By Claire West
HMRC re-launches its programme of business record checks by writing to small-to-medium size enterprises (SMEs)regarding record keeping for VAT, PAYE, NIC, corporation tax and other taxes.
HMRC has stated that the re-launch will initially involve them writing to SMEs who they believe may be at risk of keeping inadequate records, advising them that they will be calling them to discuss their business records.
HMRC will be seeking confirmation that businesses are maintaining ‘accurate and adequate’ business records covering the full range of taxes. The SME’s response to this conversation will then enable HMRC to assess whether no further action is required, or the SME could benefit from tailored educational support, or if a visit is required to check their records.
“Inspectors will be looking at records relating to the current year. 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 Tim Lyford, national head of corporate tax at Smith & Williamson the accountancy and investment management group.
He continued: “If there are no problems with your records the HMRC officer will tell you on the visit and then confirm it in writing.
If your records are inadequate you may have to pay a penalty, but HMRC will give you the opportunity to bring them up to an adequate standard. HMRC will arrange a follow up visit to check that you have made the necessary improvements.
If by the time of the follow-up you have improved your record keeping so that your records are adequate, HMRC will reduce the penalty to nil.
However if HMRC finds that your records have still not improved to an adequate standard, a penalty will apply. The penalty is usually £500 for the first offence. For businesses in their first year of trading the penalty will be £250.”
Tim fears that new businesses are more likely to be targeted by the authorities. He adds: “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."
In December 2010, HMRC estimated that some 2 million SMEs were keeping inadequate tax records.
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
- Cash businesses in particular will need to ensure they are keeping adequate records.