Why HMRC Business Records Checks are manageable for your small business

Neil Tipping explains the process of HMRC Business Records Checks and what demands are made of businesses.

HMRC introduced Business Records Checks in 2011; it involved officers turning up at premises with or without having given prior notification. This obviously placed a lot of stress on businesses.

Where HMRC found the books inadequate, it immediately put the taxpayer at odds with his professional advisers who were held accountable (whether rightly or wrongly) for the perceived inadequacy of the records. What became readily apparent was that the officers responsible for business record checks were not acting particularly consistently resulting in some rather bizarre instructions for some businesses, including in one case a formal instruction for one small business to purchase a till.

Professional bodies such as the ICAEW were not slow to make the feelings of their members known about the draconian style with which some of these checks were being undertaken. So, in late 2012, HMRC stopped carrying out the checks.

Around May 2013, HMRC revived business record checks but using a new strategy where they sent out a letter advising they would telephone the taxpayer and ask a number of questions about how they record takings and expenses. Depending on the answers given, HMRC would then decide if they were going to undertake a formal review of the records. This continues to be the case.

Record checks begin with two statements:

  • I understand what I need to do to meet my obligations (rate 1-9)
  • I need help understanding official HMRC forms (rate 1-9 but other way around from above)

The following questions are then asked by HMRC:

  • Do you have an accountant? If not, do you have anyone else helping you?
  • How long have you been in business?
  • Roughly how many sales or business receipts do you receive per month?
    1-10, 11-100 or 100+
  • Roughly how many of your sales or business receipts are in cash?
    None, one third, half, over half, all
  • How often do you update your business records with your sales or business receipts?
    Daily, weekly, monthly, Annually
  • Roughly how many purchases and business expenses do you have per month?
    1-10, 11-100, 100+
  • Roughly how many of your purchases and expenses are in cash?
    None, one third, half, over half, all
  • How often do you update your business records with your purchases and expenses?
    Daily, weekly, monthly, Annually
  • Can you tell from your records which of your expenses were for a personal use?

Following the Business Records Check

If the officer is happy with the responses to the questions, he will issue a letter advising that there will be no further action; this is the likely outcome in 95 per cent of cases.

In the event that the HMRC officer feels that the business may benefit from some additional help and support, their details will be passed onto HMRC’s business education and support team, who will contact the small business with information about self-help guidance and training.

However, if the HMRC officer feels that the business is at risk of keeping inadequate records, a face-to-face meeting will be required. Details will be passed onto the booking team, who will contact the business to arrange a suitable time and date for the meeting.

A face-to-face meeting normally lasts around two hours. During this time HMRC will enquire into how the business is run, note how the business records are kept and check a sample of the records to ascertain whether they are adequate or not. It is advisable to have your accountant or professional adviser at this meeting.

If at the meeting the business records are found to be adequate, the HMRC officer will confirm this verbally and in writing. This brings the business records check to an end.

However, where the records are inadequate, the visiting officer will discuss what needs to be done and also what happens next. A penalty may also be charged. The business will be given further time to improve their records and HMRC will provide help and support to achieve this. A follow-up visit will be arranged, normally within three months, to check improvements have been made. If the records are found to be adequate at the follow-up visit, any penalty charged will be reduced to nil.

However, if the record-keeping has not improved and records remain inadequate a penalty will be charged. This will normally be £500 for a first offence, although a reduced penalty of £250 will apply if the business is in its first year of trading. However, the maximum penalty of £3,000 will be levied if the business records have been deliberately destroyed.

You should not fear Business Health Check reviews as HMRC is now treating this as an advisory exercise rather than an opportunity to do another compliance check.

Neil Tipping is Senior VAT Consultant at Croner.

Further reading on Business Records Checks

Alan Dobie

Alan Dobie

Alan was assistant editor at Vitesse Media Plc (previous owner of smallbusiness.co.uk) before moving on to a content producer role at Reed Business Information. He has over 17 years of experience in the...

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