Revenue toughens on business record checks

The taxman’s scrutiny of business records will scale down so it can eventually scale up, though the necessary narrowing of the checks belies a much tougher stance, advisors warn.

Following a business records checks pilot earlier this year, HM Revenue & Customs this week said it planned to check 20,000 businesses for lax record-keeping, compared with its initial estimate of 50,000.

Originally, 20,000 businesses were due to be checked by the department before March 2012, yet the Revenue said the actual figure, by the year-end, will  be less, “up to 12,000”.

However, the number of full-time staff working on the checks will increase from 30 to 120, before final decisions on a national roll-out of the programme are taken in the New Year.

And while initially only a “record-keeping penalty” will be issued, in the long-term HMRC will respond to extreme cases of poor record keeping with a penalty of up to £3,000.

Advisors at Smith & Williamson say newly established businesses are among the most likely targets of the checks, which they said HMRC “started in earnest” over the past few weeks.

September also represented the first time that the tax authority used the checks initiative  to examine records for the current tax year, according to the firm’s head of corporate tax Tim Lyford.

“Until now, HMRC has only scrutinised a firm’s tax affairs if it thinks the business has filed an inaccurate return and is paying too little tax,” he said. “This new approach heralds a sharply toughening attitude to business record keeping”.

The adviser says a business will be expected to show it is keeping full and accurate records of its invoices, receipts, petty cash and general expenses, with even diary entries potentially requested to correlate the expenses.

Still, precisely how HMRC judge whether records are ‘adequate’ – which has been a source of contention among tax officials – as opposed to ‘incomplete,’ is concerning, says the Chartered Institute of Taxation.

“Despite HMRC’s Powers team indicating that, in-year, a ‘full shoebox of invoices/receipts’ was adequate, we now understand that the new compliance team considers that retaining a set of purchase invoices without listing them is inadequate, even for the smallest businesses.

“In our view that is entirely the wrong approach,” the institute said. “What counts as adequate records needs to have regard to the sort and size of business. That involves the exercise of judgement.

“Expecting the smallest businesses to have perfect records kept up-to-date every day is frankly unrealistic, inappropriate and wholly out of kilter with the government’s stated aim of reducing burdens on business.”

For its part, the Revenue said the aim should be “good record-keeping,” because it “helps businesses pay the right amount of tax at the right time, thereby potentially avoiding interest and penalties.”

Richard Summersgill, director of local compliance added: “Adequate records give businesses a clear idea of their trading position and profitability, allowing them to make business decisions and adjustments to ensure survival and success.

“And where a check has shown a business keeps adequate records, it gives HMRC a greater degree of assurance as to the likely accuracy of its tax returns. Ultimately, this is about supporting businesses and reducing the tax gap.”