To qualify for a full state pension, you need 35 qualifying years. You can earn these through paying National Insurance contributions or being awarded National Insurance credits. If you will not have sufficient qualifying years for a full state pension when you reach state pension age, you can ‘buy’ additional qualifying years through the payment of voluntary contributions.

Employed earners earn a qualifying year for each year that their earnings exceed the lower earnings limit for the year, which for 2024/25 is £6,396.

For 2023/24 and earlier tax years, self-employed earners earned a qualifying year through the payment of (or award of) Class 2 contributions where profits exceed the small profits threshold, set at £6,725 for 2023/24. For 2024/25 onwards the liability to pay Class 2 contributions is abolished and the self-employed build up a qualifying year through the payment of Class 4 contributions where profits exceed the lower profits limit (set at £12,570 for 2024/25). Self-employed earners whose profits fall below the lower profits limit but which are at least equal to the small profits threshold (of £6,725 for 2024/25) receive a National Insurance credit.

National Insurance credits are paid in various circumstances, for example, to those claiming child benefit for a child under the age of 12, regardless of whether they elect to actually receive the benefit. Credits are also awarded to those on certain benefits and to carers in receipt of carer’s allowance.

Check your state pension record

Before paying voluntary National Insurance contributions, it is important to check your state pension record. You can do this by visiting the Gov.uk website at www.gov.uk/check-state-pension. You can also check your state pension record using the HMRC app.

If you do not already have the 35 qualifying years needed for a full state pension or will not do so by the time that you reach state pension age, you can check your National Insurance record by visiting the Gov.uk website at www.gov.uk/check-national-insurance-record. This will show you what years count as qualifying years and where there are gaps in your record.

Paying voluntary contributions

To qualify for a full state pension, you need 35 qualifying years when you reach state pension age, whereas if you have at least ten qualifying years, you will receive a reduced state pension.

If you have less than 35 qualifying years, paying voluntary contributions will increase the state pension that you receive as long as you have at least ten qualifying years when you reach state pension age. If making voluntary contributions will not give you the magic ten qualifying years at state pension age, paying the contributions is not worthwhile. Once you reach 35 qualifying years, there is no benefit in making further additional voluntary contributions. Remember to factor in any National Insurance credits that you will receive.

You can make voluntary contributions by paying Class 3 contributions or, where you have low profits from self-employment, by making voluntary Class 2 contributions.

Class 3 contributions

Class 3 contributions can be paid voluntarily to plug gaps in your National Insurance record. These are weekly contributions, which for 2024/25 are payable at the rate of £17.45 per week. Contributions must normally be paid within six years from the end of the tax year to which they relate. Where the contribution is paid in the current or following tax year, it is payable at the rate for the year to which it applies; however, where it is paid later than this, it is payable at the highest rate prevailing in the period from the year for which they are being paid and the year in which the contributions are actually paid.

An extended time limit applies to fill gaps in the period running from 6 April 2006 to 55 April 2016. Contributions for this period can be made until 5 April 2025. Contributions paid in 2024/25 are payable at the 2022/23 rate of £15.85 per week. The deadline for paying contributions for 2016/17 and 2017/18 has also been extended to 5 April 2015.

Voluntary Class 2

Self-employed earners with profits below the small profits threshold can pay Class 2 contributions voluntarily. This remains the case from 2024/25 following the abolition of the liability to pay Class 2 contributions. Where this option is available, it is much cheaper than paying voluntary Class 3 contributions – for 2024/25, voluntary Class 2 contributions are payable at the rate of £3.45 per week. These are paid through the Self Assessment system. As with Class 3, voluntary Class 2 contributions can normally only be paid for the previous six years; however, an extended deadline of 5 April 2025 applies to contributions for the period from 2006/07 to 2015/16, for which contributions can be made in 2024/25 at the 2022/23 rate of £3.15 per week. The deadline for paying voluntary Class 2 contributions for 2016/17 and 2017/18 has similarly been extended.

