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ICAS: HMRC record checks are “flawed”

28th Feb 2011
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Proposals by HMRC to check record keeping by SMEs are flawed, says the Institute of Chartered Accountants of Scotland (ICAS) in its response to HMRC’s formal consultation on the topic.

According to ICAS business records checks could cost SMEs over 10 times more than HMRC’s estimate and will be an administrative burden too far.

HMRC has estimated that each visit, averaging half a day, will cost a business £54. ICAS has re-costed an average visit using “realistic” estimates of business disruption and adviser’s time - coming up with a total of more than £560 per visit.

ICAS has said it would support such visits if they were properly targeted, however HMRC plans to visit 50,000 SMEs each year for four years.

Ian Dewar, convenor of the ICAS Small Business Tax Sub-Committee, said: “Experience of our members in practice suggests that poor record keeping, where it arises, can often result in their clients paying too much tax. This comes about because good practitioners take a prudent line in preparing accounts and this often flexes the end result, the tax payable, in favour of HMRC.

“HMRC’s basic assumption seems to be that SMEs with poor records have chosen to have poor records. This is a misconception. Those with the courage and tenacity to embark on new business ventures are forced to battle from the outset against a mass of government regulation and red tape.  Typically they don’t go into business because of their record keeping skills. 

“HMRC should be looking for positive ways of encouraging taxpayers to maintain adequate records, rather than adopting a big-stick approach that we believe will cost owner managers a lot of resource that could have been better directed towards growing their businesses.”

ICAS' revised estimate of £562 for each HMRC visit is as follows:

  • 1 hour preparatory meeting between the business (£50 per hour) and its accountant (£75 per hour) = £125
  • 3½ hours spent by the business (£50 per hour) and its accountant (£75 per hour) in dealing with HMRC visit = £437

ICAS believes that HMRC should allow the first business records check of each business to take place without penalties – and on that occasion they should provide only practical advice or a warning if appropriate.

HMRC recently published a practical guide to business record checks covering invoices, receipts and deductions, what information needs to be updated regularly and what records you need to keep for tax purposes.

Further reading


Replies (18)

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By johnjenkins
01st Mar 2011 10:31

Good one this

On the face of it, it could be cheaper to say to HMRC, OK, how would you like me to keep records than spend a few hours with your local CA.

Does it matter what records are kept as long as the source documents are there???????????

How many Accountants have been preparing Accounts from incomplete records????? Me 46 years and counting.

To me this is just another way of HMRC being able to use the penalty system to penalise the imperfect!!!!!!!!!!

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By Mike Carter
01st Mar 2011 10:54


Perhaps HMRC would like to point to the statutory definitions of what constitutes adequate records - is it a collection of red books, approved software, something else?

This looks more like a discovery exercise to me dressed up as "We just want to help you be more efficient".

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By karen.morriscook
02nd Mar 2011 10:58

record keeping

I can see that we are just going to get into protracted correspondence regarding the definition of adequate book keeping.  As far as I am concerned if I can produce a set of accounts from the information supplied then the records are adequate.  I would much prefer to produce accounts for a sole trader from the bank statements and invoices that to have to decipher completely inadequate sage records.

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By The Black Knight
02nd Mar 2011 11:09

HMRC not best placed

Often we see inspectors conducting enquiries that have no understanding of double entry or accounts for that matter, and where the records are poor have no concept of what reliable information to start with.

and now they think they can lecture the rest of the world ?

has anyone seen the mess created when a tax enquiry point prepares returns for a partnership business, no wonder it is only £54 as they only use one side of an envelope to do the calculations etc.

HMRC should concentrate on good investigations (not pathetic attempts where they do not collect much of the unpaid tax) and leave the bookkeeping advice to the professionals.

Yes by all means make comment after an investigation that the bookkeeping needs improvement as it was this that caused the penalties.

But bad bookkeeping does not always mean the accounts or tax returns are wrong as often accountants work with less than perfect records.

P.S. did anyone ever see a £3000 penalty for not keeping proper records ? No ? me neither ! perhaps this mad cap political scheme will work just as well.

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By karen.morriscook
02nd Mar 2011 11:15

HMRC not best placed

I agree wholeheartedly with your comment.  Often half hearted enquiries are made because an inspector simply doesn't understand how to use the software.

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By The Black Knight
02nd Mar 2011 11:23

coincidence ......just a thought

£3000 per inspection, target

sounds like £3000 mmmmm penalty.

quick look, one page report , 3 or 4 criticisms, pow, penalty ? be back next month !

who cares about the tax when you have penalties to collect.

