“We have been with [FK Medical] for many years and [they]
continue to deliver an exceptional service … There is no
doubt that the advice we have received over the years has
resulted in increases in partner and practice incomes, greater
profitability and better financial management all round”
New Business Records Checks: What records do businesses need to maintain?
Do you run a small- or medium-sized enterprise (SME)? Are you concerned that HM Revenue & Customs (HMRC) is about to embark on 50,000 Business Record Checks (BRC) a year from this July? Are you worried HMRC may arrive at your premises and try and fine you up to £3000 for failing to keep good business records?
If so, our Tax Team has prepared some guidance for you.
Background
HMRC is conducting the reviews to ensure business owners keep full and complete records, so that accurate accounts are prepared and declared on tax, VAT and company returns.
HMRC will typically send a letter asking the business owner to get in contact within 10 days of the date of issue of the letter, to arrange a convenient date and time for an officer to visit.
The officer will visit and consider whether the records which are being maintained are adequate for the nature and size of the business, to ensure accurate returns are filed. The officer may also make recommendations on any improvements that can be made.
Terminology
As hard as they try not to, HMRC officers inevitably slip into tax jargon, which can be confusing for the business owner.
The most common phrases used are ‘point of sale’ and ‘contemporaneous’.
If a tax officer asks about the record kept at the ‘point of sale’, the officer is effectively asking the business owner to describe where the initial record of any sale is made. In the case of a retail business for example, the point of sale may be the till through which sales are rung. In the case of a café or restaurant, it may be the order pads, on which food orders are recorded for the kitchen.
Using the same two examples, if the officer then asks for the ‘contemporaneous’ records, the officer is asking for the till rolls or the original food orders (or meal tickets) taken by the waitier/waitress. With technology playing a greater part in everyday life, some business owners keep weekly spreadsheets of sales, or respond by saying all entries are kept on SAGE.
This is rarely a good enough explanation for HMRC. HMRC’s counter argument is that the computer records are effectively the secondary record and can be the subject of errors, when the point of sale data is transferred to the secondary record. For example figures can be transposed, decimal points put in the wrong place or even amounts included in the wrong category of income or expenditure.
What records HMRC will ask to see
In simplistic terms, when HMRC starts a review it is interested in how you record your income and how you record your expenses.
Income
As a bare minimum, HMRC will expect the following contemporaneous records to have been maintained.
- A record of all sales; whether till rolls, meal tickets or invoices raised for work done.
- Any supporting sales ledgers and cash books.
- All bank and building society account statements into which business income has been deposited, alongside the corresponding paying in slips.
- All electronic financial records into which business income has been paid, such as PayPal statements.
- Documentary evidence to prove the source of any non-business deposits paid into the business accounts, such as a birthday cheque from a family member or a savings policy maturity.
Expenses
- A record of all expenditure, whether motoring receipts, utility bills, landline and mobile telephone monthly invoices and stock and/or material purchases.
- All bank and building society account statements from which business expenditure has been paid, alongside the corresponding cheque book stubs.
- All credit card statements from which business expenditure has been paid.
- All weekly or monthly account statements received from suppliers.
- Any supporting purchase ledgers, cash books or petty cash records.
- A record of the names and addresses of each employee, their payslips showing their gross earnings, the tax, national insurance contributions (NICs) and any student loan repayments deducted, as well as their net pay.
- A record of all benefits in kind or expenses paid to any employees, any pension or statutory payments made and any commission, overtime or bonuses awarded.
- A record of the gross payments made to any subcontractors and details of any amounts deducted from the gross payment (both excluding VAT).
- There are further records to keep if the business is registered for VAT.
A VAT officer will generally ask to see records of all the standard rated, reduced rated, zero rated and exempt goods and services the business buys or sells. All credit and debit notes issued and received will be requested and any self billing agreements if the business is a supplier.
Please note
The income and expenditure records summarised are a bare requirement. Each business is unique and the specific requirements of HMRC will vary from business to business.
There are also highly contentious areas where HMRC pushes for records it is not automatically entitled to see. The most common examples are private financial records, confidential patient records held by medical professionals and diaries.
Needless to say, the BRC will not be straightforward and business owners need practical, sound advice to minimise, as far as possible, any exposure to the maximum fine of £3000. In the worst case scenario, a business could subsequently be selected for a full enquiry if the business records are clearly incomplete and the tax officer believes there is any element of carelessness or deliberate action on behalf of the business owner, in failing to maintain detailed records.
Prior to launching the scheme HMRC engaged in a ‘test and learn’ pilot exercise, testing and fine tuning its business records review techniques on 1500 cases across the UK. Now the BRC has begun in earnest, SMEs need to be ready. Typically the visiting officer will ask for sight of the business records maintained for the last three months, so there is still time to make improvements before any visit takes place.
If you would like to discuss this article in more detail, please contact our Tax Team on 01582 540800 or e-mail accountants@fkca.co.uk.
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