HMRC Business Records Checks

HMRC published a Consultation Paper on 17th December announcing that they intend to start a programme of Business Records Checks (BRCs) that will review both the adequacy and accuracy of business records within the SME sector. The timing of the Consultation is not ideal with a closing date for comments of 28th February 2011.

Whilst the need to keep proper records in order to comply with tax obligations is widely acknowledged, HMRC’s random enquiry programme indicates that poor record keeping is a problem in around 40% of all of SME cases (circa 5 million). Research by the Organisation for Economic Cooperation and Development (OECD) indicates that poor business record keeping generally leads to an underassessment of tax even where there is an audit-type check into a return for the period covered by such records. On this basis, HMRC's view is that poor business record keeping is responsible for a loss of tax in up to 2 million SME cases annually

As ever with HMRC Consultations, the die appears to be already cast: the programme of checks will happen starting in the second half of this year with HMRC projecting 50,000 reviews annually for the next 4 years. The Consultation is merely concerned with how to implement the programme.

Additionally, the BRC programme will be accompanied by a tariff-based penalty regime for failure to keep proper records. The maximum penalty for failure to maintain business records currently stands (and will remain) at £3,000, but the imposition of any penalty – let alone the maximum - has historically been quite rare. HMRC have said that they do not intend to have a regime which simply levies £3,000 every time there is a failure to keep proper records. The implication is that some level of penalty will be charged, the question is merely how much.

Furthermore, HMRC state in their impact assessment that this initiative will bring in £600million over the four years. Abbey Tax have commented "Are we the only cynics who have worked out that 4 x 50,000 x £3,000 comes to ... wait for it… £600million?!?"

The reasons for keeping proper books and records is far more than just about tax but this does provide an element of the "stick".