HMRC to spot-check SME record keeping

HMRC believes that around 4 in 10, or some 2 million, small and medium enterprises (SMEs) keep inadequate tax records. Later this year – HMRC has not said when – it will launch a programme of spot checks to make sure businesses are applying the rules for keeping ‘accurate and adequate’ business records. Penalties could be applied where businesses fall short.

“This approach marks a change and hardening attitude. Currently, the tax authorities typically scrutinise an organisation’s tax affairs and record keeping if they believe it has filed an inaccurate tax return and is therefore paying too little tax. But this new programme means inspectors will be able to focus on current year records before a tax return is even submitted,” said Richard Mannion, national tax director at Smith & Williamson, the accountancy and financial services group.

He continued: “HMRC will literally be able to walk into any business and demand to see their invoices, receipts, PAYE and VAT records and so on. And remember, they can go back six years in the case of a business that has been around that long.”

“The programme will apply to both new and established businesses and so it will be of concern to millions of businesses up and down the country.”

To encourage people to get their records in order, HMRC has issued a range of advisory information which is available at www.hmrc.gov.uk

“Business owners should take these warnings seriously. If they don’t keep good records, they may be unable to substantiate tax returns and so would have difficulty in proving their figures are correct, should HMRC take issue with them.”

As a basic minimum, business people need to be organised and methodical in their record keeping.

Top five tips include:

• Time: keep records going back at least six years.
• What to keep: invoices, bank statements, paying in books, details of purchases, expense details and so on.
• Personal vs. business: anyone who makes a claim for the use of assets which they use personally as well as for the business – a car being a typical example – must be scrupulous in allocating personal and business useage and have the necessary supporting paperwork to back up their claim.
• Be regular: keep on top of your expenses and record keeping. This will make it easier and more accurate. Also, HMRC is more likely to believe contemporaneous records.
• Avoid estimates: if you have to estimate an amount, make sure you can provide suitable evidence.