A STREAM of announcements from HM Revenue & Customs (HMRC) in recent months shows that it is sharpening up its act on collecting tax.
From new “task forces” tackling evasion in specific business sectors to a possible amnesty arrangement on Swiss bank accounts, the volume of projects now underway may make it feel like HMRC is attacking the “tax gap” on all fronts.
It is, however, far from a scattergun tactic. HMRC is sticking to its tried and tested risk-based approach of targeting its enforcement activities. But why would HMRC see veterinary practices as a target?
HMRC claims that its analysis shows that small or medium-sized enterprises (SMEs) are the most likely to have poor records and that businesses with poor records usually underpay tax. In fact, it estimates that up to 40% of all SMEs have inadequate records. As most veterinary practices are SMEs, some could well be on the hit list.
Checks across the country
To address the issue of poor records, HMRC is piloting “business records checks” for businesses right across the country. Up to 1,200 SMEs will be approached in the next few months about a meeting at their premises to check their records for the current tax year. The idea is to spot any recordkeeping errors or shortcomings and advise the taxpayer on how they should be put right.
The exercise will be rolled out fully in autumn 2011 with the business records of up to 50,000 SMEs checked annually. HMRC expects this work will increase tax collection by £600 million over four years.
It is important, however, to remember that this is likely to be a net increase in taxes as not all corrections will lead to a higher tax bill – corrections for some businesses will lead to additional costs or allowances being claimed, reducing their tax bills.
So far, this may sound relatively benign, even helpful. However, the concept of a visit from HMRC officers and letting them look over your books for a while may not be so attractive.
If your records are not up to scratch, that could flag up your practice as at risk of underpaying tax – not to mention almost guaranteeing another visit from HMRC in the future to check that your records have improved.
Conversely, if HMRC finds that you have good records, it is likely to take you off its “high risk” list so you should not be approached again for many years: but whether this minor “benefit” is worth the time and worry involved is open to question.
If HMRC officers contact you to arrange a records check, they will seek to make an appointment within a few days – often giving you little more than seven days’ notice. HMRC has legal powers enabling it to visit a business’s premises and, in some serious cases, it does not even require the owner’s permission to do so.
Although it is possible to refuse a visit in most cases, this option should not be taken lightly as it is very much a high-risk strategy: a refusal is likely to put your business even higher up HMRC’s risk list and may trigger a formal compliance visit or enquiry at a later date.
Fortunately, the new business record checks will be much less intensive than the traditional compliance visits that HMRC carries out, but they will follow its standard holistic approach with officers looking at the records for all taxes.
For example, where HMRC carries out a formal compliance visit, its officers now follow a single compliance process and focus “solely on the risks and behaviours identified in cases … irrespective of the head of duty”. This means that, if errors are found on a PAYE return, officers will work on the assumption that errors have been made for other taxes.
No tax penalties will be charged following a business records check undertaken during the pilot exercise. However, when the full exercise commences in the autumn, penalties will be charged where records are very poor. So, even if you are not behind with your tax returns or payments, if your records for the current tax year are in a mess, you could then face a penalty of up to £3,000.
Should HMRC pay you a visit for a records check, producing a carrier bag of receipts is not going to be enough to keep its officers happy. So, if your practice’s records are less than ideal, it would be a good idea to tidy them up now (and keep them that way), so you don’t have to catch up in a rush if a records check is arranged.
Of course, if you know or suspect that you have made administrative errors in your business or personal taxes, now is probably the best time to put them right. Making a voluntary disclosure will usually enable you to put right tax irregularities at a much lower cost than would arise if HMRC discovers a mistake or dishonesty.
If you are approached about a business records check, it is important to take expert advice immediately. A competent adviser should be able to coach you on how to present and explain your records to the visiting officers so the visit runs smoothly.
Even if your records are good, it may also still be worth having a qualified adviser on site during the visit just to ensure that HMRC’s officers do not overstep their remit: a records check should not involve an in-depth examination of your personal finances nor be conducted like a police search!
Despite the possibility of a penalty and the hassle of dealing with a visit from HMRC, in practice, the main risk from a business records check is that HMRC identifies mistakes, or worse, in your paperwork and launches a tax investigation.
Ensuring your records are accurate and up to date will minimise such risks and have the added benefits of making it easier to prepare your tax returns and saving you money in the long run.