HMRC spot checks - is your business at risk?

Small businesses across the country face spot checks from the taxman - and potential fines if their records are found to be insufficient.

As part of a crackdown on underpayment, HM Revenue and Customs has begun a new series of checks on business records. Although ostensibly in a trial phase, the campaign has come in for criticism from accountancy and business groups – with some suggesting that the Revenue has gone back on its word not to hand out fines.

What is HMRC doing?

The Revenue has embarked on a major campaign to improve the quality of small firms’ record keeping. It is expected that some 200,000 individual traders and small businesses will be subjected to an inspection over the course of the next four years, following research from HMRC suggesting that poor record-keeping is amongst the most important reasons for underpayment. Spot checks have already begun.

HMRC initially said that it was launching a pilot exercise, in which businesses that were found to have insufficient records would escape a fine. Instead, the inspector would advise the business on its responsibilities, and it would be expected to improve its paperwork.

Worryingly though, the actions of inspectors seem to be rather out of step with HMRC’s proclamations. Reports suggest that businesses are in fact being threatened with fines of up to £3,000 for relatively minor transgressions. Accountants Baker Tilly have pointed to a case in which a business’s paperwork was deemed insufficient because they failed to keep a £25 invoice for a bunch of flowers.

Until 15 July, the checks are being carried out in eight locations: Edinburgh, Manchester, Liverpool, Sheffield, Stockport, Portsmouth, Sunderland, and Irvine. After this, it appears that the visits are to be rolled out nationwide.

What might happen to my business?

Every business has a legal responsibility to keep records that are “appropriate for the size and nature of the trade.” Those who fail to do so have for many years faced the prospect of a £3,000 fine.

A fine is, therefore, perhaps the most worrying outcome of a visit. Anecdotal evidence from businesses that have been the subject of an investigation suggests that inspectors may use it as an opportunity to delve more deeply into an organisation’s records, with the aim of finding inconsistencies or evidence of underpayment, no matter how small or accidental.

The Revenue has already said that it intends to recover some £600 million in tax through the visits. A cynic might therefore suggest that inspectors could be particularly keen to find problems with records (or with a business’ general tax affairs).

What do I need to do?

You need to make sure that your records are in order. There is a range of very good reasons why you should do this as a matter of urgency. Aside from your legal responsibility to do so, the prospect of a fine is a very real one. But, perhaps just as importantly, accurate and comprehensive record keeping is a vital means by which businesses of every size can keep track of their performance, and determine whether or not they are on track to meet their targets.

If you are in any doubt about the sort of records you should be keeping, you should contact an accountant. They will be able to help you understand what is considered “appropriate” for the size of your business.

What’s going to happen next?

The scheme will be rolled out across the country, with inspections continuing over the next four years – and, potentially, beyond that point. With the Revenue continuing to clamp down on underpayment, now is a very good time to get your records in order.

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