Business Record Checks put on ice
HMRC’s programme of Business Record Checks is going back to the drawing board.
The decision follows a review prompted by feedback from professional and business bodies who argued that the tax department’s “helping hand” approach to paperwork was more of a hindrance.
After reviewing the record check pilot programme and listening to these views, HMRC director of local compliance Richard Summersgill acknowledged “the need for a fresh approach”.
The results of the review published on Friday 3 Febraury, showed that of 2,437 business records checks carried out up to 4 January 2012, 28% of businesses received an "amber" rating showing the existence of some issue with their record keeping, and another 11% were rated as "red", bad enough to require a follow-up visit.
The scheme has had a fraught gestation period, with advisers concerned about the visits turning into fishing trips for tax investigations and the stance of their professional indemnity insurers. To make matters worse, HMRC then embarked on a pilot programme last April without informing professional representatives.
While publicly Summersgill and senior HMRC figures continue to talk up the merits of helping businesses improve their record-keeping, the scheme was trimmed back from a planned 50,000 to 20,000n visits a year when the full roll-out began in September 2011.
Even with the amended programme, HMRC estimated the programme would generate benefits worth £124m from improved record keeping (and tax receipts) through the period covered by the government’s current spending review. The speed at which HMRC appeared to be implementing the programme was one source of discomfort for advisers, but following the latest review, all new appointments will be put on hold until a new process is devised and put in place after the turn of the financial year in April.
“The strength of feeling against BRC in the agent community cannot be over-stated,” the review document noted, adding that many who wanted to improve the relationship between HMRC and the tax profession felt “the way in which BRC were introduced has damaged that relationship”.
The main point of contention for the advisers is that inspectors turning up from HMRC to check clients’ inadequate record-keeping, they will question the competence of their accountant.
The internal review recommended turning the checks into more tightly targeted interventions, set within an educational framework HMRC should work with representative bodies to define what constitutes “adequate” and the point at which companies should be subjected to a follow-up visit to ensure improvements are made.
But the sting in the tail is likely to remain. Further recommendations in the latest paper call for a potential “tax intervention” if companies with inadequate records fail to improve. “In extreme circumstances a penalty might be applicable,” the internal document said. “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.”
The review noted legal arguments from professional bodies that HMRC has no legal basis to raise penalties in-year for inadequate record-keeping. Penalties are only appropriate if it can be shown that the inadequate record-keeping contributed to mistakes on the actual return. HMRC’s solicitors argue otherwise.
Nevertheless HMRC accepted that if it did pursue the checks as currently designed and start to charge penalties, it would cause reputational damage to HMRC. “Customers, and agents, still believe that BRC is a fishing exercise designed to ‘catch them out’ and that, unlike many direct tax interventions, it is not seen as sufficiently targeted to be anything else,” the report noted.
CIOT president Anthony Thomas, who has been outspoken about the issue during the past year, welcomed the recommendations as “promising” and praised HMRC for taking a fresh look at the BRC programme.
“Tax advisers are strongly supportive of efforts to improve record keeping by business, but up until now HMRC have been going about it the wrong way, endeavouring to eradicate error by increasing burdens disproportionately,” he said. “A good programme to improve business record keeping will involve HMRC and tax advisers working together to educate business about good practice and support them in improving their systems, as well as warning about the risks of poor record-keeping.”
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