By Marcus Leach

HM Revenue and Customs (HMRC) has signalled its determination to make businesses improve their record keeping by launching its programme of inspections earlier than expected.

HMRC will be seeking confirmation that businesses are maintaining ‘accurate and adequate’ business records covering the full range of taxes including VAT, PAYE, NIC and corporation tax.

“In practical terms, HMRC will expect to see that a business is keeping full and accurate records of its invoices, receipts, petty cash, general expenses and so on,” warned Richard Mannion, national tax director at Smith & Williamson the accountancy and financial services group.

“Inspectors will be looking at records relating to the current year and potentially go back six years. Failure to comply with HMRC’s standards will lead to further inspections and some organisations will face fines.

“This is the first time that the tax authorities will be looking at records for the current year. Until now, HMRC has only scrutinised a firm’s tax affairs if it thinks the business has filed an inaccurate return and is paying too little tax. This new approach heralds a sharply toughening attitude to SME record keeping by HMRC.”

In February, HMRC estimated that some 2 million small to medium enterprises (SMEs) keep inadequate tax records. It published guidance at and is now following up by finding out how well firms have applied this advice.

“Just a few weeks ago, HMRC announced its intention to carry out spot checks and it was indicated that these would not start until the Autumn. However, HMRC seems to be making an early start by sending out over 1,000 letters to businesses up and down the country,” explained Mr Mannion.

Mr Mannion fears that new business are more likely to be targeted by the authorities.

“Business owners should take these warnings very seriously. 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. They could therefore end up with an extra tax demand and even a fine," he said.

As a basic minimum, business people need to be organised and methodical in their record keeping. Smith & Williamson’s top five tips include:

- Time: keep records going back at least six years.

- What to keep: invoices, bank statements, paying in books, details of purchases, expense details and so on.

- Personal vs. business: anyone who makes a claim for the use of assets which they use personally as well as for the business - a car being a typical example - must be scrupulous in allocating personal and business useage and have the necessary supporting paperwork to back up their claim.

- Be regular: keep on top of your expenses and record keeping. This will make it easier and more accurate. Also, HMRC is more likely to believe contemporaneous records.

- Avoid estimates: if you have to estimate an amount, make sure you can provide suitable evidence.