News

January 06, 2012

HMRC backtracks on small-business record checks

HM Revenue & Customs (HMRC) has scaled down its programme of small-business record checks (BRCs) and promised to review its approach to spot checks after criticism from business groups.

In a statement sent to accountancy bodies this week, HMRC admitted that it had not properly consulted with tax professionals about BRCs or addressed concerns about possible penalties for businesses with poor paperwork. The tax body stated that it would review the programme in consultation with professional and representative bodies.

Launched last spring, the BRC programme aimed to conduct spot checks on 20,000 small businesses and gave HMRC the power to impose fines of up to £3,000 on firms whose records were not "sufficient to enable a correct and complete tax return to be submitted within time limits".

According to HMRC, poor record-keeping by small businesses was responsible for an estimated £6 billion of the £35 billion "tax gap" in the UK in 2009-10, the most recent period for which figures are available. Some 2,000-plus BRCs conducted between April and July 2011 showed that 44 per cent of small and medium-sized businesses had "issues" with their paperwork and 12 per cent had "serious inadequacies".

However, tax professionals and business groups felt that BRCs placed an unfair burden on small firms to keep perfect records beyond their statutory obligations.

Frank Haskew, head of the Tax Faculty for the Institute of Chartered Accountants in England and Wales, (ICAEW) welcomed the announcement. "There are all sorts of issues that need to be sorted out, including what sort of business records you need to be keeping, depending on the size and nature of the business," he said.

"There needs to be an acceptance by HMRC that perfect record-keeping isn't what we're talking about here, just that records need to be sufficient and adequate to enable a complete tax return to be submitted," he added. "Your records probably are adequate by the time your accountant has dealt with them. But HMRC seems to be trying to pre-empt the job we perform for tax payers without speaking to us about what we do."

Haskew said that targeting checks at businesses that were in "at-risk areas" rather than those that already had tax agents would be a better way of tackling the problem of non-tax payment by some small firms.

However, an HMRC spokesman stressed that they were already doing this with a view to helping businesses improve their record-keeping, and had not seen fit to impose any fines so far. "The BRCs are not a revenue-raising tool, but an enabling tool for an expert to go out and look at a newly-formed business or one that's been identified as having difficulty with keeping accurate records," he said.

HMRC will continue with a limited programme of business record checks while the consultation gets under way.

• HMRC extends crackdown on poor record-keepers