6 February 2012 - HMRC to change business records checks approach

HMRC has announced that it is suspending its Business Records Checks (BRC) pilot programme, following criticism from businesses and professional bodies.

HMRC has checked the records of around 2,500 businesses since April 2011 and has reported that there were book-keeping issues in 28% of cases, with follow-up visits being required in an additional 11% of cases.

However, HMRC's approach was heavily criticised for the heavy-handed way in which it was implemented and for disproportionately increasing compliance burdens for small and medium-sized businesses. HMRC will therefore enter into further consultation before revamping the scheme so that it is more tightly targeted and focuses on providing education and support, before re-launching the programme early in 2012/13.

HMRC has suggested that businesses with a higher risk of inadequate record-keeping could be targeted by reference to:

• sectors which have traditionally been found to have inadequate records, such as cash businesses, tradesmen, and public houses;
• a particular post-code or set of post-codes;
• businesses which HMRC's information leads it to believe might be approaching a key event in the business life-cycle;
• those identified by the current most-successful risk profile for BRC visits; and
• businesses which have been identified for an HMRC campaign approach, but which were, perhaps, considered too small to necessitate the more intensive campaign interventions.

 HMRC suggests that such businesses should, in the first instance, receive letters or calls which would:

• explain the background and context: inadequate record keeping can lead to incorrect tax returns;
• explain why the taxpayer has been sent the letter - they are in a category of business considered to be at risk of keeping inadequate records; or HMRC is writing to all businesses in a particular area to offer help and advice;
• direct the taxpayer to the self-help or targeted help if they want to learn more and improve their own record-keeping;
• possibly offer a self-assessment ‘check-list’ or ‘work-book’ that taxpayers can use to reassure themselves that they are meeting their statutory requirements, or a self-assessment questionnaire which could help HMRC with its future targeting;
• offer the possibility of taxpayers returning the questionnaire so that HMRC has more knowledge of their record-keeping knowledge and ability;
• make clear that the business might be chosen in the future for a BRC visit;
• explain that inadequate record keeping can result in penalties.

At this stage, HMRC appears to recognise the importance of working with agents by stating that it "...should be prepared to speak to appropriately nominated agents or representatives if customers feel that would give us a better view of the adequacy of their records".

Businesses which fail to respond to a letter or call, or which respond in a way that indicates there could be a record-keeping issue, would then receive a BRC visit. Businesses whose records are inadequate, but where very little is needed to bring them up to an acceptable standard, might just get a letter explaining the changes that are necessary.

Businesses whose records are seriously inadequate and require a much greater degree of correction to bring them up to an adequate standard should receive a letter explaining the necessary changes and should have a follow-up visit after an agreed amount of time to ensure that the changes are made. If, on return, the officers find that the business has made no, or very little, effort to improve its record keeping, HMRC considers that a further sanction would, at that point, be appropriate. This sanction is most likely to be a referral for a tax intervention to check previous returns for accuracy. However, in some extreme instances, a penalty at this stage might be appropriate.

HMRC proposes that businesses whose record-keeping was found to be seriously inadequate should be followed up two years later, initially by telephone, to check the curent position.

There is no mention of notifying a taxpayer's agent of an intention to visit a business or make a follow-up call two years later, or of discussing or agreeing any record-keeping improvements with agents. so this would appear to be an area to which further attention needs to be given. As a matter of course, agents should advise clients not to allow HMRC to carry out a check without prior notice having been given, and to inform their agent if they are contacted by HMRC with regard to a Business Records Check.