Episode 20: Is Your Record-Keeping HMRC-Ready — Or Just a Shoebox of Hope?

In episode 20, Annie talks about what HMRC actually expects from you as a sole trader when it comes to record-keeping. 

Because most bakers have a vague sense they should be keeping records without really knowing what that means in practice — or quite how long they need to keep them.

The episode covers:

• What HMRC requires (and what it doesn't)
• The five-year rule and why it matters more than most people realise
• What counts as a record for both income and expenses
• Five questions to honestly assess whether your current system actually works
• Why the bakers with the least financial stress aren't the most organised — they're the most consistent

This isn't about having a perfect system. It's about having one that exists and works for your real life.

Want to go deeper?

April is finance month inside the Home Baking Business Academy. We're covering record-keeping and expenses, tax changes and MTD in practice, National Insurance and payments on account, and a full step-by-step Self Assessment walkthrough — designed specifically for home bakers, in plain language.
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For her website with all this and more:

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Transcript

SPEAKER_00 0:04

Hello and welcome to the Profitable Baker Podcast, the show for bakers who mean business. I'm Annie Bennett, founder of the Home Baking Business Academy, and every week I'll be sharing practical lessons, mindset shifts, and inspiring stories from bakers who are building businesses they love. Because success in this industry isn't about who bakes the fanciest cakes, it's about who builds the strongest business foundations. Let's get started. Hello and welcome back to the Profitable Baker podcast with me, Annie Bennett. We are on episode 20, and today we are talking about record keeping. Now I want to start today's episode with a little exercise. Don't worry, it's not complicated. There's no equipment required. You don't even need to put down your cup of tea. I just want you to think about a receipt. A specific receipt. Not one from last week. Let's make this interesting. I want you to think about a receipt from approximately 18 months ago. Something you bought for your baking business. An ingredient order, perhaps? A piece of equipment, packaging delivery? Something that at the time you probably thought I should keep that. Now, the question is: do you know where that receipt is now? Could you put your hands on it today if you needed to? If the answer that's just come to mind was a confident yes, then brilliant gold stars and brownie points to you. This episode is going to be a nice reassuring listen and maybe a few useful reminders. But if what actually came to mind was a mental image of a kitchen drawer or a pile of papers on a desk, or possibly a cardboard box that you haven't opened since you moved house, then this episode is absolutely for you. And I promise I'm not going to make you feel bad about it, because the shoebox approach to record keeping is genuinely one of the most common things I come across in the home baking business world. You are not alone. But we are going to talk about why it matters more than you might think. Let's get into it. I've called this episode Is Your Record Keeping HMRC Ready or just a shoebox of hope? And I want to be clear that the shoebox is not entirely a metaphor. I have heard genuinely from bakers who keep their receipts in a shoebox. I've heard from bakers who keep them in a carrier bag. I've heard from bakers who photograph them and put them in the folder on their phone called tax stuff and then never look at them again. I've heard from bakers who mostly remember what they spent and sort of fill in the gaps when their submission comes around. And look, I say all this with warmth and without judgment because when you are busy running a baking business, record keeping is not the part that feels urgent. The order that needs to go out tomorrow feels urgent. The inquiry sitting in your inbox feels urgent. The fact that you need to order more boxes before the weekend, that's what feels urgent. Whether your receipts are in a logical system or a carrier bag does not feel urgent until it does. And by the time it feels urgent, it's often January, you're under pressure, and the carrier bag is somewhere you can't immediately find it. So today I want to talk about what the HMRC actually expects from you as a sole trader. Because I think lots of bakers have a vague sense that they should be keeping records without really knowing what that means in practice. And then I'm going to ask you some questions that I think are more useful than any specific system I could prescribe. Because here's what I genuinely believe a good record-keeping system doesn't need to be complicated, it just needs to exist. And it needs to actually work for your life, not for some idealized version of your life where you have two spare hours every week to do admin. I mean, who's got that? So, what does the HMRC actually expect? The honest answer is more than nothing, but less than you might fear. As a sole trader, you are legally required to keep records of your business income and expenses. That's the core of it. HMRC needs to be able to see, if they ever ask, that the figures on your self-assessment tax return are accurate and supported by evidence. Now, the good news is that HMRC doesn't specify exactly how you keep those records. They don't require a particular system, a particular piece of software or a particular format. What they require is that your records are accurate, complete, and this is the bit that often catches people out, kept for long enough. So, how long is long enough? For most sole traders, the rule is that you need to keep your business records for five years after the 31st of January filing deadline for that tax year. Let me make that concrete so it sinks in properly. So if you're filing your self-assessment return for the tax year that ends in April 2026, so it ended on the 5th of April. The deadline for that return is the 