The Companies Act 2006 places a significant amount of responsibility on directors who are, among other things, responsible for running the business, preparing the financial statements, acting in the best interests of the shareholders and promoting the success of the company.
In a lot of cases, the directors and the shareholders are the same body of individuals, but for many large companies this is not the case.
The Companies Act 2006 is the primary source of UK company law and boasts some 1,300 sections; around 700 pages and 16 Schedules. It was said to be the longest Act in British Parliamentary history, but, and perhaps unsurprisingly, the Corporation Tax Act 2009 surpassed this distinction.
The Companies Act 2006 sets out the duties of the directors of a company in Part 10 A company’s directors at Chapter 2. In addition, the directors will have to make sure the company maintains adequate accounting records which are dealt with in Part 15 Accounts and reports at Chapter 2.
The issue of document retention for companies is an important one. Not only are the directors responsible for keeping certain documents for certain periods of time to comply with legislation, but records which relate to the accounts have to be able to disclose, with reasonable accuracy, at any time, the financial position of the company at that time. All company directors need to be aware that failure to retain accounting records in compliance with the Companies Act 2006 carries heavy penalties and, in more serious cases, can result in the directors being sent to prison (something which most directors are understandably keen to avoid).
What is a ‘document’?
All companies will handle documents of some description. In today’s modern ‘paperless’ systems documents do not have to be in physical paper form, although some companies do still maintain paper documents. Clearly a document can be in paper form, but nowadays a document can also be an electronic document. For example, the company may not receive paper bank statements anymore and instead may download a PDF bank statement; and suppliers are increasingly sending their invoices out in PDF, or other electronic, format. Such alternatives would still be considered to be documents.
A document can also be a web page, an electronic file or a spreadsheet. Automation over the years has meant that documents are wider in scope than information contained on pieces of A4 paper. Notwithstanding this shift in technology, whatever form the document is in it may well be subject to legislation that dictates how long the company needs to retain the document.
What documents should a company keep?
This question is asked quite a lot by directors, company bookkeepers, company accountants and general office staff. Not all documents a business receives or generates will be kept forever; clearly storage costs would increase considerably over time if this were the case. However, some of the more common documents a business should keep (together with the length of time these should be kept according to legislation) is shown in the table below:
What if we maintain a ‘paperless’ system?
Paperless systems are becoming increasingly popular. Generally, the paperless system must be capable of producing hard copies of documentation for at least the last six years. The company’s auditors may wish to see original documentation (e.g. original purchase invoices), so access to the hard copy document should also be available.
What benefits are there of keeping orderly records?
First, and foremost, directors are duty-bound to maintain adequate accounting records which show the financial position of the business at any one point in time. The Companies Act only requires the financial position to be one of ‘reasonable accuracy’ so it does not have to be absolute, but if the accounting records are not kept in an orderly manner, the directors may be committing an offence under the Companies Act.
If the business is VAT-registered and the company prepares its own VAT returns, during any routine VAT inspection, HMRC will request sight of the company’s accounting records to verify the underlying information contained in the VAT return. If this is not produced or errors have arisen as a result of inaccurate or incomplete records, HMRC will be quick to levy penalties on top of any VAT that may have to be repaid. Inefficient document retention systems can cost the business money.
Unfortunately, once the records become messy, it can be time-consuming (and expensive) to put them in order so it is always worthwhile employing a bookkeeper, either internally or using external services, to keep on top of the paperwork. Most companies are pretty good at doing this themselves and the bookkeeper only then has to balance the books and pass the records to the accountant to prepare the financial statements. In some cases, however, this is not the case and this is where additional costs are likely to be incurred as the accountant will then have the task of putting the documentation in order and/or requesting missing documentation which, again, is a time-consuming task.
Maintaining orderly records and retaining them for the periods specified in law or regulation could also benefit the business if something happens and the directors need to search for an original invoice. For example, if the business purchased a motor vehicle three years ago and the shareholders want to know how much was paid for that vehicle, the invoice can easily be retrieved in an orderly system.
What should I avoid where document retention is concerned?
As noted above, having an inefficient document retention system can be reckless. Not only will it result in inefficiencies, but it will also prove costly in the long run to put into an orderly manner, so always keep documents in some sort of order. Many businesses assign a number to each purchase invoice or each receipt and file it in numerical order; others file documents in alphabetical order or in numerical sequence by reference to the purchase order number. Whatever system is used it should enable documents to be easily retrieved for at least the minimum retention periods in law.
If the business doesn’t prepare its own accounts, try to help the accountant by filing documents in a methodical way. Taking a box of sales invoices, purchase invoices, bank statements and payroll records to the accountant to do the year-end accounts is one thing, but if it is just one box full of paperwork in no order, the accountant will have to sort it out before they start to put the accounts together. This takes time and will inevitably incur additional fees; which can be avoided if the document retention system is efficient.
What records does my accountant keep?
Accountants will prepare accounts from the business’s completed bookkeeping; in other words, when all the year-end books are in balance and a trial balance can be extracted. Accountants are likely to retain the following documents for their clients (and they, too, will be subject to minimum retention periods):
- Copies of the company’s financial statements
- Lead schedules and working papers which prove how the figures in the accounts have been calculated and arrived at
- Corporation tax computations and returns
- The directors’ individual self-assessment tax returns if the accountancy firm prepares these on behalf of the directors
- Company secretarial documentation where the accountant offers a company secretarial services, including dividend paperwork and resolutions, annual confirmation statements, share registers and share transfer forms
- If the accountancy firm is the registered office of the business, the firm may also hold the company’s Memorandum and Articles of Association.
The list above is by no means exhaustive, but does indicate some of the more common types of documents a company’s accountant will hold on behalf of their client.
The importance of maintaining an efficient document retention system cannot be over-emphasised. Directors are duty-bound to ensure the business maintains adequate accounting records and will also be required to produce certain documents when requested by third parties (e.g. HMRC, the shareholders, auditors or the accountants preparing the year-end accounts). Maintenance of an efficient document retention system can also save costs and problems further down the line.
Steve Collings is the audit and technical partner at Leavitt Walmsley Associates Ltd.