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By Moo
02nd Mar 2011 11:41

charge out rate

Am I the only one reading this who thinks that the ICAS assumed accountant charge out rate is a bit on the mean side at £75 per hour?

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By Ian McTernan CTA
02nd Mar 2011 11:53

Another interference

About time we all started standing up and pointing out to all these non-business running career rule making interfering busybodies that businesses run DESPITE legislation, not because of it.

HMRC telling you how to keep records is like the Colonel Gaddifi telling us 'all my people love me'.

Given that they struggle to keep their own records in any sort of order at all, what qualifies them to tell businesses what to do?

Yet more Government interference - it's not hard to see why so many people are put off starting up or running a small business when fines and penalties will be thrown at you the moment you forget to comply with the 1000000 regulations you are supposed to be completely knowedgeable about.

These 'record keeping' visits are an enquiry by any other name.  I've not kept up with the regulations but what will be the statuory authority backing this? New rules no about if the Revenue want to interfere in the running of the business they are forced to open an enquiry?

It's just like a present case I have: client's income drops from 35k to 10k (he's a subcontractor working in the building trade, go figure!), Revenue open a 'informal request for information' (on 21st January (!!))with a list obviously copied and pasted from their manual asking for such things as purchase invoices and every other piece of information you might expect a business with a turnover of several million and a full time book keeper to have....and then EXACTLY 28 days later issues a formal notice requiring the production of self same documents without ever bothering to try and contact the agents (they phoned the client to tell them they were issuing the formal notice..).  I will now spend hours dealing with stupid queries from this Revenue person (on a £300 a year client who has hit hard times) and the end result will be no change in the net tax position- at which point they will reach for the 'record keeping' legislation and try and throw a penalty at us for that?

Will be interesting when the first case hits the Courts in which a client's records are deemed 'inadequate' and yet the Revenue cannot prove that there is a tax loss...

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By Briar
02nd Mar 2011 11:54

Basic Book-keeping for Inspectors

Always remember the time when an investigating inspector asked why several prepayments occurred twice two days in succession. He didn't notice (or understand?) that one was a credit and the next day's entry was a debit!

Then there was the one who queried why "Wasteage, Breakage and Pilferage" occured twice (one credit and the other debit) in the P&L Account. I took great pleasure in referring him to a page in Frank Wood's Basic Book-keeping!

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By The Black Knight
02nd Mar 2011 12:30


ICAS is Scottish I believe !

It will not be difficult to expose weaknesses in the inspections knowledge of bookkeeping.

Keep on writing complaints.

I once asked why HMRC had used several different methods to calculate the VAT in different quarters and why the only reliable information, that correctly entered, the sales invoices were ignored in favour of a sage bank account with factoring that was in a mess. Then followed up with 4 or 5 chasing letters, the reply , Silence.

You have to wonder.

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By Nick Graves
02nd Mar 2011 12:37

Nice summary, Hopkins-hohg!

Fortunately, our local tax office seems to have the wit mostly to open limited enquiries in such cases, for example when the subbis has lost/omitted a scrap which is meant to replace the hallowed CIS25 voucher. Set up for a fall by an idiotic legislation change.

Unfortunately, as in your example, there are a few Revenue officers who are clearly as asinine as those drafting the legislation.

Whilst on the issue of good record-keeping, how much has HMRC been fined for all its repeated [***]-ups and its failures to produce recoreds when requested, in the case where one's client believes they might have mislaid their copy?

Classic case of "Do as I say, not as I do." One law for the proles, no laws for the overlords.




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By Red1960
02nd Mar 2011 14:14

A Step Too Far From Big Brother

HMRC already has a perfectly adequate system to enable it monitor and examine the business records of small businesses already.

It's all very well for Government to talk the talk about encouraging small businesses and private enterprise but to then to strangle it in red tape, bureaucratic ineptitude and increasingly draconian and disproportionate penal systems is hypocrisy of the highest order whether it be from the Conservatives or New Labour.

If HMRC wishes to pursue a crusade against private enterprise and the public generally whom it all seems to regard as tax cheats then let it come out into the open and say so. The Revenue is not the Police or the CPS and it is high time it were reminded of that.

It is also about time that HMRC put its own house in order, acquired some credibility and got back to the purpose for which it was intended which is collecting taxes not running the country or acting as judge, jury and executioner on aside from the obvious waste of public funds. The potential for corruption that inevitably accompanies such a concentration of power appears to have completely escaped ICAS or anyone else.