If you make donations to charity, you can benefit from tax relief on those donations. This can be achieved in various ways.

Gift Aid

If you are a UK taxpayer, you can claim Gift Aid on donations that you make to charity. Where this is the case, the amount donated is treated as made net of basic rate tax and the charity reclaims basic rate tax on the donation. This means that every £1 that you donate is worth £1.25 to the charity.

To donate through Gift Aid, you must make a Gift Aid declaration. The option to make a Gift Aid declaration will usually be included on charitable giving pages. Alternatively, the charity may give you a form to sign.

The tax reclaimed by the charity is funded from the tax that you have paid. It is important therefore that you only make a declaration where you have paid sufficient tax to cover the tax that the charity will claim back. If this is not the case, or you make a Gift Aid declaration but are not a taxpayer, HMRC may recover the tax claimed by the charity from you. If your income falls, it is prudent to review any ongoing Gift Aid declarations so you do not get caught out.

If you are a higher or additional rate taxpayer, you can claim further relief equal to the difference between tax at your marginal rate and tax at the basic rate on your donation. This can be done in your tax return.

Payroll giving

If you are an employee and your employer operates a payroll giving scheme, you can make charitable donations through the payroll. Your employer will deduct your donations from your gross pay before tax. This automatically provides relief at your marginal rate, which means you do not need to claim higher or additional rate relief through your tax return. Your employer will pass the donations to the payroll agency that they use and the agency will pass them on to your chosen charity.

Making a gift in your Will

Donations to charity are exempt from inheritance tax. Also, if you leave at least 10% of your estate to charity, the rate at which your estate pays inheritance tax is reduced from 40% to 36%.

The way in which you operate your business determines the taxes that you pay and also your reporting obligations.

If you work for yourself and run your business on your own as an individual other than through a limited company, you are a sole trader. By contrast, if you operate your business through a personal company, even if you are the sole employee and director, the company has its own legal identity.

As a sole trader, you will pay income tax and Class 4 National Insurance contributions on your profits. For 2023/24 and earlier years, Class 2 National Insurance contributions were also payable.

Registering as a sole trader

Your registration obligations depend on whether you are already registered for Self Assessment, which may be the case, for example, if you have rental income to report to HMRC, and where you are not already registered, the level of your gross trading income.

If you are not already registered for Self Assessment and have trading income for a tax year of more than £1,000, you will need to register for Self Assessment by 5 October following the end of the tax year (so by 5 October 2025if you start self-employment in 2024/25 and have gross trading income of more than £1,000). You can register online on the Gov.uk website.

If you are already registered for Self Assessment for another reason, you will need to register as a sole trader for Self Assessment as this will register you for Class 4 National Insurance contributions. You can also register if you have low profits but want to pay voluntary Class 2 National Insurance contributions.

Gross trading income of £1,000 or less

If your gross trading income (i.e. before the deduction of expenses) is £1,000 or less, you can take advantage of the trading allowance. This allows you to enjoy your profits tax-free and without any need to tell HMRC about them.

You can still benefit from the trading allowance if your gross trading income is more than £1,000 by deducting the £1,000 allowance rather than your actual expenses. This will be worthwhile where your expenses are less than the allowance. However, in this instance, you will need to be registered as a sole trader for Self Assessment.

If your income is £1,000 or less, but you have made a loss, it is worth registering and filing a tax return so that you can claim relief for the loss.

Records

You will need to keep records of your business income and expenses. You can find guidance on the records that you will need to keep by visiting the Gov.uk website at www.gov.uk/self-employed-records.

Income tax and National Insurance

If you are self-employed, you will pay income tax on your profits. From 2024/25 onwards, the profits that are taxed for the tax year are those for the tax year (i.e. 6 April to the following 5 April) regardless of the date to which you prepare accounts. An accounting date of 31 March to 5 April inclusive is treated as corresponding to the tax year.

