The Foundation of Your IT Contracting Business
For IT contractors operating through their own limited company, understanding what records must be kept for HMRC compliance isn't just administrative paperwork—it's the foundation of your entire tax position. Getting this right means you can legitimately claim business expenses, accurately calculate your corporation tax liability, and sleep soundly knowing you're protected in the event of an HMRC enquiry. The consequences of poor record keeping can be severe, including penalties, interest charges, and potentially losing the right to claim legitimate business expenses that could save you thousands of pounds annually.
Many contractors mistakenly believe that keeping a few invoices and bank statements is sufficient, but HMRC requirements are far more comprehensive. The question of what records must IT contractors keep for HMRC compliance encompasses everything from business income and expenses to personal salary, dividends, and mileage records. With the right systems in place, this process becomes significantly easier, allowing you to focus on what you do best—delivering exceptional IT services to your clients.
Mandatory Business Records for Your Limited Company
As a director of your own limited company, you have specific statutory obligations under the Companies Act 2006 and various tax legislations. Your company must maintain accurate accounting records that explain the company's transactions, disclose its financial position at any time with reasonable accuracy, and enable you to prepare statutory accounts. These records must be retained for at least six years from the end of the financial year they relate to.
Essential business records include:
- All sales invoices issued to clients, including details of services provided, dates, and payment terms
- Business bank statements and records of all company transactions
- Purchase invoices for all business expenses, including software subscriptions, equipment, and professional fees
- Records of VAT if your company is registered (required when turnover exceeds £90,000)
- Payroll records including RTI submissions for any employees, including yourself as director
- Dividend vouchers and board minutes documenting dividend declarations
- Company formation documents and statutory registers
When considering what records must IT contractors keep for HMRC compliance, it's crucial to understand that digital records are perfectly acceptable. Many contractors find that using dedicated tax planning software streamlines this process significantly, with features like receipt capture and automatic categorization saving hours of administrative time each month.
Personal Tax Records and Expense Documentation
Beyond company records, you'll need to maintain comprehensive personal tax documentation, particularly if you operate under IR35 rules or have multiple income streams. Your self-assessment tax return requires supporting evidence for all figures declared, and HMRC can request to see this evidence for up to six years after the filing deadline.
Key personal records include:
- P60 forms from your company showing salary payments
- Dividend vouchers for all dividends received from your company
- Records of any other income, including interest, rental income, or other business activities
- Evidence of pension contributions and gift aid donations
- Capital gains records for any asset disposals
For business expenses, the golden rule is: if you can't prove it, you can't claim it. This is particularly important when determining what records must IT contractors keep for HMRC compliance regarding expenses. Keep detailed records of:
- Business mileage - note dates, destinations, business purpose, and miles travelled
- Home office expenses - including proportion of utility bills and council tax if you work from home regularly
- Professional subscriptions and training costs relevant to your IT work
- Client entertainment (though note this is not tax-deductible)
- Equipment purchases and business insurance
IR35 Documentation and Contract Reviews
For IT contractors, IR35 compliance adds an additional layer of record-keeping requirements. Since April 2021, medium and large private sector clients have been responsible for determining your IR35 status, but you remain responsible for keeping appropriate records to support this determination.
Essential IR35 documentation includes:
- Status Determination Statements (SDS) from your end client
- Written contracts and any subsequent variations
- Evidence of working practices that demonstrate you're operating outside IR35
- Records of substitution rights, control, and mutuality of obligation
- Correspondence with clients and agencies regarding your engagement terms
Understanding what records must IT contractors keep for HMRC compliance in the context of IR35 is particularly important, as HMRC can investigate past years and demand significant back taxes if they determine you should have been inside IR35. Keeping thorough contemporaneous records provides your best defense in such situations.
Digital Record Keeping and Technology Solutions
The digital transformation of tax administration makes modern record keeping significantly more efficient than traditional paper-based systems. HMRC's Making Tax Digital (MTD) initiative means that digital record keeping will eventually become mandatory for most businesses, including contractors.
Modern solutions like TaxPlan offer contractors a centralized platform to manage all their tax records efficiently. Key benefits include:
- Automated receipt capture via mobile app
- Bank feed integration for automatic transaction importing
- Real-time tax calculations showing your estimated liability
- Secure cloud storage accessible from any device
- Automated reminders for filing deadlines and payment dates
When evaluating what records must IT contractors keep for HMRC compliance, consider that digital systems not only ensure compliance but also provide valuable insights for tax planning. For instance, our tax calculator can help you model different scenarios for salary versus dividends, helping you optimize your personal tax position throughout the year rather than just at year-end.
Retention Periods and Dealing with HMRC Enquiries
One of the most common questions about what records must IT contractors keep for HMRC compliance relates to retention periods. The standard requirement is to keep records for at least six years after the end of the tax year they relate to. However, there are exceptions:
- Keep records for 6 years if you're self-employed or in partnership
- Keep company records for 6 years from the end of the financial year
- Keep VAT records for 6 years (plus the current year)
- Keep PAYE records for 3 years (plus the current year)
If HMRC launches an enquiry into your tax affairs, having comprehensive, well-organized records is your best defense. Enquiries typically focus on the last 4 years, but can extend to 6 years if HMRC suspects careless behavior, or up to 20 years for deliberate tax evasion. Being able to quickly produce requested documentation can significantly reduce the stress and duration of an enquiry.
Practical Steps to Implement Today
Understanding what records must IT contractors keep for HMRC compliance is one thing—implementing an effective system is another. Start with these practical steps:
- Set up a dedicated business bank account and never mix personal and business transactions
- Implement a digital receipt capture system using your smartphone
- Schedule regular time (weekly or monthly) to update your records
- Use accounting software or a specialized tax planning platform to automate categorization
- Keep contracts, insurance documents, and company formation papers in a secure digital folder
- Back up your records regularly, preferably using cloud storage
For contractors seeking specialist support, our platform at TaxPlan is designed specifically for the unique needs of IT professionals managing their own limited companies. The system guides you through exactly what records must IT contractors keep for HMRC compliance while providing tools to optimize your overall tax position.
Remember, proper record keeping isn't just about compliance—it's about having the data you need to make informed business decisions, claim all legitimate expenses, and plan for future tax liabilities. By implementing robust systems from the start, you transform record keeping from a chore into a strategic advantage for your contracting business.
