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HMRC have extended their controversial programme of checking the business records of small and medium-sized enterprises (SMEs).
The department unexpectedly launched the initiative as a pilot scheme earlier this year, focusing on eight areas – Edinburgh, Irvine, Sunderland, Liverpool, Manchester, Stockport, Sheffield and Portsmouth – and found that around 44% of firms had issues with their record-keeping, while about 12% of those visited had seriously inadequate records.
The broadening to SMEs throughout the UK will mean the number of full-time staff employed on the programme – which has been poorly received by some tax professionals – will rise from 30 to 120. Up to 12,000 checks will be completed by the end of the current financial year; 20,000 are provisionally planned for 2012/13.
Initially, HMRC will levy a penalty only in the most extreme cases of poor record-keeping. The department intend to issue penalties of up to £3,000 for serious inadequacies in the longer-term. Guidance will be published in due course.
The Chartered Institute of Taxation expressed unease about a number of aspects of the programme. The president, Anthony Thomas, said the professional body ‘continues to be concerned about how HMRC judge whether records are adequate. There have been some clear misunderstandings within the Revenue as to what constitutes “adequate” records as opposed to “incomplete” records.
‘For example, despite HMRC’s powers team indicating that, in-year, a “full shoebox of invoices/receipts” was adequate, we now understand that the new compliance team considers that retaining a set of purchase invoices without listing them is inadequate, even for the smallest businesses.’
Such an approach is unsuitable, suggested Mr Thomas, adding, ‘What counts as adequate records need to have regard to the sort and size of business. That involves the exercise of judgment.’
Baker Tilly tax partner Mike Down criticised the checks, noting that original plans for 50,000 checks during the pilot have been downgraded to 20,000. He also suggested that the scrutiny of paperwork will be of little use unless the Revenue informs SMEs of its plans. The publicity so far has been aimed at advisers, not their clients.
John Cassidy, partner at PKF, claimed, ‘There is no proof that a visit from a tax inspector during the year will result in the return that a business completes after the tax year has ended – many months later in most cases – being any more accurate.
‘It is unlikely that even firms that are identified as having “seriously inadequate records” for the current year will face a record-keeping penalty straight away, because HMRC cannot prove that future tax returns will be wrong.’
