Small firms warned as spot checks on record keeping return

HM Revenue and Customs (HMRC) is re-introducing its controversial programme of spot checks on the record-keeping of small firms.

The Business Records Checks (BRC) was withdrawn in February this year after much criticism, which forced HMRC to conduct a further review of it. Now, a 'substantially redesigned Business Records Checks programme' has been launched which, HMRC says 'involves a new step-by-step approach, with a much greater emphasis on education and support'. HMRC said that businesses need to keep records which can clearly demonstrate they are meeting their tax responsibilities. With immediate effect, HMRC will send letters to businesses it believes may be 'at risk' of keeping inadequate records, advising the business that HMRC will be phoning them to discuss their business records. This call will then take the customer through a set of questions to assess the customer's record-keeping affairs. Depending on the outcome of this conversation, HMRC will then determine whether the customer could benefit from tailored educational support and whether a Business Records Checks visit is necessary.

Where a visit reveals the customer is keeping inadequate records, HMRC says it will provide guidance on what the customer needs to do to improve their record keeping. HMRC will then arrange a follow up visit, normally three months later, giving the business a reasonable time to make the necessary improvements to their record-keeping processes. If, on the second visit, the records have not improved to an adequate standard, then HMRC may charge a penalty.

The Business Records Checks programme will be rolled-out, region by region, over a 14-week period. The planned timetable for visits to re-commence:

• London and Anglia – 26 November 2012
  
• South East England – 14 January 2013
  
• Scotland – 14 January 2013
  
• Northern Ireland – 14 January 2013
  
• Central England – 21 January 2013
  
• East of England – 28 January 2013
  
• North Wales and the North West of England – 28 January 2013
  
• South Wales and the South West of England – 4 February 2013

However, professional tax bodies still have their reservations about the scheme.

Warning

The Chartered Institute of Taxation (CIOT) was a strong critic of the introduction and implementation of the original scheme and has now issued a strong warning for small firms. They are particularly concerned about the manner in which HMRC proposes to levy penalties for what it sees as 'inadequate' record keeping.

Patrick Stevens, CIOT President, said: "HMRC have listened to some of our concerns and recast how Business Record Checks will be carried out, but the fundamental issue of in-year penalties remains. HMRC have still not provided a satisfactorily clear reasoning to justify their belief that they can charge penalties in-year before the return goes in for keeping records below the standard they consider is adequate. In our view it is questionable whether HMRC have the power to do this.

"HMRC have consulted representative bodies to define more clearly what constitutes 'adequate' records and we understand that this is to be included in guidance for HMRC staff. It is important that the approach taken with different kinds of businesses is appropriate. It is unrealistic to expect smaller businesses to have perfect records written up every day.

"Tax agents, and the businesses they advise, need to work closely with HMRC and ensure that, following any BRC visit, any conditions set by HMRC and accepted by the business are fully achievable. They must also check before any revisit that the conditions have been complied with, otherwise a penalty may be charged.

"Unrepresented small businesses need to follow the same recommendation, but may want to take some advice before they sign up to HMRC conditions. Many advisers offer a free initial meeting or pro bono help to those on very low incomes, so it may not be costly to get some help.

"Since the selection process for BRCs is based on risk assessment it is more likely that cash businesses will be chosen for BRCs. Such businesses in particular will need to ensure they are keeping adequate records going forward.

"Tax advisers are strongly supportive of efforts to improve record keeping by business, but up until now HMRC have been going about it the wrong way, increasing burdens disproportionately. A good programme to improve business record keeping will involve HMRC and tax advisers working together to educate business about good practice and support them in improving their systems, as well as warning about the risks of poor record-keeping."

Wrong impression

The CIOT's Low Incomes Tax Reform Group (LITRG) also advised caution that HMRC's impression that this is mainly for 'educational' purposes was misleading and clouding the fact that it is a serious compliance check with potentially large penalties.

Anthony Thomas, LITRG Chairman, said: "LITRG has worked with HMRC to recommend a number of safeguarding measures to help unrepresented businesses that are selected for Business Records Checks. These agreed recommendations include allowing family and friends who provide bookkeeping support to an unrepresented business to be involved in initial discussions with HMRC which may result in the business not needing any further records checks or visits.

"We continue to be extremely concerned that HMRC are creating an impression, wrongly in our view, that these records checks are mainly for educational purposes. It is critical that businesses understand that these are serious compliance checks with potentially large penalties being levied on those who keep poor business records."

Listened

HMRC's Director of Local Compliance, Richard Summersgill, said: "We've listened to businesses and agents, and revamped our Business Records Checks programme to make it more streamlined, targeted and better focused on education.

"The visits offer benefits for businesses at risk of keeping inadequate records. Adequate records help businesses pay the right amount of tax at the right time, thereby avoiding interest and penalties for errors and late payment, whilst also giving HMRC greater assurance when a business submits its tax returns."