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HMRC Business Records Checks – A Bright Idea to Raise an Extra £600m??

The introduction of self-assessment for individuals fifteen years ago brought with it the concept of HMRC seeking a £3,000 penalty from taxpayers who failed to keep proper records. Instances of HMRC seeking such penalties have been very rare. The new information powers legislation, introduced in 2008, had nothing to say about record-keeping penalties but did enable HMRC to carry out compliance checks outside of the formal tax enquiry framework – for example, the “real-time” examination of records.

HMRC has now decided to use these new powers to review the records of 200,000 small and medium-sized businesses over a period of four years.

A consultative document has been issued which seeks input into how such “Business Records Checks” should be implemented. HMRC believes that 40% of the five million small and medium-sized businesses in the UK maintain inadequate records, and that a targeted campaign will bring about significant improvements and thus increase the tax take.

The department estimates that an additional £600m will be collected over the next four years as a direct result of the new checks. The consultative document does not explain how much of the £600m is likely to come from financial penalties in direct tax cases. However, it is clear that HMRC intends imposing many more than before. HMRC can also charge penalties for failure to maintain adequate VAT records; however, these have a lower tariff.

Currently, taxpayers failing to meet the record requirements for the first time must be given a written warning to comply before HMRC can issue a penalty. The consultation document proposes that this “one free go” is removed, and that a penalty is imposed the first time a taxpayer is found to be non-compliant.

The new Business Records Checks commenced in the second half of 2011, and consist of a visit to the business premises by at least one officer for approximately four hours. Where the officer identifies significant record keeping failures, it is likely that a penalty will be imposed. It is probable that such cases will then be investigated to quantify any tax underpayment. The key question most businesses will ask is “are our records sufficient” and if not, will HMRC charge a penalty?

The real test is “are the records capable of being turned into a correct and complete return?”

HMRC has suggested that for records to be sufficient, there must be (a) a clear record of all business monies in and out and (b) the records must allow an accurate interpretation to be made as to the nature of the receipts and expenditure.

The consultation document invites suggestions on how to determine the level of default and the quantification of any penalty.

HMRC has said that Business Records Checks will not be random. They will follow a risk assessment and industry sectors will be targeted where HMRC has identified general problems in the past. This is likely to result in cash businesses experiencing even more robust and intrusive investigation than previously.

In view of the above, all small businesses should ensure that their business records are as robust as possible. Contact N. Armes and Co. today if you need any further details.


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