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Business record checks: sorting truth from fiction

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21st Dec 2011
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HMRC has piloted its new programme of Business Record Checks and run into some controversy in doing so. As ever, there is a problem sorting truth from accumulated fictions, says Simon Sweetman.

HMRC has given an explanation of why it is doing this, saying:

BRC evolved as a direct consequence of the Comprehensive Spending Review 10, meeting HMRC aims in closing the tax gap. It is concerned with the ability of those in business, predominantly SMEs, to keep adequate records to make a complete and accurate return of their tax liabilities. There are approximately 4.8m SMEs, the majority of whom are below the VAT threshold. SMEs account for a significant proportion of the tax gap, estimated at around 50% and within this figure roughly 1/3 relates to error and failure to take reasonable care. In view of the numbers involved and relatively low risk in single cases the use of single intervention techniques is inefficient. BRC gives a low impact entry point into this population with the intention of changing behaviours in a cost effective way.”

The question of how anyone really knows what the tax gap is aside, the point of this is that traditional enquiries are far from cost effective and too heavy on reduced resources (as we have been saying for years) and HMRC would do better to educate SMEs in record keeping, and certainly tries to do so. The question is whether the approach of having loads of information on the internet really suits this group of taxpayers. Of course these new and smaller interventions also have a compliance side (we must not forget the tax gap), and unsurprisingly it is that side that is the story.

Not for the first time (and probably not for the last) HMRC went ahead with the programme following a consultation conducted on their terms: there was lots of notice given (the legislation, after all, was in Schedule 36 of FA 2008) but when it came to the process there was not enough consultation. This has been a consistent problem – HMRC has often consulted well up to the point at which it actually sends people out and then going rather off the rails because, I think, of a reluctance to let anyone “interfere” with operational matters.

So when they started to pilot the checks they ran into a storm of protest – the Admin Burdens Board in particular felt that the problems of time and money the BRCs might cost small businesses had not been properly considered, and the Compliance Reform Forum was concerned that HMRC's view of what constituted adequate records might well be more stringent than the profession's (though this does not seem so far to have been a problem). The institutions weighed in as well, and while the checks are continuing, HMRC has agreed to conduct a serious review of them. Once that review is completed one would hope there will be more serious consultation.

It has of course turned up some horror stories, of businesses that have managed to make tax returns over a period of years while maintaining no accounting records at all. We must recognise, though, that a business bank account and keeping hold of invoices may sometimes be enough, and there was a consistent query about whether HMRC talked to agents about what they did when they got hold of the records. And so far (despite some wild rumours) no penalties have been charged at all, and one interesting suggestion (wholly practical but at the moment illegal) is for suspended penalties. HMRC has taken a very limited view of its powers to suspend penalties after everyone hailed it as a good idea.

On the whole the fear of checks has possibly been worse than the checks themselves, as is quite usual with a new procedure. Paranoia rules, so HMRC must learn to explain everything in as much detail as possible. There will still be those who don’t read the explanations or who choose to disbelieve them.

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Replies (4)

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By justsotax
22nd Dec 2011 11:28

If only the person in charge had a grasp in reality...

it is a shame that the revenue don't employee a few people who have run business (maybe they do but there is no sign of this impacting on the way they go about these things).  They then just might start coming out with solutions that work.

 

the sad reality is that they are like indiviudals who have never driven before deciding on the speed limits for certain roads with no real appreciation for how road quality, conditions, lighting, etc will affect a 'safe' speed limit. 

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ghm
By TaxTeddy
22nd Dec 2011 11:33

What about the accountant?

Surely HMRC are failing to recognise the input made by accountants in correcting deficiencies in client records?

Thanks (1)
Chris M
By mr. mischief
22nd Dec 2011 12:08

it's a joke

Strictly in my view the "weekly accounting and in-year accuracy" mularky is a joke.  I have worked in senior finance roles for three different large companies each with sales in excess of £1 billion per year, one quoted on the LSE and one at the time on the Paris Bourse.

Most of the time NONE of those companies were in full compliance with the totality of the small business record checks, this included within my areas of the businesses alone at different times:

1.  £500k to £1m stock imbalances individually at three separate sites which took 6 months and two separate non year-end stock counts to sort out.

2.  Two separate historic financial disagreements with separate customers, each one of which being over £500k and each taking at least three months to reconcile and agree because the imbalances were spread over 5 years and two accounting systems.

3.  Wholesale imbalances due to botched SAP implementation within customer and supplier records which persisted for 4 months and were complained about by suppliers who were being slow paid at Ministerial level, the Group FD then required weekly reconciliations and reports on all of this across 2 different division which had the problem.

4.  An otherwise very good SAP implementation which resulted in huge projects being settled to capital which were revenue projects, and vice-versa.  This led to a difference between P&L and Balance Sheet of over £80m which then took over 6 months to fix entirely.

5.  Numerous other issues of a lesser magnitude but still running into the circa. £500k range, still taking 3 to 6 months to sort out.  Where these originated close to year-end they were flagged up to auditors, 80%-plus of the time the "hard yards" were put in to sort them out before the auditors showed up or even during the audit itself.

If massive organistions with hundreds of qualified finance staff cannot meet these tests, why should small businesses?  Can I suggest to HMRC that instead of starting with the little guys they kick off with Vodafone and Goldman Sachs?

 

 

 

 

 

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By Mallock
03rd Jan 2012 16:02

I'll find out shortly

I have just received a letter stating that they want to carry out a BRC on me!

Are there any criteria for determining who gets a visit and any limits to what they should be allowed to see? Do I have to allow access to Sage or can I just given them hard copies?

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