You’re having your offices repainted and the decorator has asked to be paid in cash. You would prefer not to, but as he comes highly recommended and is cheap you’ve agreed to go along with it. Will this cause trouble with the Taxman?
Self-assessment and record keeping
When self-assessment was introduced in 1996 it came with new rules regarding record keeping. HMRC set out its stall early by indicating that it expected every entry on a tax return be backed up by documentary evidence. This was generally taken to mean that for, say, business expenses, you would need a receipt, invoice, etc. This implication is that without supporting document you aren’t entitled to a tax deduction.
Types of document
HMRC does have some power to say when you should keep documents and, in some situations what form they should take. It’s important to be aware that for VAT purposes HMRC has used this power to impose special record keeping conditions, but these don’t apply to other taxes.
Tip. For all tax purposes you can store copies of invoices, receipts, etc. in electronic format, e.g. as PDFs. These can be stored on your computer or in the cloud.
HMRC requires a few other documents to be kept in their original form, either on paper or as an exact replica such as a scanned copy. Essentially, this applies where the document is evidence of tax deducted from income you’ve received, e.g. a Construction Industry Scheme (CIS) statement or P60 for employment income.
Tip. If you lose a CIS, P60 or other document showing tax paid, the person who provided the original can, but isn’t obliged to, provide a duplicate. HMRC will be satisfied with that.
Falling to keep proper records
Unless you’re required to keep the original documents or copies it’s OK just to record details of transactions. In practice you’ll probably want the documents for your own benefit, especially for business transactions. But you could just keep details of what appeared on the original paperwork instead. HMRC can’t object to this.
No record of a transaction
That brings us back to the main question of where you stand if a supplier wants you to pay them in cash and doesn’t provide a receipt or invoice. Can HMRC really refuse a tax deduction?
What the law says
The law doesn’t and never did support HMRC’s view. There’s no absolute requirement to hold a document for each and every transaction unless it’s of a type mentioned above. Therefore, HMRC cant refuse a tax deduction for an expense simply because there isn’t a piece of paper to go with it. However, it can make your life difficult.
Tip. To avoid trouble with HMRC over cash payments, make a record of the supplier’s name and address, plus the usual information: date, amount, etc. If they wont give you their details, perhaps you should question if they are the sort of person you want to do business with.
HMRC can’t usually refuse a tax deduction just because it’s for a cash expense which you have no paperwork to support. However, to keep HMRC sweet make sure that you have a record of the supplier’s name and address plus the usual information you would keep for purchases.