Your income tax liability is calculated by reference to your total income for the tax year, including your profits from self-employment. You will need to file a tax return by 31 January after the end of the tax year (so by 31 January 2026 for 2024/25). You will also need to pay Class 4 National Insurance on your profits if they exceed £12,570. For 2024/25, this is payable at 6% on profits between £12,570 and £50,270 and at 2% on profits in excess of £50,270.

Your tax and Class 4 liability must be paid in full by 31 January after the end of the tax year. Where your total tax and Class 4 liability for a tax year is £1,000 or more, you will need to make payments on account for the following tax year on 31 January in the tax year and 31 July after the tax year, unless 80% of your tax is collected at source, for example through PAYE. Each payment is 50% of the previous year’s liability.

VAT

You will also need to register for VAT if your VAT taxable turnover reaches the VAT registration threshold of £90,000.

The fall in the dividend allowance in recent years may mean that you now need to pay tax on your dividend income for the first time.

The dividend allowance

The dividend allowance was introduced from 6 April 2016. It is available to all taxpayers regardless of the rate at which they pay tax and in addition to any other allowances that they may receive (such as the personal allowance or the personal savings allowance). Dividends sheltered by the allowance are taxed at a zero rate. However, they use up part of the tax band in which they fall.

The dividend allowance was set at £5,000 for 2016/17 and 2017/18. However, it was reduced to £2,000 for 2018/19, remaining at this level up to and including 2022/23. It was further reduced to £1,000 for 2023/24 and again to £500 for 2024/25.

For years prior to 2016/17, dividends came with a tax credit which matched the dividend ordinary rate of 10% on the gross dividend. This meant that basic rate taxpayers had no further tax to pay on dividend income, regardless of the amount, as long as their total income did not push them into the higher rate tax band.

Taxation of dividends

Where dividends are not sheltered by the dividend allowance or any personal allowance not used elsewhere, they are taxed at 8.75% where they fall in the basic rate band, at 33.75% where they fall in the higher rate band and at 39.35% where they fall in the additional rate band. To work out which rate applies, dividends are treated as the top slice of income.

Impact of the falling dividend allowance

The fall in the dividend allowance in recent years may mean that taxpayers who have never previously paid tax on their dividend income now have some dividend tax to pay for the first time.

Example

Barbara has had some privatisation shares for many years. She has increased her holdings by taking advantage of scrip dividends and rights issues. She receives dividend income of around £1,500 a year. She has other income of £30,000 a year from her state pension and an occupational pension. She does not complete a tax return.

For years prior to 2023/24, Barbara’s dividend income was sheltered by the dividend allowance and she had no tax to pay.

However, for 2023/24, her dividend income of £1,500 exceeds the dividend allowance of £1,000 by £500. As her dividend income falls in the basic rate band, she will need to pay tax of £43.75 on her dividend income (£500 @ 8.75%).

For 2024/25, the dividend allowance is only £500, and Barbara’s dividends exceed her dividend allowance by £1,000. As a basic rate taxpayer, she will need to pay tax of £87.50 (£1,000 @ 8.75%) on her dividend income in 2024/25.

Telling HMRC

If you are now liable to pay tax on your dividend income, you will need to tell HMRC. The way in which you do this depends on whether you already complete a tax return and the amount of your dividends.

If you already complete a Self Assessment tax return, as will be the case if you are self-employed or have other income, such as rental income, to declare, you simply include your dividend income on the dividend pages of your return.

If you do not need to complete a tax return, for example, because you are taxed under PAYE, if your taxable dividends are £10,000 or less, you can simply call the HMRC helpline on 0300 200 3300 to tell them about your dividend income. You can ask that they amend your tax code to collect the tax that you owe through PAYE. However, if you have taxable dividend income of more than £10,000, you will need to complete a Self Assessment tax return. You will need to register for Self Assessment no later than 5 October after the end of the tax year in which the need to first report the income arose.

