Business Records Checks explained
What are Business Records Checks and how do they affect small businesses
On the eve of a predicted ‘treble-dip’ recession, the government and HM Revenue & Customs (HMRC) are looking for smart ways to boost the Treasury’s coffers.
HMRC has launched countless new campaigns and taskforces, looking to crack down on tax evasion and errors. One such plan that HMRC has devised is the so-called Business Records Checks (BRCs).
Where have these checks come from and why?
In December 2010, HMRC launched a consultation on how best to implement a programme of Business Records Checks with penalties for significant record keeping failures. Much to the dismay of the representative UK tax bodies, it was not therefore a platform to voice their concerns about the actual process of the proposed checks; rather how businesses should be penalised under such a programme.
Despite this, HMRC went ahead and launched a pilot programme in April 2011. In response, the main tax bodies and institutes created such a furore that the pilot was suspended in February 2012, having completed just 3,431 checks. The original plan was to undertake 12,000 in 2011/12 and 50,000 annually thereafter.
Having had its fingers burned by the narrow scope of the 2010 consultation, HMRC has used the time during the suspension to review the pilot and listen to the representative tax bodies and institutes.
A “new approach” was therefore implemented for the full Business Records Checks launch, which took place on November 1 2012. Note: this is not a re-launch of the pilot scheme, but now the full roll-out of the programme.
What are Business Records Checks?
Businesses are required to keep adequate records in order to complete their annual tax returns correctly. The Business Records Checks are face-to-face, in-year visits from HMRC officers to inspect the records of small and medium-sized businesses.
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HMRC maintains it has introduced them to increase the accuracy of the resultant tax returns. But we know HMRC has looked at Canada, which has had Business Records Checks for many years and its research shows that they boost the tax yield significantly from micro-businesses.
Who do Business Records Checks affect?
Businesses with an annual turnover below £30m who employ less than 250 people – the vast majority of companies in the UK.
When will the BRC programme reach my region?
The BRC programme is being gradually rolled-out, region-by-region, over a 14-week period. The planned timetable for visits is as follows:
- London and Anglia – November 26 2012
- South East England – January 14 2013
- Scotland – January 14 2013
- Northern Ireland -January 14 2013
- Central England – January 21 2013
- East of England -January 28 2013
- North Wales and the North West of England – January 28 2013
- South Wales and the South West of England – February 4 2013
What will HMRC check?
Following the protests from the representative tax bodies described previously, the BRC process got a face-lift and it now comprises of four stages:
1. HMRC will identify businesses at risk of inadequate records
Very little is known about how HMRC identifies high-risk businesses, but we can take an educated guess and assume it is a fairly automated and computerised process. The system probably looks for large variances from year-to-year and possibly at the industry you’re operating in.
It’s no surprise that HMRC often targets sectors that are predominantly cash-based, such as taxi drivers, beauticians/ hairdressers, tradesmen and market stall holders, because their figures are more open to ‘manipulation’.
2. An initial phone call by HMRC to the business owner
Having identified a list of cases, the HMRC compliance centre will firstly write to the businesses to say they will be receiving a call from them to discuss their records, about a week or so in advance.
During the telephone call, the HMRC officers will ask a few simple questions. HMRC estimates these calls will only last about 10 to 15 minutes. There are three possible outcomes from the call:
- If they think your systems sound adequate, no further action will be taken at this stage.
- If they think you might need some additional support or advice, you may be referred to HMRC’s Business Education and Support team to discuss self-help guidance and training.
- If they think your record keeping sounds inadequate and at risk of resulting in an inaccurate tax return, then they will want to undertake a Business Record Check and your details will be passed to the visiting booking team who will contact you to arrange the visit, which will then be confirmed in writing.
Top Tip: If you have given authority for an accountant to liaise with HMRC on your behalf, your accountant can take this call for you if you don’t feel comfortable with it.
3. A visit from an HMRC officer – the Business Records Check itself
If HMRC does proceed with a BRC, during the visit the HMRC officer will:
- Ask you to explain how you run your business
- Make notes of how you keep your business records
- Check a sample of your current business records – usually your records for the last four months
It is estimated that the BRC itself will last for somewhere between two to four hours.
