Save content
Have you found this content useful? Use the button above to save it to your profile.
AIA

TaxZone Newthwire 56: Record-keeping

by
1st Jan 2005
Save content
Have you found this content useful? Use the button above to save it to your profile.

TaxZone Newthwire
Issue 56 - 19 July 2004 - Record-keeping
Available on subscription at:
https://www.accountingweb.co.uk/premium_content/newthwire


Editorial note
John Newth
Many of us, in our student days, were brought up on what were known as incomplete records. A small business, be it shop, farmer or motor engineer, would bring into the office a polythene bag filled with invoices (perhaps on a spike),
receipts and bank statements. Some of the documents would be missing, and in order to prepare accounts one had to be a mixture of an accountant and a detective.

The books, such as they were, consisted of a written record of
sales, and if one was fortunate, petty cash payments. Bank
payments and receipts were ascertained from the bank statements,
cheque stubs and paying-in book. A farmer might have had a
professional stocktaking, but other trades did their own stock
take. Debtors, creditors and work in progress demanded much
detective work.

In effect the bank cash book was written up in the accountant's
office, and the first major task was to effect a bank
reconciliation. The next hurdle to overcome was to prepare a
cash account. Inevitably this produced a cash difference.
Traditionally, differences were either credited to sales or
debited to drawings, but not until after a thorough
investigation, including questions to the client, had taken
place. Even in those days gross profit percentages were
important.

Current Inland Revenue investigators would have had a field day'
with each of these clients. Most were honest but not book-
keeping literate, but the occasional bad egg was around. I can
remember a metal deed box being opened in the office after the
death of a small greengrocer. It contained the sum of 11,000 in
cash, which was an enormous sum in the late 1950s.

Regards,
John T Newth
mailto:[email protected]

Disclaimer
==========
No responsibility for loss occasioned to any person acting or
refraining from action as a result of any information in this
wire is accepted by the author or AccountingWEB. In all cases,
appropriate professional advice should be sought before making
a decision.

PAYE
----
One item of bookkeeping and tax regulation goes right back to
the mid 1940s. The existence of PAYE obligates any employer to
keep the requisite PAYE records in respect of employees (and in
the case of a company, directors). PAYE audit teams and Schedule
E Compliance staff have powers unavailable to other members of
the Revenue in that they may visit the premises of an employer
to check PAYE and employment records.

A draconian penalty regime in respect of PAYE and P11D errors
and failures should ensure that any sensible employer does his
or her utmost to comply with the system, even if it represents
unpaid tax gathering for the government.

Value Added Tax
---------------
The first attack to breach informal practices was the advent of
VAT in 1972. Customs & Excise officers undertook 'control
visits' and had the power to examine the books of any trader,
and claims for input tax could be refused and repayments denied
if the proper documentation was not available. This was one of
the first impetuses to proper record keeping.

The law and regulation
======================

The law
-------
Whether or not one remembers the days outlined above with
affection, the plain fact is that the practices outlined above
are now illegal. Section 12B, Taxes Management Act 1970 outlines
the fact that an unincorporated business must, in effect, keep
proper books of account for the benefit of the Inland Revenue.

Such books and records must also be retained for a period of
five years and 10 months after the end of the relevant year of
assessment. A mitigable penalty of up to 3,000 pounds can be
imposed by the Revenue for failure to keep or retain the
necessary records.

An additional reason for keeping a clean set of books is that
they may be required to be produced during an Inland Revenue
Enquiry or investigation. Now that enquiries and investigations
are statutory and standardised, taxpayers and their advisers are
in no doubt of what may be required. The Revenue may make
application under section 19A, Taxes Management Act during a
self-assessment enquiry, or alternatively one of the parts of
section 20 may be invoked in more formal proceedings.

The books and records of limited companies are, in any case,
subject to the provisions of the Companies Acts, which regulate
the form of accounts as well as many other issues. Companies are
also subject to SSAPs and FRSs, among other regulations, and
their accounts must demonstrate a 'true and fair view' and
'materiality', as well as other concepts.

Additionally, a company is subject to paras 21-23 of Schedule 18
to the Finance Act 1998, as part of CTSA. Books and records must
be retained for a period of six years after the end of the
accounting period. Once again the penalty for non-compliance is
a mitigable penalty of up to 3,000 pounds.

Regulation
----------
We live in a world of more and more regulation. The provisions
of the Companies Acts, for instance, regulate the affairs of
companies. Charities are now regulated strictly by the Charities
Commission. Businesses within the financial sector are regulated
by the Financial Services Authority - and so on. Most trades and
professions now have some sort of regulatory body, which will
have relevance to their book- and record-keeping.

