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Record keeping and penalties

The new record keeping and compliance visits from HMRC have started for some small business with letters issued in Scotland and the UK at the start of April 2011. It was expected that the visits wouldn't start until July 2011when the compliance visits would be fully operational but it has already started as part of  "test and learn visits. 

 It is expected that HMRC plan to visit 50,000 SMEs each year for four years. 

What is checked by a compliance officer?

 It is envisaged that an officer of hmrc might begin a compliance check in respect of any taxes for one or more of a number of purposes. These include checking that a tax return, amendment to a return or claim is correct

  • statutory record keeping requirements are being met
  • tax has not been underpaid or over-claimed
  • any issues concerning possible tax avoidance are considered 

 The key points in regard to poor records are: 
  • If the records are shown to be poor then the officer has in effect shown that the figures on the tax return cannot be relied upon and the officer could then look to make assessments for under declared profits.
  • basic integrity of records is clearly identified in the guidance as an element of "taking reasonable care". This would mean that a taxpayer with very poor record faces not only a discovery assessment - for a period of 6 years due to the failure to take reasonable care (the period would otherwise be 4 years) but also potentially penalties of up to 30% of the tax to which he is now assessed based on that failure. The opportunity to make a late disclosure is lost, because the integrity of the records is only disputed when a compliance check is under way.
  • It is the responsilbity of the business owner to keep sufficient records so that any tax return prepared by them or by an agent is correct and complete. No excuse will be acceptable (by law) for limited ability of business owners.


What sort of records should be kept?

 All businesses are required to keep a record of all sales and takings, including cash receipts.

Records include:

  • till rolls
  • sales invoices
  • bank statements
  • paying-in slips
  • accounting records

These records allow you to quickly see what you are owed and accurately work out your total income.

You must also keep a record of all purchases and expenses, including cash purchases.

These records include:

  • receipts
  • purchase invoices
  • bank and credit card statement
  • cheque book stubs
These records allow you to quickly see what you have spent, how much you owe and what you can claim for tax purposes.


Motoring records

 All business owners using motor vehicles are required to keep the following records:

  • a log or record of mileage trips. This is based on the agreed mileage allowance rate.
  • car / vehicle information.
  • stock book (for businesses in the motor trade )
  • company car and/or van information (eg. log books, valuation, emissions, purchase / sale records)
  • pool car logs.
  • fuel receipts provided by the business for personal and company vehicles if the actual costs are being used.


How is the penalty charge calculated?

HMRC calculate penalties as a percentage of the additional tax due. This will be calculated when the inaccuracy is corrected. The additional tax due is called the potential lost revenue.

HMRC measure the potential lost revenue differently where the inaccuracy results in an overstated loss.

The penalty rates for inaccuracies can be

  • up to 30 per cent of the potential lost revenue if the inaccuracy is careless
  • up to 70 per cent of the potential lost revenue if the inaccuracy is deliberate
  • up to 100 per cent of the potential lost revenue if the inaccuracy is deliberate and the person attempts to conceal it

There is no penalty if a person can demonstrate they have taken reasonable care to get their tax right, but despite this, submit an incorrect return.

The percentages are stepped and are higher when the underlying behaviour causing the inaccuracy is more serious. Penalties are significantly higher for those who deliberately try not to pay the right amount of tax to obtain an unfair advantage.

The penalty payable where tax has been under-assessed because of the person's failure to send a return is 30 per cent of the potential lost revenue.