Business Records Checks: what the Small Business Owner needs to know

My accountant is trying to drum up business for their “Tax Investigation Insurance Scheme” which is fine. What isn’t fine is that they’re mixing it up with the proposed Business Records Checks which are another thing entirely. It’s nothing short of scaremongering to link the two together but that’s a matter between me and my accountant. For now, let’s look at BRCs and what they might mean for us.

I’m not, at this point, going to get deeply into the government justification for BRCs (indeed, they claim it’ll help us make more money, a-ha-ha-ha) because it can be summed up as this: money. They claim that they’re missing out on billions of pounds of tax revenue because poor record keeping amongst small businesses almost always results in lower tax bills. Or at least, so they say. It seems to me that if the problem is simply poor record keeping, it would be just as likely that this would result in paying too much as too little but reading between the lines they believe small businesses are deliberately keeping poor records to reduce their tax bills.

The plan is for HMRC officers (don’t you just love ‘em?) to investigate “up to” 50,000 small businesses annually. Given that there are 5 million SMEs in the UK, that means one in 100 can expect to be investigated although that will be biased towards certain industries (especially those that deal with cash, I imagine).

I’ve dug around the consultation document and other supporting information to summarise things here:

The stated point is to improve business records
It’s due to roll out in the second half of 2011
It’s claimed intention is to look at record keeping as it is happening, not to look back at past years. It is not a tax investigation. In other words, HMRC might ask you how you keep your records and what records you keep. They will then decide whether you’re complying with the law and use their “professional judgement” as to whether you’re committing a breach serious enough to be fined. Given that this is an exercise in increasing revenue for HMRC I rather suspect their “professional judgement” might err on the side of fining you. Nothing new there then.
The level of fines hasn’t been determined but it’s likely to be pretty punitive – a ceiling of £3,000 is proposed
Each investigation is supposed to take up to 1 day but that must depend on the business. So you will lose time and you’ll probably have to pay your accountant too
You face two fines: one for poor record keeping and one for inaccurate returns
Separate fines for VAT and Corporation Tax
Cases are to be selected based on a Risk Assessment of the industry the company works in, along with a few random ones for good measure.
You should get 7 days notice of any visit.

Here’s the critical section:

It is not intended to begin a programme of Business Records Checks with penalties for significant record keeping failures without first providing for a period of adjustment; that is, allowing a reasonable period for all to bring their record keeping up to standard,with penalties being imposed only for significant record keeping failures occurring after the end of that period.

In other words, small businesses will be given time to get their house in order before the regime begins. At least that’s the plan.

What records do I need to keep?

That depends on your business. There’s the “Keeping records for business –what you need to know” factsheet produced the HMRC but perhaps more useful is BusinessLink’s interactive tool: Find out what records you should be keeping.

I recommend that you get a good quality book-keeping system such as FreeAgent and have as many transactions sent and received electronically as you possibly can.

My Thoughts

My gut reaction is that this is yet another imposition on micro businesses. The government talks a good game when it comes to supporting small businesses but the facts are somewhat different. The smaller your business, the bigger, proportionately, the burden of red tape and HMRC has become noticeably more intrusive in the past 18 months.

If this is just about encouraging better record keeping then perhaps there’s a place for it but there are ways of achieving this that don’t involve jack-booted HMRC clones knocking on your door.

What’s worse is that this is clearly a money-grabbing exercise and is likely to descend into fining as many firms as possible for inconsequential errors in their record keeping when what the government apparently wants us to do is actually run our bloody businesses so we can reinvigorate the economy. Talk about wanting your cake and, simultaneously, eating it.

My message to government is to get off our backs and show some genuine support. They should be cutting down the administrative burdens of doing business not increasing them.

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