HMRC accused of targeting small businesses to raise cash

THOUSANDS of small firms could be hit with unfair fines of up to £3,000 under plans by HM Revenue & Customs (HMRC) to scrutinise their business records, tax experts have warned.

The Chartered Institute of Taxation (CIOT) has hit out at government proposals to check the tax records of 50,000 UK SMEs a year over the next four years, with potential penalties of up to 3,000 if a discrepancy is found. HMRC aims to raise 600 million through the project, which experts point out, is equivalent to a maximum 3,000 fine for every business investigated.

In a strongly worded response to HMRC's consultation on the checks, which are expected to start in the second half of this year, the CIOT described the proposals as "misguided".

The institute's concerns were echoed by the Federation of Small Businesses in Scotland, which raised fears that HMRC would use the scheme as a revenue raising exercise.

The CIOT has also questioned the legal basis for the project and said failure to review the underlying legislation would trigger a deluge of tribunal appeals from businesses. HMRC plans to use powers under the Finance Act 2008 to justify the checks.

But the CIOT says the record checks would be carried out before the returns stage, meaning many records would be incomplete and still awaiting accountancy input. HMRC should instead scrutinise accounts immediately after they have been submitted, the institute argued, claiming firms could be fined unfairly because the single-visit checks would not account for subsequent work on records by company accountants.

Anthony Thomas, deputy president of the CIOT, which has more than 15,000 members, called on HMRC to "revert to the drawing board".

"Its purpose seems to be more about raising money through penalties than about helping businesses improve their systems," he said. "HMRC is putting forward a blunt instrument designed to deliver punishment when what is needed is a collaborative process focused on providing education, guidance and support."

Thomas added: "A penalty should only be levied once it has been proved that the bookkeeping records have led to an incorrect return. The penalty should be linked to the incorrect return."

HMRC's documentation implies that businesses could be penalised even where they have overpaid tax. In its consultation response, seen by Scotland on Sunday, the CIOT asked: "How can a government levy a penalty if tax is overpaid? The response must take account of actual tax revenue loss. Unreasonable records must be those that cannot be reconstituted and have led to tax loss."

Colin Borland, head of the FSB in Scotland, said: "The FSB has been quick to praise HMRC when it has shown common sense and understanding with small businesses, but we are concerned that these plans could put this progress at risk."We have expressed our concern that this opens the door to spot checks on company records and will be used primarily to raise revenue, not standards."

Good firms wanting to follow the rules should be helped to do so, not caught out with spot checks and fines, Borland added.

"It would surely be far better to leave the charging process as it is and give small firms the opportunity to improve their records if processes are deemed inadequate," he said.

The CIOT also raised concerns that HMRC has not apparently set aside staff training costs for a tax approach requiring specialist skills.

The response said: "We find it hard to escape the conclusion that the main purpose of this project is to raise penalties. Is it only a coincidence that the number of planned visits over the four years multiplied by the maximum penalty equates to the additional revenue from tax and penalties identified in the impact assessment?"