On 17 December 2010, HM Revenue & Customs (HMRC) published a consultation on the possible introduction of a new system of Business Record Checks from July this year. It is estimated that poor record keeping is very common and often leads to the under-assessment of tax due. In the current economic climate, HMRC therefore intends to increase the recovery of tax by exploiting its existing legislative powers to investigate the business records of up to 50,000 businesses on an annual basis, imposing penalties of up to £3,000.
Which businesses will be subject to Business Record Checks?
Business Records Checks will apply to small and medium enterprises. This will cover businesses which:
- employ fewer than 250 worldwide employees; or
- have either:
- an annual global turnover not exceeding €50m; or
- an annual global balance sheet total not exceeding €43m.
What tax records are businesses required to keep?
Income tax and corporation tax
The law currently requires those who complete an income tax or corporation tax self-assessment to keep and preserve the records needed to make a correct and complete return.
Companies and those carrying on a trade, profession or business (whether alone or in partnership) must also keep records of:
- all amounts received and expended in the course of the trade, profession or business; and
- all sales and purchases of goods made in the course of trade.
Those registered for VAT must keep various records, including:
- all their business accounting records;
- their VAT account; and
- copies of all VAT invoices issued and received.
How will the Business Record Checks be conducted?
HMRC will carry out a risk assessment of the businesses considered likely to be in breach of the record keeping requirements, based on businesses which have features associated with poor record keeping. A small number of businesses will also be selected at random. HMRC is also considering the possibility of writing to businesses identified in the risk assessment, with a warning that they are likely to be selected for a check if there is no improvement.
As provided under existing legislation, the checks themselves will be carried out by an HMRC officer at the business premises. Notice of at least seven days must be given and the HMRC officer will inspect the statutory business records.
How can businesses protect themselves?
Businesses should consider seeking professional advice to ensure that their business record keeping is satisfactory in order to avoid the risk of an intrusive HMRC inspection, with the possibility of a fine.
This may also have other benefits for businesses in the current economic climate, including improved financial management and in turn, the improved chance of business success.
This article is written on the basis of current tax law, practice and interpretation at the date of this document.