For 2024/25 and later tax years, unless they elect otherwise, unincorporated businesses must prepare their accounts and calculate their taxable profit using the cash basis. This is a reversal of the position applying for 2023/24 and earlier tax years, where the accruals basis was the default, but traders who were eligible to use the cash basis could elect to do so if they preferred. To enable the cash basis to operate by default, the restrictions which applied previously have been lifted.

Cash basis v accruals basis

The cash basis works on a cash in and cash out approach. Income is only taken into account when received, and expenses when paid. Consequently, there is no need to account for debtors and creditors or prepayments and accruals. As income is not recognised until received, relief for bad debts is automatic.

By contrast, the accruals basis matches income and expenditure to the accounting period to which they relate. This necessitates the computation of debtors and creditors and prepayments and accruals.

Removal of cash basis restrictions

For 2023/24 and earlier tax years, traders were only able to elect to use the cash basis if their turnover (as computed under the cash basis) was £150,000 a year or less. Once in the cash basis, they could remain in it until their turnover reached £300,000; once turnover reached this level, the trader had to move to the accruals basis. The turnover limits are removed from 2024/25.

Under the cash basis as it applied for 2023/24 and earlier tax years, traders were only able to deduct interest and finance cost up to a maximum of £500 a year. The cap does not apply from 2024/25, enabling traders to deduct all allowable interest and finance costs.

The cash basis rules as they applied for 2023/24 and earlier tax years also imposed restrictions on the ways in which losses could be used. Prior to 2024/25, where accounts were prepared under the cash basis, it was not possible to relieve the loss sideways against income of the current and previous tax year. The ability to carry a loss back in the early years of a business against income of the previous three years was also denied where the cash basis was used. These restrictions have been lifted from 2024/25.

Accruals basis election

For 2023/24 and earlier tax years, traders who did not elect to use the cash basis simply prepared their accounts using the accruals basis by default. As the cash basis is the default basis from 2024/25, traders who wish to continue to use the accruals basis will need to elect to do so.

Moving between the cash basis and the accruals basis

To prevent some income and expenditure being counted twice and some not being included at all, adjustments are needed when moving between the cash basis and the accruals basis and vice versa. Adjustments may also be needed where capital allowances have been claimed under the accruals basis but the expenditure has not been relieved in full to ensure relief is given for the balance of the expenditure.

The nil rate band is the amount that a person may leave free of inheritance tax. Each person has their own nil rate band, which for 2024/25 is set at £325,000. A person’s estate may also benefit from a further nil rate band – the residence nil rate band (RNRB) – where they leave a residence to a direct descendant or descendants.

The nil rate band is available regardless of the amount of a person’s estate. However, the RNRB is reduced where the value of the estate exceeds £2 million, being abated by £1 for every £2 by which the value of the estate exceeds £2 million. This means that the RNRB is not available for estates valued at more than £2.35 million, while a reduced RNRB is available for estates valued at between £2 million and £2.35 million.

Spouses and civil partners

The inter-spouse exemption means that there is no inheritance tax to pay on anything that a person leaves to their spouse or civil partner. This means where a person leaves their entire estate to their spouse or civil partner, they will not use their own nil rate band or RNRB. However, this is not a problem as the bands are transferable, allowing the surviving spouse or civil partner’s estate to benefit from their spouse or civil partner’s unused nil rate bands on their death. Consequently, it is not necessary to leave bequests to the value of an individual’s nil rate bands to someone other than their spouse to prevent their own nil rate bands from being wasted.

Claiming the transferable nil rate band

On the death of the surviving spouse or civil partner, their estate can claim the unused portion of their spouse or civil partner’s nil rate band, which can be set against the value of the surviving spouse/civil partner’s estate.

It is the unused percentage that is claimed, rather than the absolute amount. This provides an automatic adjustment for changes in the nil rate band, so that the amount that is available for transfer is at current rather than historical amounts. If the first spouse or civil partner to die left everything to their spouse/civil partner, the surviving partner’s estate will benefit from 100% of the nil rate band at the value at the time of the surviving partner’s death.

