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18th January 2012

JUST FOR THE RECORD

Record keeping

 

Record keeping is not the topic that sets most pulses racing, but the inadequacy and weakness of accounting and tax records is assuming greater prominence with HMRC (tax office). This article will outline HMRCs current and future thinking, some general; considerations and tips.

On July 13^th 2011 HMRC published their response to a consultation document issued in December 2010 which was concerned chiefly with the issue of how best HMRC might implement a programme of Business Records Checks (BRC) with penalties for significant record keeping failures.

The language used by HMRC may indicate their focus is on business and that it does not affect landlords or property investors, but to my mind this would create a false impression. Our tax system operates on the basis that ‘ignorance of the rules is no excuse’, penalties for compliance breaches may be mitigated and time to pay liabilities discussed; however any tax and statutory interest owing will be due for collection.

HMRC consider that the test of whether business records fulfil the statutory requirements for direct taxes is essentially one of whether the records kept are ‘capable’ of being turned into a correct and complete return of tax liability. They do not think that a lack technical ability nor a lack of ‘neatness’ is necessarily a bar to fulfilling those obligations.

The problem, as identified by HMRC was that “poor record keeping is a problem in around 40% of all of SME cases (circa 5 million) ….this is responsible for a loss of tax in up to 2 million SME cases annually.

The loss of tax through poor record keeping, particularly in the current economic climate, cannot continue and HMRC is, therefore, determined to use the powers at its disposal to improve business record keeping and so reduce the loss to the Exchequer that stems from poor business records.”

The top three identified errors made by businesses were:

• Understated income
• Overstated expenses
• Incorrectly claimed private expenditure

One interesting key aspect of a BRC is that the Finance Act 2008 included a power to inspect business records before the return has been made to HMRC.  In the words of HMRC  “BRC are designed to enable HMRC to inspect the adequacy of a business’ records keeping by means of a quicker pre-return check, in order to reduce the burdens on business that would be associated with a subsequent in-depth enquiry post return.”

As a guide, the basic sets of financial records that should be kept include a detailed cash book, sales ledger, purchase ledger, wage books and PAYE records. 

The general rule is that all business owners must maintain financial records and retain them as a general rule for a minimum of six years. However, for an employer, you need to keep Pay As You Earn (PAYE) records for three years (in addition to your current year) and for a personal (non-business) tax return, they only need to be kept for 22 months from the end of the tax year to which they relate

There are no rules about the format you must use to record your figures - those kept on paper are just as valid as those stored on computer.

Record keeping is not just about compliance, it is the backbone of any (management) information system, bear in mind the ‘four S’ approach

S is for...system - Spend time setting up a system which you stick to

S is for...separate - Treat the organisation as separate to you as the individual

S is for...security – Minimise the number of people involved in your financial record-keeping, and control access to those records

S is for... storage - Keep a regular and safe back-up of computerised and paper records

 

This article was written by ....

 

Mahmood Reza

mahmood@proactiveresolutions.com

www.proactiveresolutions.com