In 2011 HMRC introduced Business Record Checks. These mini-investigations of small business’ accounts were designed to encourage good record keeping amongst the UK’s smallest enterprises, however were heavily criticised by business and accounting bodies alike.
In February this year HMRC announced they were putting the brakes on the rollout of Business Record Checks while they reviewed the process. The problem, according to those familiar with the checks, was that HMRC was focusing on “live” figures. Historically, tax investigations have focused on figures from previous financial periods, which were reviewed and signed off by the business owner and their accountant.
The checking of live (or the current year’s) figures is problematic as many small business owners are somewhat relaxed in their approach to bookkeeping. Indeed, many freelancers’ “accounts” amount to little more than a shoebox of receipts and invoices until they hand them over to their accountant. Live figures are often incomplete and inaccurate by their very nature!
A common problem, for example, involves the paying of dividends. Directors who pay themselves with a salary / dividend split (like Crunch clients) would usually rely on their accountant to draw up dividend vouchers (in our case, Crunch’s software takes care of it). Upon being selected for a Business Record Check, a freelancer with a shoebox of paperwork would not be able to prove what proportion of their income was salary and what proportion dividends without the paperwork to prove it.
HMRC has now announced that, from November 1st, Business Record Checks are back in an improved, friendlier format. As with their recent IR35 reforms, HMRC has promised that their improved Business Record Checks will be more targeted, beginning with an initial phone call.
During the phone call a questionnaire will be completed. Depending on the outcome of this questionnaire, the business will either be told that no further action is required, be provided with “targeted self-help education options” to improve their record keeping or, if HMRC deem it necessary, be scheduled for a BRC visit for further examination of their accounts.
Complete records do not equal accurate records
Proving proper record keeping will be easier for Crunch clients than those who use the shoebox method, as all their accounts are easily searchable and downloadable through our software. You can also use Snap, which will automatically upload your receipts to your Crunch accounts and store them electronically, negating the need to keep the original paperwork.
If, as a client, you have any questions about the correct way to record income or expenditure, it is vital you seek advice from either our Help Centre, your account manager or one of our accountants. This will ensure that not only are your accounts kept up to date, they are also accurate should HMRC come calling!
Photo by Okko Pyykkö