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.