How big a problem is record keeping?
Rebecca Benneyworth considers the evidence gathered during HMRC’s pilot record checks in 2006-7 and considers what its new approach will mean for advisers and their clients in 2011.
During the development of HMRC’s new powers, and when the tax authority was ready to start bringing forward legislation, it set out the its objectives for compliance checks on taxpayers including businesses.
“It is envisaged that an officer of HMRC might begin a compliance check in respect of any of the relevant taxes for one or more of a number of purposes. These include checking that:
- a tax return, amendment to a return or claim is correct
- statutory record keeping requirements are being met
- tax has not been underpaid or over-claimed
- any issues concerning possible tax avoidance are considered.”
The second of these objectives is now generating some publicity and HMRC is expected to target smaller businesses to check the quality of their records during 2011. Although the stated intention of the record keeping checks is to ensure that smaller firms are keeping adequate records, there are potentially more serious issues at stake than a “slapped wrist” for poor records.
There is not presently any evidence that HMRC is planning a “big stick” approach to smaller businesses, but the consultation process that concluded on 28 February made it clear that there will be a focus SME record keeping in 2011.
There is also some history for HMRC of looking at business records (in the relatively recent past) and being dismayed with what was observed!
The 2006 Budget included details of HMRC’s plans to use new approaches to compliance. Business and the accountancy profession were consulted to see how this might work. Although this all occurred five years ago, the work done then will have a bearing on what happens in 2011.
Almost as soon as the consultation closed, HMRC announced a trial of the new methods that started on 10 July 2006. The accountancy profession’s view was that the trial was set under way far too quickly, and many advisers had doubts about participating in the trial.
Although the 2006 pilot scheme was much criticised, a number of key lessons were highlighted in the evaluation report (467kb PDF) produced in April 2007. These are likely to shape compliance developments over the next few years, and indeed are likely to form the basis of the entire structure of compliance effort in the medium term.
There is a risk that some of the more specific issues arising have not had sufficient attention from the profession. The pilot scheme review included the following comment, which highlighted the specific issue of record keeping: “Some taxpayers are not able to declare the correct amount of tax because their business records are not adequate. If this is left unaddressed it could subsequently lead to more significant errors.”
HMRC identified the poor records they observed in the trial as a key risk to the integrity of the tax system. It would be naïve to expect that this conclusion would not form a major part of the compliance drive in the future.
Detailed analysis – record keeping