Business Record Checks (BRCs): where now?

HMRC is continuing to pilot its Business Record Checks initiative on an estimated 10,000 small businesses, however it responded to objections raised in December 2011. It has decided to undertake a strategic review of the project.

BRCs have proved highly controversial on two fronts:

1) HMRC announced a continuation of an intial pilot before it had even evaluated the first results, and

2) HMRC appears to have made a policy change: intending to charge taxpayers penalties of up to £3,000 for any failures to keep records using section 12B TMA 1970 – records to be kept for the purposes of returns instead of Schedule 24 FA 2008.

The Institute of Chartered Accountants (ICAEW) Tax Faculty has been vociferous in objecting to the pilot, Frank Haskew, Head of the Tax Faculty points out in a recent article in the ICAEW's Taxline that the link between bad record keeping and the tax gap is not only unproven but had HMRC properly evaluated its early findings it would have seen that there is no "pot of gold" in Business Records Checks.

The Chartered Institute of Taxation points out that HMRC is wrong to charge penalties under that section: 12B does not apply to in-year record checks, because its wording does not make any sense. Andrew Gotch writing in the CIOT’s magazine Tax Adviser says that section 12B applies to records used to prepare tax returns so that in-year records cannot be judged for accuracy and any record keeping failures cannot apply under that section until the return is due/completed. Further, HMRC has new powers under Schedule 24 FA 2007 – penalties for errors and mistakes in tax returns. In its 2006 consultation on Schedule 24 HMRC used examples of record keeping failures to show how the new powers applied. It now seems clear that HMRC has either changed its policy or it deliberately mislead all during the Schedule 24 consultation.

Accountancy Age quotes Conservative MP Priti Patel as saying that "This is the persecution of small businesses at a time when they are already facing a very, very hard time...the attitude of HMRC to small businesses is frankly disgraceful when they are blatantly doing deals with large firms which have allowed them to escape millions of pounds in tax liabilities."

Where now?

HMRC's statement issued in December 2011 summarises the current position: 

“HMRC recognise that the launch of the BRC pilots has caused considerable concern to the tax profession and that the project would have benefited from more detailed consultation with tax professionals at an earlier stage. In the light of these concerns, HMRC will undertake a strategic review of the project in consultation with the professional and representative bodies. The purpose of the review is to consider the overall aims of BRCs, examine whether the current approach is the best way of achieving the policy objectives and identify what changes are needed to ensure that the objectives are achieved.  

“In the meantime HMRC will continue with a limited number of BRC pilots and the results of them will be evaluated as part of the review. Richard Summersgill (HMRC’s Director, Local Compliance) and Naomi Ferguson (Director, Business Customer & Strategy) are jointly sponsoring the review and it will be led by Tracy Kirkham. HMRC will also consult with the professional bodies and other representatives through the Compliance Reform Forum and also with ABAB (the Administrative Burdens Advisory Board). HMRC expect to report initial findings in early 2012. 

“Given the concerns over possible penalties, HMRC would like to take this opportunity to reassure taxpayers and agents that HMRC will not (except in extreme cases such as where a taxpayer has no records or has destroyed them) be seeking to use the record-keeping penalty provision during the pilots. No such cases have been identified so far. 

“HMRC and the tax profession share the overriding policy objective, namely to ensure that businesses’ record-keeping meets the necessary statutory requirements and that their records are sufficient to enable a correct and complete tax return to be submitted within the time limits. HMRC are grateful to the representatives of business and the agent bodies for agreeing to work with them on the review and look forward to developing a shared understanding of how the overriding policy objective can be implemented with representatives’ full support.”

So, a case of "wait and see". Given that the tax bodies are all enjoying ministerial support at the present time under an initiative to improve HMRC's efficiency, the onus is on HMRC to show that something sensible comes from these BRC pilots.

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