better safe than sorry’ approach, whereby useful rooms become occupied by useless files that gather dust for decades and simply clutter up your workplace.
Walking the administrative tightrope between the two scenarios is a delicate balance, requiring a familiarity with UK data laws and an understanding of your organisation’s reliance on the files themselves. While we might not be familiar with your specific document needs, in this blog post we can help you to understand your legal obligation with regards to the retention of accounting records and recommend a third possiblescenario - affordable, off-site financial document storage.
But before we delve into the legalities of keeping accounting records safe, it might prove useful to define exactly what we mean by accounting records.
What Falls into the category of accounting records?
The term ‘accounting records’ encompass a wide range of documentation, but typically they track the financial activities and transactions of an organisation, allowing it to monitor profits - or losses - over time, make informed strategic decisions and remain legally compliant with government legislation.
Included under the umbrella of accounting umbrella are things like:
- Invoices;
- Receipts;
- Sales data;
- Bank statements;
- Payroll documents;
- Income statements;
- Audit reports;
- Loan agreements; and
- Other financial contracts.
While many of these accounting records will be stored digitally, often on a central network or external cloud solution, you might be dealing with physical documents. If so, they might be taking up valuable space that could be better utilised. While one option is to entrust your files to off-site document storage experts, another might simply be disposal.
How long to keep accounting records before disposal?
Most organisations in the UK are legally obligated to retain accounting records for a set period of time. How long they are required to do so will depend on their legal structure and the regulatory standards set by the industry in which they operate.
For example, according to the Companies Act 2006, if your organisation is a public or private limited company, meaning that it is a separate legal entity from its owner/s, the government requires you to store your accounting records for a minimum period of six years. A sole trader, on the other hand, you must retain your financial records for at least five years after the 31 January self assessment tax return submission deadline of the applicable tax year. So, if you send your 2023 to 2024 tax return on the 15th January 2025, you must keep your records until at least January 2030.
If you are operating in an industry that is subject to additional data storage regulations, your retention period might be longer. Financial businesses, such as a bank, brokerage firm, or payment processor are subject to these stringent measures, typically retaining the documents for between six and 10 years. Medical institutions, too, have an additional storage burden owing to the sensitivity of the files that they manage.
How should accounting records be stored?
Faced with a room that is filled with physical files, you are going to find it quite difficult to find what you are looking for without a robust cataloguing and retrieval process in place. As a result, many organisations choose to store their accounting information digitally, scanning in the individual physical files to ensure that they don’t get lost whilst also storing the originals in a purpose-built facility.
If you would prefer to keep the physical files physical and forego a digitisation process, our advice would be to speak to document storage experts who can provide tailored advice to meet your individual needs.
You might think that five, six, even 10 years is an exceptionally long time to keep documents safe under lock and key, but it is important to note the benefits of doing so other than simple legal compliance.
What are the reasons for keeping accounting records that long?
Having historical financial data always comes in handy. For example, the announcement of an audit might strike panic into one organisation that doesn’t have accounting records, whereas it will be business-as-usual for one that can simply hand over six years’ worth of files, assist wherever queries pop up, and sit back and relax. Your shareholders, too, will appreciate the transparency that the accounting records provide, allowing you to produce regular reports that can demonstrate the value of their investment.
But the retention of accounting records is not exclusively beneficial to businesses keen to look to the past or make the present more comfortable. These files can also inform the strategy of your organisation as it continues to navigate a changing world. Perhaps the sales report from three years ago can inform how you should overcome a particularly tricky challenge today.
What is the penalty for prematurely disposing of accounting records?
It is all to tempting to dispose of files that you consider to be obsolete. But if those files have not met their retention period obligation, your organisation could face legal action according to the Companies Act 2006. Individuals, too, could be prosecuted if they are deemed responsible for the decision to dispose of the documentation, potentially leading to expensive fines and even - in extreme cases - imprisonment.
Other impacts of prematurely disposing of accounting records might include director disqualification, a loss of credibility in the eyes of your clients, and disrupted internal and external audits. Accounting records storage is, therefore, a matter that should be taken seriously, something we are confident you are doing already.
Conclusion
How long to keep accounting records before disposal will depend on your organisation’s legal structure, as well as the specific regulations put into place by the industry it operates in. Far from simply being an obligatory chore that could prove to be a headache for many decisionmakers, effective document storage can have a number of tangible benefits. If, however, you would like to leave the process to experienced specialists, we are here to help. Talk to us today if you require expert advice or practical assistance.