A further incentive to keep proper books of account is the
Proceeds of Crime Act 2002 and associated Money Laundering
Regulations. Any valid defence against accusations of money
laundering can best be achieved if the relevant transactions are
shown clearly within the books and accounts of a business.

The accountancy institutes all have their different regulatory
regimes for members. The members of the ICAEW have voted
recently to bring in what is known as 'Practice Assurance'
(although only 16% of members voted). The result of this is that
individual practice will have to pay a further annual fee, and
may be visited for the purpose of the examination of clients'
files and papers. This is intended partly to update the JMU
Monitoring Visits, which only concerned auditing practices.

The role of the accountant
==========================
The professional accountant has a crucial role in the context of
book- and record-keeping. Decisions made and actions taken when
a client is first engaged will have far reaching consequences as
regards compliance, financial susceptibility and business
success.

Ideally the first meeting with a business client should include
a major discussion regarding book keeping and accounting
systems. This is very basic, but vital to a successful
relationship between accountant and client. The client can be
reminded early on that a good set of books will probably save
him accountancy fees.

At its most basic advice can be given on the actual books that a
business should keep, and how they should be written up. Even if
the client is not computerised the accountant's office will be,
and education regarding the coding of book entries will be a
vital part of client education.

Clients should be encouraged to write up the books of account
regularly. This will include recording petty cash payments
daily, and making sure that the bank statement is reconciled
with the cash book regularly, and that the cash account also
agrees. I appreciate that some of this is idealistic and that
actual life is not like this, but one can only try!

In the case of larger businesses the accountant may be able to
promote his or her services by suggesting that monthly/quarterly
management accounts are prepared, and offering the services of
the practice in that respect.

Annual accounts
---------------
In this wire I am concentrating mainly on the unincorporated
business. The accounts and audit of limited companies are beyond
my remit, but are controlled by the Companies Acts and CCAB
regulations.

For an unincorporated business I see the bare minimum as the
preparation of a trading and profit and loss account and then a
balance sheet. In a trading situation the gross profit
percentage will be an important part of the accounts, and it is
wise to identify the reason for variations before the accounts
are finalised and then explain them when they are submitted to
the Revenue. If not, the inspector is likely to institute a full
self-assessment enquiry.

In non-trading situations, there may be a profit and loss
account or an income and expenditure account, but always a
balance sheet. My view is that a balance sheet is vital, even if
it only includes motor car, bank balance, debtors and creditors,
drawings and capital account. Although details of drawings are
not part of what the Inland Revenue can legally ask for, a
demonstration of the taxpayer's means and his or her ability to
live financially, can allay the inspector's suspicions.

Personally, I would go further, and provide full accounts even
if the turnover is 15,000 pounds or less. There are stories of
numerous Revenue enquiries where 'three line accounts' only are
submitted. Going the extra mile is likely to save all concerned
time and money in the long run. Such businesses have been the
recipients of 'enabling letters', regarding which there has been
recent adverse publicity, and the more evidence that can be
produced to protect the client the better.

It should be remembered that all the accounts figures must later
be transposed on to the self-employed part of the SA tax return.
I would include the figures for the very small business in those
sections, even if the turnover is less than 15,000 pounds. I
submit the accounts to the Revenue in all instances, making
reference to the enclosures in the tax return 'white space' and
also in an attached letter.

Tax return record-keeping
-------------------------
It is also important that information for the preparation of the
tax return is also kept and retained. Even if the taxpayer is
not liable to tax this could be important, as there is always
the possibility of a tax reclaim.

Any taxpayer can keep the following items, among others, in an
annual file:

# Form P60 and monthly payslips. Form P45 where appropriate.
Also copy of form P11D.

# Details of DWP benefits received. This will be notified at the
beginning of each year by the DWP.

# Dividend counterfoils in respect of dividends received and
stock dividends in respect of shares, unit trusts and investment
trusts.

# Statements in respect of share and other investments purchased
and sold. Also any other chargeable capital gains.

# Annual statements from banks and building societies of
interest received and tax deducted.

# Details of ISAs. They need not be declared, but need to be
evidenced.

# Where property is owned, details of rents received, expenses
and interest paid. The lender may need to be approached for a
certificate of interest paid.

# A note of capital gifts made for IHT purposes. Also gifts made
out of income. This could be vital information on a subsequent
death.

# Details of charitable gifts made by Gift Aid or under deed of
covenant.

# Statement from the NSB regarding NSB investment account
interest for the year.

# Details of pension premiums paid in respect of personal
pension plans, AVCs etc.

# Income from annuities, estates etc., as evidenced by forms
R185E.

# Statements from insurance companies regarding life assurance
'gains'.

# Details of allowable professional subscriptions paid.

The above list is by no means exhaustive, and there are many
other possibilities in connection with more complex returns.
However, it does represent the items more commonly encountered.

