By Claire West

A proposal by HM Revenue and Customs (HMRC) to start making large-scale checks of business records before relevant tax returns are submitted is misguided and will not achieve its objective, argues the Chartered Institute of Taxation (CIOT).

HMRC are proposing to use powers in Finance Act 2008 to check business records in up to 50,000 cases annually, beginning in the second half of 2011, and to impose penalties for poor record keeping. The proposals appear in a consultation paper issued in December 2010, to which the CIOT has responded.

Anthony Thomas, CIOT Deputy President, said:

"The CIOT is strongly supportive of efforts to improve record keeping by business. Many tax advisers have struggled to get clients to follow best practice in this area and would welcome HMRC's assistance in persuading them.

"However we do not believe this project will meet that objective. Its purpose seems to be more about raising money through penalties than about helping businesses improve their systems. HMRC are putting forward a blunt instrument designed to deliver punishment when what is needed is a collaborative process focused on providing education, guidance and support. We think they need to revert to the drawing board on this.

"In addition, while supportive in principle of systems based pre-return checks that provide guidance and education to businesses, we think that the legal basis for levying penalties as a result of such a check prior to submission of a return is questionable unless there is a failure to keep any records at all or there has been a failure to preserve them. A penalty should only be levied once it has been proved that the bookkeeping records have led to an incorrect return. The penalty should be linked to the incorrect return."

The CIOT has also criticised the consultation process for the proposals. Anthony Thomas said:

"This consultation was poorly timed. Many tax advisers involved with small businesses who would have liked to comment have been tied up with self-assessment returns and the need to start submitting returns in a new language, iXBRL, during the period.

"If HMRC are determined to press ahead with some form of business records checks they should at least address some of the issues we have raised and consider doing further structured workshops for tax agents before commencing any visits.

"The agents of represented taxpayers should receive notices of visits from HMRC inspectors, while the unrepresented need to be given clear guidance on HMRC's powers and their rights."