Anyone who has direct dealings with HMRC at any level knows that it is incapable of managing or administering its own affairs to the extent of answering a telephone, answering a letter or even accepting communication by email so exactly on what practical level can it possibly advise other organisations about management and administration of their affairs when it is so transparently incapable of handling its own. HMRC understands nothing about commercial operations and has a culture which diametrically opposed to commerce which it still fails to understand requires something more than simply calling taxpayers "Customers" ... as if anyone were actually fooled by that.

As for ICAS... shame on you because these proposals should not be supported at any level in principle or not. The profession and the public have a right to expect more from ICAS than such supine weasel words. Government intrusion where it is not warranted is not acceptable under any circumatances and HMRCs current powers are already more than adequate for the task required of it.


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By wood and co
02nd Mar 2011 14:32

HMRC not best placed

The Revenue seem to think they know best about everything.

It appears to me that the Revenue live in a world of their own. Take the rejection of PDF files in favour of ixbrl. Until the Revenue dictated that we had to use this format most people had never heard of it, where as virtually every office had pdf available, even if only as a conversion from word or wordperfect.

They will probably soon advise us that all our centuries of bookkeepeeing practice is wrong and tell us how we must do it in future.

The people at Somerset House need to get out into the real world and discover just how difficult and costly it is to deal with all the regualtions they have come up with.

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By PK Busness Services
02nd Mar 2011 21:16

Charge Out Rates

 £75 per hr? Mean ??

 Are you kidding....

 Find me small businesses who would be prepared to pay that?

 Cos I dont know any






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By Stoker
03rd Mar 2011 08:19


This must be part of the drive to get the private sector to create all those jobs that will be needed in order to soak up the rejects from the public sector as the spending cuts take effect.

One does wonder why HMArsey are so bothered about scraping pennies from the bottom of the barrel of the SME sector when there are billions of tax avoidance from the likes of the Guardian Media Group, Barclays, Mr Green et al.

Funny old place, England.


Just feeling generally grumpy now the EU have followed Gordon Brown in fecking my pension.


Brown's 2-billion a year pension grab seems to be continuing nicely under call-me-Dave


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By wingco44
04th Mar 2011 21:01

Mr Grumpy

Well said Grumpy. 

But this is only the tip of the iceberg; I know of numerous people/companies (15+) who have been subjected to vicious attacks from HMArsey (love it) and now go out of their way to 'avoid' tax.  I have had two tax enquiries and the last one came up with a claim by me for a 'returned favour' meal in South Africa where I had 'treated' my 2 very generous hosts to a meal costing £54 (fillet steaks in South Africa are brilliant and cheap).  How much time and effort went into that useless exercise?

My first Tax investigation was conducted by the most delightful and respectful tax inspector who not only reduced my unpaid tax bill from £12000 to £1500 (she told me about the 'fixed profit car schemme' and I was able to go back 6 years of mileage claims) she did it will style and courtesy - wonderful, and so much more effective than these seriously unskilled bunch I am dealing with today.  I then got myself an accountant.

But now my heels are firmly dug into the 'avoidance' mode and they will get far less than otherwise (legally).

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11th Mar 2011 12:17

It must be seen as fair

One outcome I have seen many times is that when the system is seen as unfair, people just won't accept it. I've had clients who have been the subject of investigations/enquiries that they consider to have ended unfairly (settling with tax they did not believe to be properly due but could not afford further fees or stress to resist). More often than not I've agreed that the outcome is unfair. Sometimes my own sense of injustice has led me to offer to continue without charge, usually not taken up because the client's had enough by then. Often the reaction has been to the effect that they will get justice by the back door. I had one client who ended up with a £700 VAT penalty he considered unfair. He was so incensed at the injustice that he said he would "fiddle" his tax until he'd got £7000 back. Another had a very rough and unpleasant time with a particularly sadistic inspector. No tax was paid in the end but my client was left very battered. His reaction was to retire 4 years early and he said he would do the remaining 4 years entirely within the black economy and pay no tax at all.

Naturally, I don't know if any of these folk actually did that kind of thing but part of me doesn't all together blame them for thinking like that. Ultimately, governments govern by the consent of the people and if HMRC's behaviour is perceived as just plain unfair some tax payers will give in, cough up and then get their tax and penalties back (some with interest and penalties of their own) by evasion. I suspect HMRC will be the net loser in this and that means the rest of society too.

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By johnjenkins
14th Mar 2011 10:14


Well said BCL.

You would think over the years politicians would have realised what has been going on. In fact up until the GB era things weren't too bad.

This attitude that HMRC have developed will back fire big time.

What do you expect when the big boys get away with paying the least possible (legally) and SME's are punished for the simplist of errors.

An interesting next couple of years me thinks.

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