Some accountants deal with tax return information by sending the
client a long checklist of items, and completing the return
based on this information. In my view, it is wise to also have
some personal contact, as items can easily slip though the net
otherwise.

Accounts books and records
--------------------------
We now turn to the actual business books and records. This is
probably fairly obvious, but the following cover the affairs of
most small businesses:

# Bank cash book.
# Petty cash book
# Bank statements
# Stock records
# Invoices (both sales and purchases) and receipts
# Used chequebooks and paying in books
# Sales records
# Purchase records
# Fixed assets register - the accountant may need to keep this
# Wages book and PAYE records.

At the year-end details of debtors and creditors will need to be
ascertained. In many instances this is the job of the
accountant, after enquiry. Similar considerations apply to work
in progress, which for an unincorporated business can still be
valued at the lower of cost and market value, except in the
specific circumstances outlined in the revisions to FRS 5.

I take as read that the type of businesses I am considering will
not keep a nominal ledger. In my student days we used to write
up a bound book, and then later on make closing entries.
Nowadays, the basis of the final accounts will be the extended
trial balance, whether or not this is prepared on a manual or
computerised basis.

Specific items
==============
A client needs to be made aware of specific items that need to
be recorded correctly in the books of account. In this respect I
will not go into the VAT aspect, which is another issue
altogether.

Motor expenses
--------------
Clients need to be made aware of the principles of a tax claim
for a business motor vehicle. Assuming that the business owns a
car, which has some private use, the proprietor should be
encouraged to include all motor running expenses in the books in
a particular column.

The vexed question of a mileage record then needs to be raised.
In reality the most that can be expected is for a businessman to
record business and private mileage separately over a typical
sample month in the year. It should be possible to agree a
private use percentage with the client, and justify it to the
Revenue.

In my view it is best to record all the expenses in the accounts
and then make an add-back in the tax computation. This accords
with the entries on the SA form for self-employment.

Drawings
--------
Cash and cheque drawings should be separately recorded in both
cash book and petty cash book, and the client should be
encouraged to earmark a separate column in the books for these
items. At the year end the accountant will identify other items
that are wholly private, and these should be debited to
drawings. Where part of an expense is tax claimable my practice
is to debit the items in the accounts and deal with the
disallowance in the tax computation. This could involve, as well
as motor expenses, private telephone and so on.

The Inland Revenue has no legal right to have an analysis of
drawings. Nevertheless, all concerned may consider it judicious
to supply this information in certain circumstances for the
benefit of the client and the business.

Spouse's or partner's salary
----------------------------
Many small businesses employ 'the other partner' on a part-time
basis. In other instances they may be in partnership. There are
a number of principles to remember in connection with a salary.

First the amount paid should be commensurate with the
responsibility, hours worked and experience of the person
concerned, so that the salary can be justified for tax purposes.
Second the amount must be actually paid, and not adjusted
through a book entry in the nominal ledger.

Where tax is payable, the appropriate PAYE records must be kept.
Even if the amount paid is less than the tax exemption limit it
is wise to fill in the appropriate forms. For national insurance
purposes, eligibility to certain state benefits commences at a
much lower figure than the tax and NIC exemption figures, so
that attending to this chore may be productive.

Use of home
-----------
Where the home is used partly, wholly or occasionally for
business purposes, something can be claimed in the accounts. The
client should be encouraged to retain the bills for council tax,
other services and utilities and repairs, insurance, cleaning
etc, so that calculation can be made and claim made at the year
end. This will be adjusted through the drawings account. The
success of such a claim always depends on justification. The
basis of such a claim has been dealt with exhaustively in
previous wires and on the AccountingWEB site generally.

Conclusion
==========
Finally, the most important thing of all is to know your client
and his or her business and eccentricities. Items will be picked
up in conversation from time to time that don't necessarily
appear in the books of account. As you know the business better
and better, this may be reflected on how you finalise the
accounts. Within the fee scale agreed, regular contact and
perhaps meetings are advised.

Ask a question
==============
Readers with a current case should post their query in Any
Answers.

JOHN T NEWTH
https://www.accountingweb.co.uk/premium_content/newthwire

Subscription Information
===============================================================
Update your subscriptions by visiting the Profile page and
selecting the "My Services" link.
https://www.accountingweb.co.uk/profile
===============================================================
Copyright (C) 2004 TaxZone. All rights reserved.
===============================================================
TaxZone, 100 Victoria Street, Bristol, BS1 6HZ
Tel:+44 117 915 9600 Fax:+44 117 915 9630
http://www.taxzone.co.uk
===============================================================

Tags:

Replies (0)

Please login or register to join the discussion.

There are currently no replies, be the first to post a reply.