The rise and fall of business records checks
In 2011 in a far-away HMRC office inspiration struck: small businesses were paying the wrong amount of tax because they weren’t accurately recording their sales and expenses.
If only tax inspectors could examine those records before the accountants got their hands on them – the problem could be cured at the source! What’s more there was a handy little provision (TMA 1970, s 12B) which could be used to apply penalties of up to £3,000 for “inadequate” business records. Thus the business records checks (BRC) program was born.
BRC started as a pilot between April and July 2011, when HMRC officers visited around 800 small businesses to examine their business records for the current accounting period. No penalties were imposed at that stage, but if the records were found to be inadequate on a follow-up visit, a penalty was possible.
The BRC program was rolled out across the country from September 2011, with the expectation that 20,000 visits would be undertaken each tax year. The professional bodies, including the CIOT, were not happy that HMRC was capable of judging whether business records were inadequate before the accounts were complied. HMRC appeared to believe that incomplete records – eg shoebox full of receipts – equated to inadequate records. There was also disagreement about the legal basis for charging a penalty for inadequate records.
In December 2011 HMRC started a back to basics review of the BRC as only 12% of businesses had been found to have inadequate records compared with the estimate of 60% as predicted by HMRC before the start of BRC. Accountants complained that BRC visits were a complete waste of time. No penalties for incomplete records had been imposed.
Nearly a year later the BRC program was revived as a telephone interview. This consisted of about a dozen questions, two of which concerned cash receipts and payments. If the answers were considered acceptable no further action was taken, in other cases a BRC visit or educational contact from HMRC was arranged. No penalties were to be charged until a second BRC visit was undertaken to the same business.
By October 2013 around 29,000 businesses had been contacted under the BRC programme and not one penalty had been imposed for inadequate records. HMRC decided to undertake another review of BRC and draw up some benchmarks of what good record keeping should look like.
In September 2014 Simon Sweetman reported on an external review into the BRC and businesses attitudes towards record keeping. He hoped that HMRC would learn from “dogs dinner made of the idea”.
Perhaps HMRC has learned some lessons, as this week the CIOT was contacted by HMRC to say the BRC was to be wound-down from 20 October 2015. CIOT trumpeted this as a “victory for common sense”.