31st of January 2027. So next January. You need to keep the supporting records for this for that tax year until January 2032. Five years. Not one year, not until the bill is paid. Five years from the filing deadline. That's why the 18-month receipt question at the start of this episode matters. Because 18 months ago is well within the window of records, you're legally required to be able to produce. Now, let's talk about what records actually means in practice. Because I think this is where a lot of bakers are either doing too little or worrying unnecessarily about not doing enough. Your records need to cover two things: your income and your expenses. For income, that means keeping evidence of what you were paid and when. That might be invoices you've sent, order confirmations, payment notifications, bank statements showing money coming in. If you're taking cash payments, for example at markets or fairs, you need a record of those two, even if it's just a simple log of the total of what you took that day. For expenses, it means keeping evidence of what you spent and what it was for. Receipts, invoices from suppliers, bank statements, confirmation emails from online orders. Anything that shows the money that went out of your business and what it was spent on. Now, you don't need to send any of this proof to the HMRC. You don't file your receipts with your tax return. You just need to have it available if the HMRC ever opens an inquiry into your return, which for the vast majority of sole traders is rare, but it can happen. But the legal obligation is to have it there regardless. And here's the thing about inquiries: the HMRC has up to 12 months from the filing deadline to open a routine inquiry into your return. In certain circumstances, they can go back further. So the five-year rule isn't bureaucratic overcaution, it's the actual window of exposure. So I want to ask you some questions now, not to make you feel anxious, that's really, really not the point, but because I think the right questions are more useful than a generic list of things you should be doing. So here are the questions I want you to think about. Question one: Could you find that receipt from 18 months ago? We started with that and I want to come back to it. Now, not to catch you out, but as a genuine test of whether your current system, whatever it is, actually works. If the answer is probably not, or it depends which pile, or I'd have to check my bank account and hope for the best, that's really useful information because it tells you that your current system has gaps. Question two Do you know which of your purchases were business expenses? Now this sounds obvious, but it's less straightforward than it seems. If you do a big supermarket shop and it includes both household groceries and baking ingredients for an order, do you record the business portion separately? If you buy something online and it goes to the same card you use for personal spending, and there's no problem with that by the way, you don't have to use a separate account if you're a sole trader, but are you capturing that? If you pay for a business subscription by direct debit, is that showing up in your records as a business expense or just disappearing quietly into your bank statement every month? The question isn't whether you know something is an expense, is whether you've recorded it as one. Question three Could you explain your figures if asked? Now imagine, horror of horrors, that the HMRC send you a letter tomorrow. And again, this is unlikely, but it does occasionally happen. They send the letter asking you to explain the figures on your last self-assessment. Could you do it? Could you show them the income that underpins your turnover figure? Could you show them the receipts or invoices that correspond to your expenses total? Could you demonstrate that the figures on the form are accurate? If the answer is I think so, probably, then it's worth thinking about. Now, if you are new in business and you haven't set up your systems yet and you haven't got anything to declare yet, and you're not doing a submission, it's worth bearing all this in mind for when you do. So when you set your systems up when you start trading, make a point of keeping those records, keeping those accounts up to date, because it will save you an awful lot of time later. And there we come to question four. Are you recording things as they happen or reconstructing them later? So there's a significant difference between keeping records in real time and trying to piece things together retrospectively. Real-time records are accurate. Reconstructed records can be estimates. And estimates, however well intentioned, introduce errors, often in the wrong direction, meaning you either claim less than you're entitled to or claim something you can't actually evidence. And question five, possibly the most important question, does your current system actually work for you? Or does it only work in theory? Because a beautifully, perfectly organized system that you set up in April and abandoned by June isn't a system, it's an intention. What you need is something you will actually use consistently in the middle of your busy baking life. So I want to tell you about a scenario that plays out. I'm going to tell you a little story because we all love a little story, don't we? Let's um imagine a baker. Let's, what should we call her? Let's call her Amina. That's a nice name. Amina. Amina's had a good year. Her orders are up, she's taken some on some new customers, and the Christmas period was particularly strong. She knows she's had a decent year, and she's broadly aware that her tax bill will probably be higher than last year. Now, the time comes to do her self-assessment. She's got her bank statements, she's good about that. She knows how to get where to get those from, and she goes through them transaction by transaction, trying to remember what each one was for. The supermarket trip. She knows some of those had business ingredients in, but she didn't separate them at the time, so she estimates. The equipment she bought in March, or was that 45 or 65? She can't find