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HM Revenue & Customs (HMRC) is launching a public consultation on a new system of compliance checks for 'Small and Medium-sized Enterprises', (SMEs), to bring about improvement in business record keeping. HMRC’s David Stephens seeks tax agents’ views.

Business Records

How good are your clients’ business records? This year [2011] HMRC is toughening up its approach to SMEs' record keeping, with the introduction of a new type of compliance check – a Business Records Check.

We estimate that around 40 per cent of SMEs – around two million businesses – do not keep adequate business records, even though they are legally bound to keep accurate records to ensure they make a correct Income Tax or Corporation Tax Self Assessment return.

Inadequate records, for example, those that fail to show all of a business’s income or that fail to differentiate between personal and business expenditure, can lead to tax losses for HMRC, which means a loss of revenue to fund the UK’s public services. We estimate that, every year, up to two million SMEs are not paying the correct amount of tax as a result of poor record keeping.

Proposed Business Records Checks

The new Business Records Check can be made at any time before a business has submitted a tax return. Up until now, in relation to direct taxes, HMRC has always carried out compliance checks after a business has submitted a tax return.

Through this consultation we are seeking your views on a number of issues, including:

• how and when to carry out business record checks;
• what counts as ‘compliance with record keeping obligations’;
• which types of business might attract a business record check;
• what counts as a minor failure or a significant failure in record keeping;
• when to apply a penalty and what level of penalty is fair, up to a maximum of £3,000;
• the start date for applying penalties for significant record keeping failures.

We believe that improved record keeping will lead to a reduction in the amount of tax lost in the UK. We also believe that by keeping better records, businesses will benefit from improved financial management which, in turn, could improve their chances of business success.

Further Guidance for SME Clients on Keeping Good Records

To help SMEs understand what records they need to keep, we have published a factsheet, which you can download from our website at Keeping Records for Business - What you Need to Know.

And the Business Link website has an interactive tool for your clients to check their current practices. The tool is available at Practical Advice for Business – select ‘Taxes, returns and payroll’, then ‘Getting started with company administration’ and then ‘Find out what records you should be keeping’.

Two Separate Penalties

Under its new approach to record keeping, HMRC may now apply two separate penalties: one for inadequate record keeping and another for incorrect and incomplete tax returns. Up until now, the two issues were treated together, with a single penalty for making an incorrect return.

Consultation - Link

To read the consultation, go to Business Records Checks: Consultation Document.