Posted by Sally Nichols on 12 Nov 2012

Business Records Checks

Last year HM Revenue & Customs (HMRC) devised and began testing a new compliance procedure – Business Records Checks (BRCs). The aim was to visit smaller businesses and identify those that are not keeping adequate records. However, professional bodies had serious concerns about the process, and in the face of these HMRC suspended BRCs in order to consult and have a re-think. HMRC has now announced that BRCs will be re-launched from 01 November 2012.

The roll-out of BRCs will be done region by region, over a 14-week period beginning on 01 November 2012 and ending early in 2013. This is not a recommencement of the pilot but a full roll-out of the BRC process.

The Business Records Checks Process and Guidance

It is a four-stage process:

  1. The first stage is that HMRC’s computer-driven risk analysis produces a list of cases for possible BRCs. BRCs will therefore only be targeted at businesses where HMRC perceives some risk that records may be inadequate. Staff in local offices will not be able to add to this list.
  2. An HMRC Compliance Centre will write to those on the list saying that they are being considered for a BRC and that the writer will phone them a week later to ask a few questions. If you get 1 of these letters don’t wait for the phone call: call HMRC or let your payroll provider know in order that they can call. There are about 15 questions, all of them very basic so you should be able to answer them easily.The phone call should eliminate most clients who use accountants. HMRC thinks that its questions can identify who is likely to need a BRC. Most of those phoned will not get one. Some may be offered support and advice on keeping records. The minority will get a visit.
  3. A BRC visit is not intended to identify whether the records are good or even reasonable. HMRC’s concern is whether they are adequate to enable a correct and complete return to be prepared. “Adequate” represents a very low bar. In some cases keeping the bank statements alone will be sufficient. In some cases so will be information that you intend to seek from third parties. HMRC’s main concern is to check that there are enough records to ensure that all of the income will be picked up when the return is prepared. In most cases fairly rudimentary records will meet this concern. If HMRC thinks that the records are inadequate the officer will explain at the visit why he or she thinks so. If you disagree, explain why you think the officer is wrong. If you cannot convince him or her, there will be an informal internal appeal route for you to try to convince another HMRC official that the records are adequate.
  4. If it is accepted that the records are inadequate HMRC will make a further visit around three months later to check that changes have been introduced and that these meet its concerns. If no changes have been made, or the changes are clearly not going to satisfy the concerns, HMRC will consider imposing a record-keeping failure penalty at that stage. This will normally be £500.

Penalties

As noted, there will only be penalty where the records are inadequate and remain inadequate at the follow-up visit. The penalty will be £500 for the first offence, though for businesses in their first year of trading it will be £250. If during the BRC HMRC finds that the taxpayer has deliberately destroyed records, a penalty of £3,000 would apply (or £1,500 if only some of them had been destroyed).

Under this system it is hard to get a penalty; the taxpayer has to have made no real effort to cooperate with HMRC after it has pointed out inadequacies in the records. There are of course the normal appeal rights against the penalty, including the right to request an internal review. Even if the initial BRC visit takes place at the start of the tax year, any appeal is highly unlikely to reach the tribunal until after the end of the year. Accordingly if you feel strongly enough to take the appeal to the tribunal the strong probability is that you will have been able to prepare the tax return – and so prove that the records are adequate – before the hearing.

Full details are on the HMRC website at Business records checks.

Contact us

If you would like any advice regarding the above article or would simply like to discuss other ways in which we could help you or your business, please contact us on 01962 856 990 or customerservice@taxinnovations.com.