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HMRC have put a temporary halt on their scrutiny of small firms’ record-keeping, following much criticism by businesses and tax experts.
The department’s controversial business record checks (BRCs) initiative is to be significantly retooled on the recommendation of an internal review, which was based on discussions with trade organisations and professional bodies.
Proposed changes include a more targeted approach that better defines the meaning of adequate paperwork and also educates taxpayers about their statutory requirements to keep satisfactory records and the possible penalties for failing to do so.
BRCs were announced in January 2011 to the consternation of accountants and tax advisers. The scheme’s earlier-than-expected launch of a trial phase in April led to more complaints and eventually to a Revenue apology for failing to provide clear information.
HMRC will now postpone the making of news appointments to check firms’ records until early in the 2012/13 financial year – by which time department officials aim to have met with representative bodies to hold further consultations on the implementation of the recommendations in the new report.
‘After reviewing the pilot programme and listening to the views of businesses and representative bodies, we acknowledge the need for a fresh approach,’ said the Revenue’s director of local compliance, Richard Summersgill.
In the period until the relaunch, the department will undertake only visits already booked, as well as follow-up visits to businesses that have already been identified as having unacceptably poor records.
Up until 4 January this year, 2,437 checks had been carried out, with 28% uncovering an issue, 11% of which were serious enough to warrant a follow-up visit, according to Revenue figures.
The Chartered Institute of Taxation (CIOT) has repeatedly voiced misgivings about BRCs since their unveiling 13 months ago, and the organisation welcomed the taxman’s review of a ‘flawed’ programme.
‘HMRC are trying to have BRCs put firmly into the field of compliance activity, which is where they belong. That will provide an incentive for taxpayers to pay more attention to record-keeping as well as removing grey areas for advisers,’ said CIOT president Anthony Thomas.
He went on to stress the need for a more flexible attitude by Revenue officials towards quality of paperwork: ‘What counts as adequate… varies from business to business, and a uniform approach will not work. The smaller business cannot be expected to have voluminous records written up every day. That is simply not appropriate.’
Mr Thomas added, ‘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.
‘A good programme to improve business record keeping will involve [the department] and tax advisers working together to educate business about good practice and support them in improving their systems.’
PKF partner John Cassidy applauded the taxman’s ‘sensible and pragmatic decision’ to retool the BRC scheme, which he claimed has been ‘fundamentally flawed and taken up a lot of everyone’s time for little discernible benefit.’
He added, ‘HMRC should have started consulting on this back in 2010 before the scheme launched. This was a major issue for business owners because it gave tax inspectors the authority to impose immediate... penalties on companies that were identified as having “seriously inadequate records” for the current year – even though [the department] would not be able to prove... that future tax returns would be wrong.’
Mike Down, Baker Tilly's head of tax investigations, noted that the latest statistics given by the taxman are substantially different from those provided when the BRC programme was introduced.
HMRC had anticipated raising £600 million in the first four years of the checks, but the amount has been scaled back to £124 million: a ‘more realistic, but still optimistic’ figure, according to Mr Down who suggested the department ‘must advertise properly’ if the new-style BRCs are to be successful.
