The HMRC clampdown: What you need to know

Startups examines the government's drive for tighter bookkeeping

As if small businesses didn’t have enough to think about, HM Revenue and Customs (HMRC) is about to give them another reason for concern.

HMRC says it plans to assess the paperwork of 50,000 small firms across the UK, going back as far as six years, to search for flaws in their trading records.

The penalty for improper record keeping can be as high as £3,000, so those firms which are caught out will probably be faced with a steep charge for their complacency.

One can easily see the reason behind HMRC’s sudden interest in small firms’ accounts; Revenue bosses believe they could raise up to £600m through the clampdown, and that sort of money could make a huge difference at the present time.

But, if David Cameron and Nick Clegg are serious about stimulating the UK’s small business community, is this the best time to be subjecting its members to scrutiny?

Contrasting opinion

Some experts believe the clampdown is poorly timed. Philip Monks, chief executive of British bank Aldermore, said: “The VAT rise will only add to the financial squeeze faced by many SMEs.

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“A worryingly high percentage of SMEs say they will require additional funding but, with many of the big banks still reluctant to extend credit, the VAT rise could strain working capital to breaking point.”

But others believe HMRC’s policy is nothing to be concerned about. Nichola Ross Martin, who runs her own virtual tax network, told us: “This is not a new clampdown – HMRC have been getting tougher on bookkeeping over several years.

“Ultimately, the punishment will be proportionate to the crime. There are no penalties for errors if you’ve made an error despite taking reasonable care – but if the case is deliberate, you could be fined up to 100% of the tax at stake.

“Any normal person will say it’s reasonable for a small business to be fastidious in their bookkeeping. It’s a mug’s game not to keep proper records, and it’s much harder to operate a business without them!”

Similarly Andrew Gotch, a senior officer with the Chartered Institute of Taxation, told us that “it’s not a bad thing for businesses to keep proper records, and the legislation is not changing to make them keep more detailed records.

“As long as a company’s records are reasonably accurate, they’re likely to be ok even if they make a slight error. But if the records are clearly inaccurate, that’s a different matter altogether.”

Next steps

What do Britain’s small firms have to do to prepare themselves for the HMRC clampdown?

Nichola Ross Martin believes that one of the main focus areas of the inspectors will be “claiming expenses without receipts.  If you’re VAT-registered, you need receipts.

“I’d also tell firms to make sure they’ve got a decent advisor, and give themselves a real-time record review from time to time. If a company is below the VAT threshold, it won’t be obliged to provide quarterly returns; it’s vital that such firms put their own spot checks in place instead.”

Similarly, Andrew Gotch told us that, if small firms aren’t currently represented, they should “get an accountant or tax advisor who understands what the revenue are looking for, and don’t leave it until the last minute to put their records in order.

“Also don’t panic, because I expect the hurdle will not be as high as some people are expecting, because it would be simply impractical to put it that high. Stay calm.”



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