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HM Revenue & Customs (HMRC) announced last Friday that there would be "a fresh approach to Business Records Checks in 2012". 

Whilst continuing to affirm the perceived benefit of Business Records Checks (BRCs) to HMRC and to businesses, HMRC said that the BRC "should be amended to be a more tightly targeted compliance intervention, but set within a framework of additional education and leverage activity." This will include a suspension of BRC activity whilst HMRC improves the programme.

When BRCs were originally announced, HMRC said that they would visit 50,000 small businesses a year, and expected that the visits would yield a benefit of around £600 million up to 2014/15. It is interesting then that, despite their perceived success, they have confirmed that the programme will be significantly curtailed going forwards, with a target of only 20,000 visits annually, and an expected yield of £124 million. 

Agent Objections

HMRC's report appeared to accept that BRCs could not continue in their current form - even though this would be the most cost-effective option. Clearly this was as a result of the concerns expressed by the tax agent community: "The strength of feeling against BRC in the agent community cannot be over-stated."

Reasons for agents' objections included:

• The consultation exercise of December 2010 was "too little too late" and by asking what was the best method for implementing BRCs and the corresponding penalty regime, overlooked the rather more fundamental question of whether or not BRCs were a good idea
• Whether or not HMRC is in a position to advise on adequacy of record-keeping
• The legitimacy of raising penalties in-year on records felt to be inadequate, even though the tax return on which they would be based has not yet been prepared or submitted - so how might one be sure if the records actually were inadequate?
• That BRCs were simply a 'fishing exercise' designed to catch businesses out. HMRC does not explain to businesses why they have been selected for a BRC.

Penalties Still Remain...

Whilst many in the tax agent community will be pleased that HMRC has 'seen sense' over BRCs, there are still some areas where HMRC is sticking to its guns and particularly in the area of penalties:

• HMRC believes it has the legal authority to raise 'in-year' penalties for poor record-keeping - it doesn't have to demonstrate the link between poor records and an inaccurate return based on those records, so it can penalise poor records even when the corresponding return hasn't yet been raised.
• Penalties of up to £3,000 for failure to keep 'adequate' records will continue to be a part of the BRC programme: "the cost of one-to-one interventions and the potential impact on the benefits of the programme meant that this review concludes that maintaining BRC as a purely educational tool [i.e., no penalties] is not a viable option".
• HMRC indicates that penalties will rarely be imposed but it clearly reserves the right to impose penalties on the initial visit - or when. after referral from a BRC, a 'full audit' (enquiry/investigation) finds deficiencies in the corresponding tax return.

...and "Leverage"

HMRC is also intending to include what it refers to as "leverage activity" which would include letters or telephone calls to businesses identified as belonging to 'at risk' categories - cash businesses, tradesmen and public houses are mentioned in HMRC's report. How targeted businesses respond (or not) to those letters or telephone calls, which may involve a questionnaire on how the business keeps its records, will help HMRC to identify those businesses which may require a BRC or further intervention. 

In previous 'leverage' activity, HMRC has often failed to adapt its approach where the taxpayer has an agent - which has often been perceived as circumventing the tax agent. Whilst HMRC states that it recognises that any new format should take into account the concerns raised by the representative bodies, it seems that HMRC may well be about to back out of one, partly-explored minefeld in favour of another.