It should be noted that the transferable nil rate band can only be claimed, usually by the surviving partner’s personal representative, on or after their death. The claim must be made within two years from the end of the month in which the surviving partner dies (or, if later, within three months from the date on which the personal representatives first act). The surviving partner is not able to claim the transferable nil rate band during their lifetime, and as such, it is not available to shelter chargeable lifetime transfers. If the surviving partner remarries or enters a new civil partnership and is again widowed, their estate can only benefit from one transferable nil rate band.

Transferable RNRB

As with the nil rate band, the unused portion of a person’s RNRB can be transferred to the estate of their surviving spouse or civil partner. The RNRB is only available where a residence is left to a direct descendant.

As noted above, the RNRB is subject to a taper and, when planning ahead, consideration should be given to the likely value of the estate on each spouse’s/civil partner’s death. For example, if a person has an estate of £1.5 million which includes their share in a residence and they leave it to their spouse, there will be no tax to pay and the taper will not apply. However, on the death of the surviving spouse/civil partner, having inherited everything on their partner’s death, their estate may exceed £2 million, such that the RNRB may be fully or partially lost. If this is likely, it may be better for each spouse to leave their share of a residence to a direct descendant rather than to each other to preserve the availability of the RNRB.

As long as the value of neither estate exceeds £2 million, a married couple or civil partners can leave £1 million free of inheritance tax as long as they leave a residence worth (or funds from a former residence having downsized of) at least £350,000 to one or more direct descendants.

HMRC have revealed that every year lots of simple errors are made in tax returns in relation to capital gains tax which result in the taxpayer suffering additional tax, interest and penalties. Here are some common mistakes, and how to avoid them.

1. Using the correct annual exempt amount

When calculating how much capital gains tax you need to pay, it is important to make sure that you use the annual exempt amount for the correct tax year. This is the capital gains tax equivalent of the personal allowance, and is the amount of gains that you are allowed tax-free for a tax year. The annual exempt amount is applied to net gains (gains for the year less losses for the year), and before using losses brought forward from earlier years. Spouses and civil partners each have their own annual exempt amount.

The annual exempt amount is £3,000 for 2024/25, reduced from £6,000 for 2023/24. It is lost if not used in the tax year to which it relates.

• Disposals of UK residential property

Earlier payment and reporting deadlines apply to gains on UK residential property. UK residents who make a chargeable gain on the disposal of a UK residential property must report the gain to HMRC within 60 days of completion and pay the capital gains due on the gain within the same time frame.

If no capital gains tax is due, for example, on the disposal of property which has been the taxpayer’s only or main residence throughout the period of ownership, the reporting requirements do not apply.

If the taxpayer has also made other gains or losses in the year, the capital gains tax for the year is finalised in the Self Assessment tax return.

• Private residence relief – final period exemption

Where a property has for some time been the taxpayer’s only or main residence, the gain relating to the final nine months is covered by private residence relief, even if the taxpayer no longer lives in the property. This is increased to the final 36 months where the taxpayer leaves their home to go into care.

Prior to 6 April 2020, the final period exemption was 18 months.

In calculating the amount of private residence relief, it is important that the correct final period exemption is used, and that it is only applied once.

• Lettings relief

The scope of lettings relief was drastically reduced from 6 April 2020 and now only applies where the taxpayer lets out part of their home and lives in part of it as their main residence and is eligible for private residence relief on part of the gain. It does not apply if the whole house has been let out, even if this was prior to 6 April 2020 when the old lettings relief rules applied. Now lettings relief is only available to live-in landlords. It is equal to the lower of:

• the amount of private residence relief;
• £40,000; and
• the gain relating to the let part.

It is important that lettings relief is only claimed where due and the relief is calculated correctly.

• Business asset disposal relief

Business asset disposal relief (formerly entrepreneurs’ relief) is subject to a lifetime limit of £1 million. The limit includes amounts of entrepreneurs’ relief – the clock did not restart with the name change.