the receipt. She knows she paid for a course at some point in the autumn, but she's not sure exactly when or how much. She's got a rough number in her head. She files the return based on her estimates. She pays the bill, she feels relieved it's done. Now here's the thing. You know what I'm going to say, don't you? She probably has been broadly accurate. She's a careful person, she's done her honest best, but she'll never know exactly how accurate she was. She might have claimed less than she was entitled to. She might have claimed something slightly off. And if HMRC ever asked her to evidence those figures, she'd be working from memory and bank statements rather than actual records. And that would possibly mean getting into a little bit of hot water with the HMRC. If you haven't got the proof, you can't claim it. So that's the shoebox of hope. It's not chaos, it's not deliberate inaccuracy, it's just a system that relies on memory and estimates rather than evidence. And that has real consequences, both for the accuracy of your tax return and for your peace of mind. So what Amina needs to do is get herself a system, record things regularly, and probably join the academy as well. Now, I said at the start that I wasn't going to prescribe a system, and I'm going to stick to that because I genuinely think the right system is different for different people, different businesses, different ways of working. But what I will say is this. The bakers I know who have the least stress about their finances at the end of the tax year are not necessarily the ones with the most sophisticated systems. They're the ones with consistent habits. They're not even the ones that get an accountant to do it all for them because even if you do that, you've still got to get the proof. You've still got to file your receipts. They might use a simple spreadsheet, they might use an app on their phone, they might have a dedicated email folder for order confirmations and supply invoices. They might batch their admin once a week for 20 minutes. The detail of what they do varies enormously, but the common thread is that they do it regularly and they do it close to the time the transaction happened, not six months later. The question to ask yourself about any system you're considering is not is this the best system or is this what an accountant we use? The question is, will I actually use this? Does this fit around how I really work, not how I imagine I work? If I go away for a week and come back to a pile of orders, can I catch up with this system in a reasonable amount of time? If the answer to those questions is yes, then it's a good system for you, regardless of what it looks like. I also want to touch briefly on something that I think is genuinely underappreciated, which is what good records can do for your business beyond the tax return. When you know your numbers and you know I'm really passionate about bakers' businesses knowing their numbers, you can clearly see what's coming in, what's going out, what your most expensive ingredients are, what your margins look like across different products, what months are strong, what months are quieter, and you can make better business decisions. You price better, you plan better. You know when you can afford to invest in new equipment and when you should hold off. You can see whether a market stall is actually profitable once you factor in all the costs, or whether it looks profitable but isn't once you account for everything. Your record keeping isn't just a compliance requirement, it's the foundation of understanding your business. And bakers who understand their numbers have a significant advantage over bakers who are operating on instinct and hope. So if the prospect of HMRC asking questions doesn't particularly motivate you to sort your records out, maybe the prospect of genuinely knowing how your business is performing will. Now, before I finish, I want to come back to where we started. That receipt from 18 months ago. Maybe you found it immediately in your head. Maybe you winced a little. Maybe you're now slightly eyeing a drawer or a carrier bag in your kitchen with mild concern. Wherever you are with this, the point is not to make you feel behind or disorganized or like you've been doing it all wrong. The point is to make the case that record keeping done consistently and in a way that works for you is one of the most genuinely useful things you can do for your business. It protects you if HMRC ever asks questions. It means your tax return is accurate rather than estimated. It gives you information you can actually use to run your business better. And it really genuinely does not need to be complicated, it just needs to exist. Now, if this episode has made you want to get properly on top of your record keeping, not in theory but in practice, then I want to point you in the direction of my Academy membership. Throughout April, we've had lots of sessions on record keeping expenses designed specifically for home bakers. Not generic advice, but practical advice on what to keep, how to organize it, how long to keep it, and what a realistic system looks like for a real busy baking business. We've also covered allowable expenses in detail, so you know not just that you should be claiming things, but exactly what you can and can't claim in a baking business context. Now that sits alongside three other financial sessions in April covering tax changes and making tax digital, national insurance and payments on account, and a full step-by-step self-assessment walkthrough that's happening at the end of the month. If finances have been part of your business you've been quietly avoiding, then April Inside the Academy is the month to change that. Now, all the details about the Academy and how to join are in the show notes, and I'd love to have you part of it. If you've enjoyed today's episode, please do share it. And if you have a question you'd like me to cover in a future episode, you know where to find me. Thank you so much for listening. I'll be back very soon with the next episode. Until then, take care of yourselves and take care of your business.