New approach to business records checks

HMRC develop new approach to Business Records Checks (BRCs)

Following the latest phase of BRCs HMRC have discovered that most businesses have been keeping proper records, so they now want to consider how the department can better target their activity.

BRCs are used by HMRC to determine how robust a businesses records are and whether or not a taxpayer needs further educating in the art of book-keeping.

When a business is selected for a BRC they are initially contacted by letter which is then followed up by a telephone call from HMRC. During the telephone conversation, which normally lasts between 10 – 15 minutes, the Revenue officer will ask questions to help them assess if that business is keeping the right sort of records. From those replies the officer:

• Will assess whether the taxpayer is likely to be able to submit an accurate tax return from their records. This will be divulged during the call and confirmed in writing, and no further action will be taken at that stage.
• May feel the business could do with some additional help and support to put their records in order. Again, this will be mentioned during the call and the taxpayer's details passed on to HMRC's Business Education and Support Team who will contact them with information about self-help guidance and training.
• May decide the taxpayer is at risk of keeping inadequate records in which case they will be paid a visit by HMRC. Once again, this will be mentioned during the telephone inquisition. The taxpayer's details will be passed to the visiting booking team who will contact them to arrange a suitable date and time for the visit, and confirm that in writing.

When HMRC come calling

Should a business require a visit from HMRC, the Revenue officer will:

• seek an explanation of how the business is run;
• note how the business records are maintained;
• carry out a sample check of the records, usually those for the last 4 months and then conclude if the business records are adequate. 

There will be five potential outcomes following the visit:

(1)  If there are no problems with the records

If the records are found to be adequate the HMRC officer will confirm such at the time of the visit, with further confirmation in writing a few days later. This will mark the end of the BRC.

(2)  If  record keeping requires improvement

If the records are inadequate then the business may have to pay a record-keeping penalty. Before this happens however HMRC will give an opportunity, and further time, to bring the records up to an adequate standard. HMRC will specify what improvements need to be made, and will offer as much help and support as is needed to achieve this.

Within 3 months of the initial visit HMRC will arrange a follow up visit to check that the necessary improvements have been made. If at the follow up visit the book-keeping has improved to HMRC's satisfaction the penalty will be reduced to nil.

(3)  Record keeping doesn't improve

If at the follow up visit HMRC find that the records have still not improved to an adequate standard, a penalty will apply. The penalty is usually £500 for the first offence. For businesses in their first year of trading the penalty will be £250.

If during the BRC HMRC discover that records have been deliberately destroyed, a penalty of £3,000 would apply (this may be reduced to £1,500 if only some of the records are destroyed).

(4)  Inadequate records

In cases where inadequate records are found, HMRC will refer the business for another BRC visit in 2 years time.  If the records are still found to be inadequate  a new penalty will be charged.

(5)  If the businesses tax needs to be checked

If, during the BRC, HMRC identify that tax returns may be inaccurate, either because the business makes a voluntary declaration to HMRC that they have underpaid tax, or the Revenue identify that there is a potentially significant tax liability, the visiting officer will pass the details to other teams who may contact the business  to carry out a check into their tax return.

Where HMRC find that the business needs to register for VAT, PAYE or CIS they will pass their details to the appropriate team.

From 4^th November 2013, HMRC's BRC activity in the Edinburgh, Glasgow, Leeds, Bradford and Stockport areas will explore new ways of using the checks. The department will then evaluate new risk processes and ensure new approaches are cost effective and fit with its wider compliance activity.

For those clients for whom you have concerns about their record keeping now would be a good time to remind them of the improvements they need to make or suffer the consequences. Even those clients whose records you consider to be just fine, this is an opportunity for you to reaffirm

that should they receive any communication from HMRC regarding a BRC then they should contact you first. Better for you to identify and remedy your client's shortcomings than HMRC, for which your client will be most grateful.