Taxpayers have also mistaken the limit for an annual limit.

Up to certain limits, it is possible to enjoy some savings income tax-free. The extent to which this is possible depends on the rate at which you pay tax; not all routes are open to all.

Personal allowance

If you do not fully use your personal allowance elsewhere, any balance not otherwise used can be set against your savings income, allowing it to be received tax-free.

Savings allowance

Basic and higher rate taxpayers are entitled to a savings allowance. This is in addition to their personal allowance.

For 2024/25, the savings allowance is set at £1,000 for basic rate taxpayers and at £500 for higher rate taxpayers. The allowance is available in addition to the personal allowance and also the dividend allowance.

Rising interest rates in recent years may mean that basic and higher rate taxpayers now receive interest in excess of their savings allowance on which tax is payable and which must be notified to HMRC on their Self Assessment tax return. This may mean that they need to file a tax return where previously they were not required to. Where this is the case, it is important to register for Self Assessment.

Taxpayers who pay tax at the additional rate (which applies to taxable income in excess of £125,140) do not benefit from a personal savings allowance and must pay tax on any savings income unless it is otherwise exempt. They will also not receive a personal allowance, as the personal allowance is fully abated at this level.

Savings starting rate

Savings income which falls within the savings starting rate band is taxed at the savings starting rate of 0%. Depending on the individual’s personal circumstances, they may be able to enjoy up to a further £5,000 of savings income tax-free.

The savings starting rate band is set at £5,000, but is reduced by any taxable non-savings income. This is other taxable income in excess of the personal allowance (but excluding any dividends which are treated as the top slice of income). Consequently, the full £5,000 savings starting rate band is available where other taxable income is less than the individual’s personal allowance. The standard personal allowance is £12,570 for 2024/25. The savings starting rate is eroded once taxable income in excess of the personal allowance reaches £5,000.

The savings starting rate is applied before the personal savings allowance.

Tax-free savings accounts

If savings are held within a tax-free wrapper such as an Individual Savings Account (ISA), the associated savings income is tax-free. A taxpayer can invest up to £20,000 in an ISA in 2024/25.

Maximum tax-free savings income

Where a person has the personal allowance available in full to set against their savings income, they can enjoy tax-free interest in 2024/25 of £18,570 (personal allowance of £12,570 plus savings starting rate band of £5,000 plus savings allowance of £1,000), plus that from tax-free savings accounts.

The deadline for filing your 2023/24 Self Assessment tax return online is 31 January 2025. An earlier deadline of 30 December 2024 applies if you owe £3,000 or less and wish to pay the tax that you owe through an adjustment to your PAYE code. While these dates are some way off, there can be advantages of filing your 2023/24 tax return early.

Self-employed taxpayers

If you are self-employed and you prepare your accounts other than to 31 March, 5 April or a date in between, there will be more work involved in calculating your taxable profit for 2023/24. This is because the 2023/24 tax year is the transition year between the current year basis which applied for 2022/23 and earlier tax years and the tax year basis applying from 2024/25. The profit for 2023/24 will comprise that for the year to the accounting date ending in 2023/24 (the standard part) and also the profits for the period from the end of that period to 5 April 2024 (the transition part). For example, if you prepare accounts to 30 June, the standard part is the year to 30 June 2023 and the transition part is the period from 1 July 2023 to 5 April 2024. This is found by apportioning the profits for the year to 30 June 2024. The 2023/24 tax year is the last year in which relief can be given for any unrelieved overlap profits that arose on commencement or a change of accounting date.

Where the accounting period does not correspond to the tax year, there will be more than 12 months’ profit to assess in 2023/24. Accounting periods ending on 31 March, 5 April or a date in between are treated as corresponding to the tax year. However, the transition part of the profits less any overlap relief is automatically spread over five years (2023/24 to 2027/28 inclusive) unless you elect for these to be assessed earlier (for example, where your personal allowance is available or they would be taxed at a higher rate). Consequently, your tax bills may be higher than normal for the next five years.

