Q. Some of my business associates have been talking about a possible new initiative from H M Revenue & Customs (HMRC) called Business Review Checks (BRCs) that will be carried out across 50,000 SMEs per year. Is this true and how will these BRCs be carried out and what could be the implication to businesses?
A. Your associates are correct as HMRC did release a consultation document on 17th December 2010 which proposes this new initiative of Business Review Checks. This is part of HMRC’s attempts to make businesses more compliant in all areas of taxation, thus reducing the potential loss of tax.
HMRC claim that whilst the need to keep proper records in order to comply with tax obligations is widely acknowledged, their random enquiry programme indicates that poor record keeping is a problem in around 40% of all of SME cases (5 million overall). On this basis, poor business record keeping is responsible for a loss of tax in up to 2 million SME cases annually.
The consultation document states that accountants and tax advisors tell HMRC that whilst they advise clients on what records to keep and how to keep them, many do not follow the advice given. This causes additional and unnecessary work for those accountants who have no way of enforcing the standards that they think necessary. The document goes on to state that 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, so reduce the loss to the Exchequer that stems from poor business records.
The objective of the proposals contained in the consultation document is to use the existing powers of Schedule 36 Finance Act 2008 and to impose penalties for significant record keeping failures, thereby bringing about an improvement in record keeping across the population of the roughly 2 million SMEs whose records currently fall below standard. By doing so they hope to reduce the tax losses to the Exchequer that result from poor business records.
The consultation document proposes that dedicated BRC teams will be set up from existing staff to carry out 50,000 reviews per year within the SME sector. HMRC hope to have these teams operational in the second part of 2011 with a target of £600 million of additional revenue over a four year period.
The aim will be to review all record keeping and accounting systems being implemented by a business and ensure they are sufficient and properly maintained so that correct returns can be submitted at the appropriate times. HMRC have provided a fact sheet detailing what records should be maintained by different businesses for different taxes and this can be found at www.hmrc.gov.uk/factsheet/record-keeping.pdf
The guidelines contained in the fact sheet will be the starting point for any review as it outlines what is expected from businesses. If you do not keep sufficient records you could face penalties of up to £3000 for failure to comply with the requirements.
HMRC already considers the standard of business records in the context of other types of compliance checks such as full enquiries into returns. Whilst full enquiries and other types of checks will continue to be used by HMRC in appropriate cases, they state these are resource intensive and can run for a year or more. By comparison, a BRC will typically be completed in less than a day and is the preferred option for addressing the problem of poor business records in the majority of cases, as it is the most cost effective for both HMRC and the business population.
The consultation period ends on 28th February 2011 but no great changes are envisaged in how HMRC will carry out the BRC’s or whom they will be targeting.
In view of this SME’s may want to consider a review of all book keeping and accounting systems over the next few months to ensure they will not be facing significant penalties if HMRC visit.
To find out more about his subject, or any taxation issue please call the Advice Service on 01455 852555 and one of our specialists will be happy to help.