Bookkeeping and VAT for small businesses: an overview

Overview

Bookkeeping is keeping a running record of the money coming into and going out of your business: sales, purchases, bank transactions and the VAT on them. Accounts and tax returns are built from it, so gaps in the record turn into guesses later.

The duty to keep records is yours, and you can hire a professional to help with the work. If you're VAT-registered, you must also keep some of your VAT records digitally and send your returns through software that works with Making Tax Digital, HMRC's digital reporting system, unless you're exempt. If your books are simple, you may be happy keeping them yourself. Plenty of owners get help once the evenings start disappearing or the books fall behind.

What you have to keep, and for how long

Sole traders must keep records of business income and expenses, with proof such as receipts, invoices and bank statements, under gov.uk's rules on business records if you're self-employed. The usual period is at least 5 years after the 31 January online filing deadline for the tax year. So for a 2025/26 return, due by 31 January 2027, that means keeping records until at least the end of January 2032.

Limited companies keep accounting records for 6 years from the end of the last company financial year they relate to, as gov.uk's guide to company and accounting records sets out. HMRC can fine a company £3,000 for not keeping them, and a director can be disqualified.

Our guide to record-keeping rules covers what counts as a record, the longer periods that can apply, and what to do if records are lost.

Bookkeeper or accountant?

A bookkeeper keeps your records up to date through the year. An accountant uses those records to prepare your accounts and tax returns, and advises you on tax. Depending on your business, you may need both kinds of work done, though not always from two different people.

If you have a handful of transactions a month and keep them tidy yourself, you may only need the accountant's part. Our guide to bookkeeper or accountant sets out what each does and how to tell which you need.

What bookkeeping costs

Prices vary. Some bookkeepers charge by the hour and others a monthly fee, so ask how the price changes with the number of transactions you have, whether you're VAT-registered and whether your books are up to date when you start. Ask what's included before you compare prices, as a lower fee can leave out work such as VAT returns or payroll.

At Quill & Ledger, bookkeeping for a limited company is part of a monthly package from £120 a month. Prices depend on the size of the business, and offers and discounts are available, for example if you own more than one company. Our guide to what bookkeeping costs goes through what drives the price.

In-house or outsourced

An in-house bookkeeper makes sense when there's enough work to keep someone busy, because you're paying a salary, holiday cover and payroll costs whether or not there's work that week. Outsourcing means paying for the work you need and nothing else.

Our guide to in-house or outsourced bookkeeping compares the two side by side, with the costs on each side.

Choosing and moving to cloud software

You can keep books in a spreadsheet, on paper or in accounting software. If you're VAT-registered, gov.uk says you must keep some VAT records digitally and send returns through software that is compatible with Making Tax Digital, unless you're exempt. HMRC lists software that's compatible with Making Tax Digital for VAT.

Sole traders come under Making Tax Digital for Income Tax too, phased in from April 2026 according to your qualifying income, the amount you earn from self-employment and property.

Our guide to moving to cloud software covers what changes when you switch and how to do it without losing your records.

Catching up on messy books

Books that are months behind are fixable, and fixing them is usually a matter of gathering the bank statements, invoices and receipts for the missing months and working through them in order. If a record is lost, gov.uk's advice for sole traders is to give HMRC your best figures and tell them which are estimates.

The cost of catch-up work depends on how far behind you are. Our guide to catching up on messy books covers what a clean-up involves and what to gather first.

VAT

You must register for VAT if your taxable turnover for the last 12 months goes over £90,000 (the threshold gov.uk shows as of November 2026), or you expect it to in the next 30 days. You can register below that if you want to, which is worth weighing, since you then have to charge VAT and pay it over to HMRC.

Once registered, you send a VAT return, usually every 3 months, even if there's nothing to pay or reclaim. The return and the payment are both usually due 1 calendar month and 7 days after the period ends, and the payment must reach HMRC by then, even on a weekend or bank holiday. For a quarter ending 31 March 2027, that's 7 May 2027. For VAT periods starting on or after 1 January 2023, each late return earns a penalty point, and reaching the limit brings a £200 penalty, as gov.uk's guide to sending a VAT Return explains.

Our guide to VAT returns and Making Tax Digital for VAT covers the records you need and how filing works. A second guide, on VAT schemes, explains how the Flat Rate, Cash Accounting and Annual Accounting schemes change the return and who each one suits.

Getting ready for year end

Year-end accounts are only as good as the books under them. For a limited company, these are the deadlines. The Corporation Tax payment falls due earlier than the Company Tax Return.

Sole traders file a Self Assessment return instead. Our guide to year-end preparation covers what to have ready for your accountant, so the accounts aren't held up by missing paperwork.

Cash flow basics

Profit and cash aren't the same thing. A business can show a profit on paper and still run short of money, because customers pay late or a large bill falls due before the sales come in. Up-to-date books are what let you see that coming.

Our guide to cash flow basics covers how to read your cash position from your books and what to look at each month.

Conclusion

Keep records of everything that comes in and goes out, keep them for the right length of time, and keep them up to date. If you're VAT-registered, you must also keep some VAT records digitally, unless you're exempt.

Your next step depends on where you are now. If your books are up to date and simple, you may not need anyone. If they're behind, or the evenings spent on them are adding up, our bookkeeping services cover the monthly work, and our VAT returns service covers returns on their own.

This guide is general information, not advice for your situation.