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Extended business records checks programme will waste time, says PKF

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PKF has warned that HMRC’s extended programme of business records checks will ‘waste everyone’s time’, and suggested that HMRC staff employed on the programme could be put to ‘much better use’.

About 44% of businesses visited so far had ‘issues’ with record-keeping, while around 12% had ‘seriously inadequate records’, HMRC announced last week. The ‘pilots’ involved 800 visits focusing on eight different sites.

The programme will now be extended to cover ‘key areas’ across the UK. But the CIOT said serious questions concerning the exercise remained unanswered.

Anthony Thomas, CIOT President, said the tax body had queried the legal basis for applying penalties before a tax return is submitted.

‘We continue to be concerned about how HMRC judge whether records are adequate – there have been some clear misunderstandings within HMRC as to what constitutes “adequate” records as opposed to “incomplete” records,’ he said. What counted as adequate records needed to have regard to the type and size of business.

‘That involves the exercise of judgement. Expecting the smallest businesses to have perfect records kept up to date every day is frankly unrealistic, inappropriate and wholly out of kilter with the government’s stated aim of reducing burdens on business.’

‘Blunt instrument’

Thomas said the CIOT was unhappy about HMRC handling of the programme’s expansion. The department had begun rolling it out ‘before providing evidence that the trials conducted earlier this year have been cost-effective’, and had started rolling out the expanded programme ‘well before’ the latest announcement.

 ‘Communications seem very much an afterthought. That is not the way to build a good relationship with tax advisers,’ he said. HMRC’s approach seemed to be ‘a blunt instrument designed with little or no input from professional bodies’.

John Cassidy, tax investigation and dispute resolution partner at PKF, said: ‘There is no proof that a visit from a tax inspector during the year will result in the tax return that a business completes after the tax year has ended – many months later in most cases – being any more accurate.

‘It is unlikely that even businesses which are identified as having “seriously inadequate records” for the current year will face a record-keeping penalty straight away because HMRC cannot prove that their future tax returns will be wrong.

‘Of course, such visits might be used to fish for information that gives HMRC reason to doubt past tax returns and lead to a tax investigation into them, but that is not supposed to be the purpose of this exercise.’

The Institute of Chartered Accountants of Scotland said it had raised concerns about the checks’ effectiveness, the costs imposed on businesses, and ‘the apparent inadequacy of the book-keeping and accountancy training given to the HMRC staff involved’.

HMRC said it planned to complete up to 12,000 checks by the end of the current financial year, with 20,000 provisionally planned for 2012/13.  A decision on a ‘national roll-out’ will be taken in the New Year.

‘Initially, HMRC will only levy a record-keeping penalty in the most extreme cases of poor record-keeping,’ it said. ‘In the longer-term, HMRC intends to issue penalties of up to £3,000 for serious inadequacies in record-keeping.’

Guidance is provided on the HMRC website and will be updated in due course to give notice of the revised approach.

HMRC said in its December 2010 consultation that it intended to ‘check business records in up to 50,000 cases annually, beginning in the second half of 2011’. OECD research had suggested that poor business record keeping was responsible for a loss of tax in ‘up to two million SME cases annually’, it added.