Financial records retention: what do businesses need to know?
By Paul Ravey, Manager at Access Records Management
A company’s daily business operations will generate numerous records that require careful management. The correct maintenance and retention of these records can be a complicated process:businesses need to consider their own organisational requirements, as well as make sure they operate in line with the law.
Financial records make up the bulk of most organisations’ important files and documents. It’s crucial that these records are securely stored – yet kept easily accessible. This enables key decision makers to pull the information they need when they need it. Correct record retention also ensures that documents are retained in line with regulatory requirements which helps businesses avoid the potentially costly consequences of non-compliance.
Of course, financial records come in various categories –each with specific regulations to consider. When it comes to retention periods, here are some of the most important rules you and your business must bear in mind.
Examples of accounting records include invoices, receipts, employee payroll, purchases, expenses, VAT records, and tax returns. And any supporting documentation or relevant information needs to be retained too. Whether these records are digital or physical, they are subject to the Companies Act 2006 and the VAT Act 1994.
According to these statutes, private organisations must retain their accounting records for no less than three years while public companies have to retain this data for at least six years. Our recommendation in any case is creating a record retention policy that maintains data for six years, even if it does not fall under a statutory period.
The records must be housed at a registered office or other location determined by the directors of the business. Options include an accountancy firm, a satellite office, or a records management facility. Officers of the company in addition to any others granted access must be able to inspect these records. And, if you need to convert physical records to a digital format, make sure that all information is accurately transferred.
The Taxes Management Act dictates legal compliance for all tax records. All documents related to taxes, money received or spent as a business, must be kept for five years from the last date by which the relevant tax return was filed.
These documents can include paid invoices, credit card receipts, receipts for cash transactions, bank statements, checks, and more. Like accounting records these should also be maintained in a registered office or other location.
In most cases, insurance records can have a shorter retention policy than accounting or tax records. Polices and claim correspondence must be retained for three years after lapse, according to the Data Protection Act 1998.
However, insurance companies must adhere to different legal responsibilities. According to the Limitation Act 1980, business agreements and contracts like former client policies must be stored for six years or financial penalties could occur.
Wage and personnel records
This category of records can include many different types of records that overlap with the above types. Carefully follow the Employment Rights Act 1996 in addition to the earlier mentioned acts to determine your organisation’s record retention policy.
Personnel records can include income tax, pay details, pay roll, national insurance contributions, annual earning summaries, application forms, holiday information, medical records, expense accounts, overtime details and more. These are likely to vary from company to company.
Wage records specifically must be retained for six years according to the Data Protection Act 1998. The act also requires that all other confidential personnel files should be kept for seven years after the end of the individual’s employment.
The consequences of poor records management
Maintaining records properly, while ensuring legal compliance, can be an arduous task for any administrator. But legal compliance and proper retention can prevent an organisation from receiving penalties that can reach up to half a million pounds and help organisations avoid scandals like the infamous Enron financial fiasco. The financial regulatory environment is only getting stricter, with increasingly harsh penalties for non-compliance. Staying abreast of these regulations is essential, even if you don’t run a large enterprise.
A records retention policy should also, of course, include an archival and disposal strategy as well. Once the statutory period passes, companies are no longer obligated to retain these records, but may choose to retain or archive them as part of an internal policy. If not, a records management service can assist in proper disposal that does not expose any private, confidential information.
Because of the time and effort required to follow best practices, it can often be more effective to work with a records management company. This frees up internal resources for other projects or growth-oriented tasks. Outsourcing your records management requirements will help to reduce the burden on yourteam, protect your company’s data, and preserve its reputation.