How to handle an HM Revenue and Customs Business Records Check
HM Revenue and Customs may be under fire for letting multi-national businesses such as Starbucks, Amazon and Google get away with sophisticated tax avoidance schemes. But while it might be difficult to get the big companies to pay up, HMRC is very adept at catching the little guy – especially if his records aren’t up to scratch.
On November 1, 2012, HMRC started a new approach to Business Records Checks (BRCs). The target audience of these checks are small businesses. And that means everyone from self-employed drivers upwards.
A BRC is a check by the Revenue to ensure that the records of a business are adequate to allow a taxpayer to submit an accurate or proper tax return. HMRC thinks a lot of small businesses are making mistakes, which are overall costing them big money. HMRC sees BRCs as a bolting of the stable door, while the horse is still inside!
Adequate books and records?
This is one of the difficulties. How do you define “adequate books and records”? Unfortunately there is no exact answer to this question. For most sole traders, the following would be regarded as adequate records:
- A record of all sales and takings, including cash receipts. For example sales invoices, bank statements, and paying-in slips;
- A record of all purchases and expenses, including cash purchases. For example purchase invoices, receipts, bank and credit card statements, and cheque book stubs.
HMRC select a number of self-employed traders based on their view of businesses which are more likely to be at risk of having inadequate records. The criteria it chooses are not known, but guess which trade is most likely to be up there with the market traders and entertainers? Yes, the good old private hire and taxi driver.
What is involved in a Business Records Check?
After the selection process the following may happen. HMRC will contact you by letter, telling you that you have been selected for a Business Records Check, and they will get in touch, normally by phone, within a few days.
In the phone call, they will ask approximately 15 questions about your business records to help them determine if they are adequate.
There are three possible outcomes from this questioning.
- They will then assess whether you are likely to be able to submit an accurate tax return from your records. No further action …job done.
- They will conclude that you could do with some “additional help and support” to put your records in order. The HMRC’s Business Education and Support Team will subsequently contact you
- They will decide you are a risk and are keeping inadequate records. In this case, the taxman will state that you need a face to face visit.
What should you do if you receive the letter about BRC? Firstly, don’t panic. Firstly, contact your accountant, who will advise you as to whether it would be better if he contacts HMRC on your behalf.
If you decide to deal with the phone call yourself, then do so. But if as a result of the call, HMRC states that you need a face to face visit, please contact your accountant before the visit. He will be able to attend the meeting to ensure that the HMRC officer comes to a reasonable conclusion.
Most importantly, do not take these phone calls or visit lightly. You can get a penalty if they don’t like your records (usually £500). And HMRC is also more likely to open an inquiry into you if the inspector doesn’t like your records.
The best plan is to make sure your records are in order. Ask you accountant for a proper system or weekly reporting sheets, and keep the HMRC wolf from your door this winter.
By Gary Jacobs, Drivertax