Filing your tax return early will give you more time to ensure that you have the funds available to pay the higher bills, and to make arrangements to pay in instalments where payment might otherwise be difficult.

Employed taxpayers

If you are employed you may need to file a tax return if you have other sources of income, such as rental income or investment income. If you owe less than £3,000, you can elect for the tax to be collected through your PAYE code if you file your return by 30 December 2024. This saves you paying the tax in a lump sum, providing an interest-free instalment option.

Filing the return now the 2023/24 tax year has ended ensures the 30 December 2024 deadline is not missed.

Earlier repayments

If you have overpaid tax for 2023/24, the sooner you file your tax return, the sooner you are able to receive a repayment. The money is arguably better in your bank account that in HMRC’s.

Certainty as to tax bills

Once you have filed your return, you will know what you need to pay by 31 January 2025 and, where you need to make a payment on account for 2024/25, what you need to pay by 31 July 2025. This provides certainty as to future tax bills and allows you to organise your finances to ensure that you have the necessary funds available.

If you know you will struggle to meet your tax bills, you can set up a Time to Pay arrangement to allow you to pay your bill in manageable instalments. You may be able to do this online.

Peace of mind

Filing your tax return ahead of the deadline provides peace of mind that the job has been done and that it has been ticked off the ‘to do’ list.

If you are registered for VAT, you will need to keep normal business records. The records must be complete, up to date and sufficient to enable you to calculate the VAT due to or due from HMRC. You will also need to maintain a VAT account and keep copies of your VAT invoices.

Business records

HMRC take a wide view of what constitutes ‘business records’ and their list includes:

• annual accounts, including a profit and loss account;
• bank statements and paying-in slips;
• cash books and other account books;
• purchase invoices;
• copy sales invoices;
• credit or debit notes issued or received;
• orders and delivery notes;
• purchase and sales books;
• records of daily takings, such as till rolls;
• import and export documents;
• relevant business correspondence; and
• any documents or certificates supporting special VAT treatment.

The precise records that need to be kept will depend on the type of business. However, all businesses will need to maintain a VAT account and keep copies of invoices.

If your business is registered in Northern Ireland, you must also keep any documentation relating to dispatches and acquisitions of goods to or from the UK or an EU member state.

VAT account

The VAT account forms the link between the business records and the VAT return and all VAT-registered businesses must keep a VAT account. To comply with MTD, it must be kept digitally; either within a software package or on a spreadsheet.

To show the link between the output tax in your records and the output tax shown on your VAT return, you must keep a record of:

• the output tax owed on sales;
• if your business is registered in Northern Ireland, the output tax owed on acquisitions from EU member states;
• the tax required to be paid on behalf of a supplier under a reverse charge procedure;
• tax that must be paid following a correction or adjustment for an error; and
• any other adjustments required by the VAT rules.

You must also keep a record of the following in order to show the link between the input tax in your records and the input tax shown on your VAT return:

• the input tax claimed on business purchases;
• if your business is registered in Northern Ireland, the input tax allowable on acquisitions from EU member states;
• any tax that can be recovered following a correction or an adjustment for an error; and
• any other necessary adjustments.

Need to keep digital records

To comply with the requirements of MTD for VAT, VAT-registered businesses must maintain certain records digitally and keep their accounts within ‘functional compatible software’. This is a software program or set of software programs, a product or set of products or an application or set of applications which are able to:

• record and preserve digital records;
• provide HMRC with information and returns from data held in those digital records via an API (application programming interface) platform; and
• receive information from HMRC using the API platform.

Where data is transferred between software, applications or products (for example, from a spreadsheet to the VAT return software), this must be via a digital link.

VAT invoices

VAT invoices issued are an important part of the business records, while VAT invoices received are the primary evidence for recovering VAT. Copies must be kept of all VAT invoices issued and received.

Maintaining records

The general rule is that business records for VAT purposes should be kept for at least six years.