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HMRC consults on action to tackle poor record keeping

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HMRC is planning a programme of pre-return ‘business records checks’ to review the adequacy and accuracy of records in the small and medium enterprise (SME) sector. Poor record keeping is a problem in around two million SME cases, the department estimated.

HMRC expects the programme to raise £600 million of extra revenue over four years. It observed that poor records cause additional unnecessary work for tax agents who ‘have no way of enforcing the standards that they think necessary’.

The programme will ‘help ensure a level playing field between those businesses who gain an unfair advantage [and] businesses who play by the rules’.

A consultation launched on 17 December will examine how best to achieve ‘a major improvement’ in the standard of record keeping. It will not consider whether existing law is appropriate.

‘Record keeping requirements were updated in FA 2008 and guidance is continuing to be updated,’ HMRC said. ‘Record keeping penalties will be considered as part of a separate review into HMRC’s regulatory and specialist penalties.’ Penalties will be imposed for ‘significant’ record keeping failures.

The programme will target businesses with a turnover of less than €50m and fewer than 250 employees. Up to 50,000 checks will be undertaken each year. They will ‘typically’ be pre-return checks, taking half a day on average to complete.

The programme has been discussed in outline with the department’s Compliance Reform Forum, which includes representatives of the CIOT, ICAEW, ACCA and other professional bodies.

OECD research indicates that poor business record keeping generally leads to an under-assessment of tax, even where there is an audit-type check into the tax return, HMRC said.

‘On this basis, poor business record keeping is responsible for a loss of tax in up to two million SME cases annually. Tax agents tell us that whilst they advise clients on what records to keep and how to keep them, many do not follow the advice given.’

HMRC added: ‘The loss of tax through poor record keeping, particularly in the current economic climate, cannot continue and HMRC is, therefore, determined to use the powers at its disposal to improve business record keeping and so reduce the loss to the exchequer that stems from poor business records.’

Comments are invited by 28 February, and HMRC will run workshops next month with a view to beginning the programme of checks later in the year.