On 1 November 2012, HMRC started a ‘new approach to Business Records Checks’ (BRCs). The target audience of these checks are small and medium sized businesses which is why we are writing to you about this development.
What are Business Records Checks?
In the context of income tax, a BRC is a check by HMRC that the records of a business are adequate to allow a taxpayer to submit an accurate income tax return.
HMRC consider that a large number of small and medium sized businesses are making errors which are not individually significant but the cumulative effect for the total tax collected from such businesses is very high. HMRC therefore see BRCs as a cost effective way of checking the adequacy of business records.
What are adequate records?
This is one of the difficulties. Unfortunately there is no precise answer to this question. For a trading business, the following would be regarded as adequate records:
- a record of all sales and takings, including cash receipts. For example till rolls, sales invoices, bank statements, and paying-in slips;
- a record of all purchases and expenses, including cash purchases. For example purchase invoices, receipts, bank and credit card statements, and cheque book stubs.
Why might a business be selected?
HMRC select a number of businesses based on their view of businesses which are more likely to be at risk of having inadequate records. The criteria for HMRC’s computer driven risk analysis is not known but, for example, a business with a lot of cash transactions is likely to be seen as higher risk.
What is involved in a BRC?
After the selection process the following may happen.
- HMRC will contact the business, initially by letter, advising that the business has been selected for a BRC and HMRC will get in touch, normally by phone, within a few days.
- In the phone call, HMRC will ask approximately 15 questions about the business records to help them determine the adequacy of the records.
- From the replies given the HMRC officer:
- will assess whether you are likely to be able to submit an accurate tax return from your records. No further action will be taken at this stage;
- may feel you could do with some additional help and support to put your records in order. The HMRC’s Business Education and Support Team will subsequently contact you;
- may decide you are at risk of keeping inadequate records in which case they will state that you need a face to face visit.
- In each case, HMRC will tell you during the call.
What should you do if you receive the letter about BRC?
If you do receive a letter, we would recommend that you contact us as soon as possible. We can then advise you as to whether it is better if we contact HMRC on your behalf. We may be able to answer the questions without you having the stress of answering them.
If you would prefer to deal with the phone call yourself, then do so but if as a result of the call, HMRC state that you need a face to face visit, please contact us before the visit. We will be able to attend the meeting to ensure that the HMRC officer comes to a reasonable conclusion as to the state of the records and what action may be necessary to remedy any deficiencies.
Please do not take the prospect of these visits lightly. If HMRC consider that the records are inadequate and no changes are made, HMRC may apply a record keeping penalty (usually £500). That won’t necessarily be the end of the problem as when your tax return is submitted, HMRC are more likely to open an enquiry into the reported profits.
If you would like any more information please do get in touch.
John Elliott
Tax Partner
