HMRC Spot Checks: Are You Ready?

Diana Flier, compliance expert, Intuit UK

What are HMRC spot checks?

HM Revenue & Customs has hit the headlines in recent weeks following its plans to press ahead with unannounced compliance spot checks on small businesses in the UK. The initiative is expected to see some 50,000 small businesses visited and face the threat of fines of up to £3,000 on those whose records do not meet minimum standards.

This is by no means a new issue, HMRC has made it very clear over the last couple of years of their intention to make compliance visits and how far back the organisation can go when calculating taxes owed from previous years.

Following several consultations the new rules arguably go a long way towards making it easier to understand the various requirements and penalties for inaccurate returns, failure to notify and both late filing and payment.

According to HMRC more than two million small business owners could be keeping inadequate records, which in turn typically lead to an underassessment and payment of tax. It is because of this that HMRC is introducing compliance spot checks on the SME sector.

In the first instance HMRC will be trialling a new single compliance process across ten areas within the UK. The trial commences this month and will run for six months, before being rolled out county-wide, subject to the trial results.

Alongside the threat of fines, it is paramount small business owners are pro-active in getting their books in order as poor record keeping is also one of the top five reasons why small businesses fail.

What do small businesses need to do?

To quote HMRC guidance “You must keep records of all your business transactions.”

As it stands all businesses must file a tax return with HMRC and these returns can take many forms including Corporation Tax Returns and Self Assessments. As part of a tax return a business will need to report a multitude of figures such as income, business expenses and disallowable expenses. The returns are used to tell HMRC how profitable a business has been and in turn the amount of tax that needs to be paid. If HMRC have any queries with the tax return, they can ask to see all the associated records and documentation, including all issued and received invoices and receipts.

In line with its refreshed approach HMRC has dictated that sole traders and partnerships with a turnover of less than £15 million are no longer required to submit their accounts along with their tax return, as all the required information will be captured in the ‘Standard Accounts Information’ (SAI) part of the return. This is by no means a ‘get out’ as these businesses will still need to produce these accounts should an investigation by HMRC be launched.

What types of records do small businesses need to keep?

This will vary depending on the type of small business, if it has employees and also whether it is VAT registered. It is worth noting that if HMRC find that a small business has not kept all the required records, or if they have not been keeping records for long enough, they could find themselves facing a fine. While there are a number of online resources available to support small businesses on the specific types of records it should keep, a quick check list should include:

• A cash book
• A petty cash book
• A sales and purchase ledger
• A wages book
• Invoices and receipts both issued and received
• Electronic records of sales or till rolls
• Details of items not rung through the till
• Details of incidental or miscellaneous income - for example rent for accommodation owned by the business
• Hire purchase and leasing details
• An inventory of stock on hand at the end of the accounting year
• Bank and building society statements, pass books, cheque stubs and paying-in slips which include details of business transactions
• Details of any money taken out of the business personal use
• Details of any private money brought into or taken from the business

While bookkeeping typically falls pretty low down on a small business owner’s agenda it is worth noting that it is more than just legal requirement, but can make or break a business. Getting into and keeping up good bookkeeping habits is crucial to both passing an HMRC spot check and running a successful business. As well as setting aside dedicated time each week to review and update their books, small business owners should consider using financial management software. This will not only to help them track their expenses in real-time and manage cash flow but mean that should the HMRC come to their door they are not reliant on a pile of paperwork and can quickly and efficiently be accountable for their record keeping.