An inspector calls

It will not surprise you to hear that not all tax returns submitted each year are complete and accurate. Whilst some of these are, no doubt, deliberately incorrect,  others are inaccurate as the accounting records upon which they are based are poor.

In fact, HMRC’s existing random enquiry program indicates that poor record keeping is a problem in around 40% of all small and medium enterprises (SME) cases.   Given that research by the OECD indicates that poor record keeping generally leads to an underpayment of tax (still no surprises), HMRC wish to raise records keeping standards.
HMRC is therefore planning a program of Business Records Checks (BRC) that will review both the adequacy and accuracy of business records and has issued a consultation document requesting feedback on how best to implement this. The consultation is not about whether this should be done, merely the methodology. 

The aim of the BRC program is to review up to 50,000 cases annually, commencing in the second half of 2011. Penalties will be imposed where significant record keeping failures are discovered which, it is believed, will bring about an improvement across the SME business population. As it is estimated that poor record keeping is responsible for a loss of tax revenue in up to 2 million SME businesses, there is plenty of room for improvement.
As noted above, HMRC already undertake random enquiries, so what is new about the BRC program. The main change relates to the timing of the checks.

Historically, with direct taxes (Income Tax and Corporation tax), HMRC had no power to check records before a tax return was submitted. However, Parliament provided just such powers to HMRC in the Finance Act 2008 so an enquiry can now be made at any time. However, don’t be concerned every time there is a knock at the door. It is intended that all visits are pre-arranged with at least 7 days notice being given.

So how will the 50,000 per annum be selected. Whilst a small number will be chosen at random, the majority will be selected on the basis of risk assessment. This will  focus on businesses that, as HMRC put it,  have features associated with poor records keeping.  Early targets are therefore likely to include businesses dealing in cash and those with low value transactions where invoices are not raised for each one.

Given that HMRC will be targeting particular categories of business, one thing they are considering is how they can encourage all the businesses in the category to improve their records, not just those visited . One suggestion in the consultation document is that they  write individually to all of the businesses in the category that has been identified as higher risk to inform them that they are more likely to be selected for a check in the hope that they will improve their records in anticipation of a potential visit.

If you are chosen, are you happy that your records are sufficient?  What you must keep depends on the type of tax you have to pay and what type of business you are. How you keep the records, to a degree, is up to you. There are guidelines published by HMRC (http://www.hmrc.gov.uk/factsheet/record-keeping.pdf) if you want to see how your records stack up.