By Claire West

HMRC believes that around 4 in 10, or some 2 million, small and medium enterprises (SMEs) keep inadequate tax records. Later this year — HMRC has not said when — it will launch a programme of spot checks to make sure businesses are applying the rules for keeping ‘accurate and adequate’ business records. Penalties could be applied where businesses fall short.

“This approach marks a change and hardening attitude. Currently, the tax authorities typically scrutinise an organisation’s tax affairs and record keeping if they believe it has filed an inaccurate tax return and is therefore paying too little tax. But this new programme means inspectors will be able to focus on current year records before a tax return is even submitted. "

"HMRC will literally be able to walk into any business and demand to see their invoices, receipts, PAYE and VAT records and so on. And remember, they can go back six years in the case of a business that has been around that long,” said Richard Mannion, national tax director at Smith & Williamson, the accountancy and financial services group.

“The programme will apply to both new and established businesses and so it will be of concern to millions of businesses up and down the country.”

To encourage people to get their records in order, HMRC has issued a range of advisory information which is available at

“Business owners should take these warnings 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, should HMRC take issue with them."

As a basic minimum, business people need to be organised and methodical in their record keeping.

Mannion also offered his top five tips for SME record keeping:

- 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.

Yesterday the [url=]Federation of Small Businesses voiced its concerns[/b], stating that "FSB research has shown that one in 10 small firms spends more than six hours per week fulfilling their tax responsibilities. However, many small businesses do not have a dedicated finance or accounting department and will be unaware of the intricate details of tax obligations - especially when starting out.

"Rather than imposing fines which could cripple some small firms, it would be more pertinent for HMRC to move to a system where small businesses are encouraged to improve record keeping and understand their tax obligations better."

Smith & Williamson is an independent professional and financial services group employing around 1,500 people. The group is a leading provider of investment management, financial advisory and accountancy services to private clients, professional practices and mid-to-large corporates.