Taxman to ‘spot-check’ small company records

Small businesses and the self-employed have been given four fewer excuses to feign innocence about errors or holes in their book-keeping, ahead of a ‘spot-check’ of company records by the taxman.

Describing each of them as a “free tool”, the Revenue cited four web pages - two on its own site – two on Business Link, that it said were to help small traders “get their business records ship shape.”

Advisors to small businesses preferred that the guidance, not all of it new, was effectively a final warning before HMRC begins its Business Record Checks programme, which imposes a new penalty of up to £3,000.

Scheduled for the second half of this year, the programme (and the inflated penalties) will target about 50,000 small businesses, suspected by HMRC of not meeting their minimum record-keeping standards.

“This approach marks a change and hardening attitude [from HMRC],” said Richard Mannion, tax director of Smith & Williamson, the chartered accountants.

“Currently, the tax authorities typically scrutinise an organisation’s tax affairs and record keeping if they believe it has filed an inaccurate tax return and is therefore paying too little tax.  But this new programme means inspectors will be able to focus on current year records before a tax return is even submitted."

Under the regime, the penalty for late filing of personal and trust returns will no longer be ‘capped;’ £100 penalties will be immediate after the due date (whether or not tax has been paid), and three months overdue will attract a penalty ever day.

In total, and factoring in the 100% penalty for traders who deliberately conceal their details 12 months after the due date, the regime is estimated to raise £600million.

However this total return, envisioned over four years, was provided by HMRC in a consultation paper on the programme without a breakdown or model for how it is to be achieved.

“Another worry is that HMRC did not draw up details of what standard criteria would be used to assess each business,” said the Federation of Small Businesses, warning its members of “spot checks” on their records. 

“[This is] raising further concern that the process is solely going to be used to raise revenue for the department.”

Either way, the initial December consultation, its proposed penalties and the four guidance pages confirm that HMRC is “keen” to tackle record-keeping, specifically small traders’ “significant failures”, said the Institute of Chartered Accountants in England and Wales.

Partly that’s evidenced by the pace with which HMRC is moving. 

The institute’s Tax Faculty said: “HMRC is publishing the free guidance tools in advance of its programme of business records checks – which seems a little premature given that HMRC cannot yet have assessed the response to the consultation.”

And partly it’s clear from the Revenue taking a multi-pronged approach to ensure small traders are aware of the incoming programme.

“ Business owners should take these warnings seriously,” Mr Mannion said. “If they don’t keep good records, they may be unable to substantiate tax returns and so would have difficulty in proving their figures are correct, should HMRC take issue with them."

Fortunately then,  sole traders, the self-employed and all smaller businesses can find  “some useful information” in the online guidance pages, said Jane Moore, manager at the Tax Faculty .

“However, while of course businesses need to keep whatever records are required by law, “ she said, “we would not like to see HMRC treat non-statutory guidance as gospel when it comes to assessing what sort of records are satisfactory.”

Directing taxpayers to those four “products”, HMRC encouraged: “It may seem like a challenge, particularly when you’re starting out, but keeping good records will bring real advantages to your business.

“Get a proper system in place and you’ll not only be confident that you are paying the right tax, but you’ll keep up-to-date with how much you owe suppliers and how much you are owed.”

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