TT160: Business Record Checks

January 23, 2011

Small and medium businesses (SMEs) are being urged to maintain accurate and up to date financial and business records.

HMRC has announced it is planning a programme of business records checks that will review both the adequacy and accuracy of business records within the SME sector. No new legislation is proposed in this regard, the programme will use existing law regarding record keeping and penalties for failure to comply with those requirements.

Why is the HMRC proposing Business Record Checks

HMRC has a well established programme of random enquiries into taxpayers’ affairs and related records. Whilst the need to keep proper records in order to comply with tax obligations is widely acknowledged, HMRC’s random enquiry programme has indicated that in around 40% of all SME cases (equal to around 5 million cases), the problem is poor record keeping. Further research indicates that poor business record keeping generally leads to an under-assessment of tax. In other words, poor record keeping could cause the loss of tax revenues in some 2 million SME cases.

It is therefore in the Revenue’s interest to improve business record keeping. As HMRC puts it in their consultation document, “the objective of the Business Records Checks is to use the powers of Schedule 36 Finance Act 2008 to check business records in up to 50,000 cases annually, beginning in the second half of 2011 and to impose penalties up to £3,000 for significant record keeping failures”.

How long must you keep the records?

HMRC expects all businesses to retain business and accounting records for at least six years from the end of the accounting period. For example, if the accounting period ends on 31 December 2010, need to keep the records for that period until at least 31 December 2016.

What records do you need to keep?

For tax purposes, the sort of records you need to keep depends upon the type of tax you have to pay.

Listed below are examples of most common records:

  • Accounting records (including details of assets, liabilities, income & expenditure).
  • Business records (bank statements, cheque book stubs and paying-in slips, business agreements and contracts, purchase and sales information and cash book).
  • VAT workings (including sales and purchase invoices, import and export documentation).
  • PAYE records (including payments made to employees, deductions of income tax and national insurance contributions, employee benefit and expenses and statutory payments).

You do not necessarily need to keep all records in their original paper form. Electronic copies are acceptable in most instances, provided they are legible and you are able to produce them in a readable format. There are certain documents that must be kept in their original form, for example, dividend vouchers, so if unsure please enquire before disposing of the original.

What do you need to do?

Please ensure that you know what constitutes business and accounting records, and what you need to keep. Then please ensure you comply.

Many taxpayers have had tax enquiries, VAT inspections, PAYE visits which may not have highlighted any errors, but rather time consuming issues with having to prove to HMRC’s satisfaction, the adequacy of underlying records to substantiate the return.

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