Top Tip: If you have given authority for an accountant to liaise with HMRC on your behalf, your accountant can attend the visit with you, or alternatively you can leave your accountant to take care of the entire visit and you needn’t attend at all if you don’t wish to.
4. Follow-up action and a second visit
If your records are found to be adequate by the visiting officer, they will tell you so during the visit and will confirm this in writing a few days later. This would mark the end of your BRC.
They find problems
If the officer finds your records to be inadequate, they will specify what improvements they think need to be made and should offer you support and help to achieve them.
They will then arrange a follow-up visit for around three months later, to check that their suggestions have been implemented.
If the officer is satisfied during the follow-up visit, then no penalty should be issued by HMRC.
If the officer is dissatisfied, a penalty is likely to follow: around £500 for your first offence (or £250 if you are in your first year of trading). They will also arrange for a further visit – in around two years’ time. If your records are found to be inadequate during this visit too, you will be issued with another penalty.
I would hope this scenario is unlikely, but if HMRC was to find that you had deliberately destroyed your records, they could fine you up to £3,000 – but this could be reduced to £1,500 if only some of your records have been destroyed.
Don’t forget: As a general rule of thumb, you are required to keep your records for at least six years.
What should I do to prepare for Business Record Checks?
Frustratingly, legislation and HMRC are not that prescriptive about the format of business records. But best practice teaches us that business owners and taxpayers should do things like:
- Keep everything! Invoices, receipts, bank statements, cheque book stubs, paying-in book stubs, VAT returns, Self Assessment tax returns etc.
- If you issue sales invoices, give them sequential reference numbers and make sure you have all the details required on them – particularly important if you’re VAT registered. HMRC will also want to see how you manage outstanding customer balances, so make sure you have procedures in place for this.
- Try to neatly organise your paperwork, say chronologically or alphabetically.
- Keep your records securely (for example a locked, fire-retardant cabinet) or if you have a computerised system, use passwords and take regular back-ups that are kept in a safe place.
- Maintain your records on a regular basis – try to avoid leaving everything until the quarter end or year end.
- If you handle a lot of cash in your business, HMRC will want to see that you have tight controls, such as separate cash records, but particularly that a cash reconciliation is undertaken at the end of the day/ week etc.
- Remember to put an entry down or make a note if you take some cash out of the till and clearly distinguish expenditure that is personal and don’t try to claim it is business-related if it is not.
Is there anything else I should know?
You’re on the radar
If you receive the initial letter and have the telephone call with the compliance centre, then HMRC have identified a risk. So even if a BRC does not follow, it is not unreasonable to assume that you have a higher chance of an enquiry at some point.
Careful with your tax return
If your business is subject to a BRC and HMRC identify some errors, then make sure that you deal with those errors accordingly in your tax return – you might even want to add an explanatory note.
Try not to panic
Thanks to all the hard work by the tax representatives and institutes, the BRC process is far more educational than punitive. Therefore, even if you receive a visit and inadequacies are identified by HMRC, you should be offered the opportunity to improve your record keeping before being slapped with a penalty. And if you are issued with a penalty unfairly, there is an appeals process.
Is there any help for me out there?
The UK has one of the longest tax codes in the world and it is constantly evolving. Therefore, unless you have recent experience of the UK tax regime, I would encourage you to use an accountant.
In this scenario, a good accountant can advise you on what bookkeeping system might suit you best and may even be able to offer you some training and support. And they will inform you of your statutory responsibilities, to ensure that your risk of an enquiry or BRC is minimised.
As stated above, if authorised, an accountant can also deal with the majority (if not all) of the BRC process on your behalf. Not only does this take the stress away from you and ensure that it is handled effectively, but it leaves you free to carry on running your business.
Larger accountancy firms will also be able to offer you insurance policies that would cover your accountancy fees should you be faced with an enquiry. Remember, even if you successfully defend yourself in court against HMRC, you cannot recover your fees from HMRC so such insurance cover can prove invaluable.
Further information about BRCs is available from HM Revenue & Customs at www.hmrc.gov.uk.
You can get a free consultation with a TaxAssist Accountant right here on Startups.co.uk. TaxAssist Accountants is the UK’s largest network providing tax and accountancy advice and services specifically for small businesses.