Following a review, HM Revenue & Customs (HMRC) reports a fresh approach to its business records checks (BRC) programme in 2012. It is re-thinking on penalties too.

HMRC started piloting BRCs last year. The BRCs are not to be confused with the Single Compliance Process (SCP) although taxpayers will be unlikely to appreciate the difference and the SCP is also subject to a review.

According to its report between April 2011 and 4 January 2012 it made 2,437 BRCs:

  • 28 per cent of those businesses visited had “some issue” with their record keeping.
  • 11 per cent (268) had “issues serious enough” to warrant a follow-up visit but only 61 follow ups were made.

HMRC does not detail what “some issue” or “issues serious enough” actually means. It considers that BRCs do improve tax compliance.

It was initially intended that some 20,000 BRCs would initially be undertaken building up to 50,000 per year. These figures have been drastically reduced to 6,000 building up to 20,000. Any estimated cost savings clearly require revision.

Options and conclusions

The review/report considered four possible options:

1. Cease all BRC visits and abandon the programme. 

2. Do nothing - the ‘as is’ option.

3. Amend BRC to become a purely educational tool. 

4. Amend BRC to be a more tightly focused compliance intervention.

HMRC is following 4. BRC should be amended to be a more tightly targeted compliance intervention, but set within a framework of additional education and leverage activity engaging with the tax bodies.

The agent’s perspective:

What are adequate records for a small business?

HMRC's report is short on the details as to what constitutes ‘adequate’ records and when records are so ‘inadequate’ that a return visit is necessary.

Penalties

There are mixed messages with regard to penalties: a key issue for the tax bodies is whether there will be double penalties.

According to the report no penalties have been issued during the BRC pilot, “it is unlikely that issue of penalties would ever be widespread given a current level of 11 per cent of businesses having records assessed as being seriously inadequate and a 96 per cent improvement rate.”

We are told that a record-keeping penalty could be levied if no records are kept or that the customer has deliberately destroyed records to prevent or frustrate the check.

The report recommends that:

  • Further work should be done to agree a reasonable tariff for the application of penalties for inadequate record keeping.

However, it then goes on to suggest that:

  • If a business is referred for a full audit and it is found that tax returns submitted before, or after, the referral were inaccurate and that inaccuracy was a result of inadequate record keeping then a record-keeping penalty should be charged in addition to any other penalty due.

Chartered Institute of Taxation (CIOT) President, Anthony Thomas, comments on the re-think: 

“HMRC are trying to have BRCs put firmly into the field of its compliance activity, which is where they belong.  That will provide an incentive for taxpayers to pay more attention to record-keeping as well as removing grey areas for advisers and HMRC as to the status of BRC.  All small businesses and their advisers need to be aware of the implications of BRC for matters like disclosure of inaccuracies and to be on the front foot when a BRC is announced. 

“I welcome the recommendation that HMRC should consult with representative bodies to define clearly what constitutes ‘adequate’ records for the purposes of BRC. What counts as adequate records varies from business to business and a uniform approach will not work.  The smaller business cannot be expected to have voluminous records written up every day: that is simply not appropriate. 

The CIOT’s Low Incomes Tax Reform Group (LITRG) has also been active in pressing for improvements to the BRC scheme.

 Robin Williamson, Technical Director of LITRG, says:

“We welcome HMRC’s acceptance of LITRG’s recommendation that helping business with their record keeping obligations is as much an educational function as a compliance one. We are pleased that HMRC will work with LITRG and other voluntary sector bodies to ensure that good record keeping and other educational support is available to small unrepresented businesses.”

Links:

Business Records Check Review - Report

Single Compliance Process - Review

 

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