Scott Hallesy: Make sure you're one step ahead of taxman with record-keeping

This Thursday, 1 April, will be the first anniversary of HM Revenue & Custom's new and extended powers and penalties regime. This constitutes one of the biggest changes in attitude to the enforcement of tax compliance in a generation. I question whether HMRC can be trusted not to abuse those powers in light of current circumstances.

From the taxpayer's point of view, it's a "perfect storm". Government is pushing hard to collect as much tax as possible to minimise the national debt, tax admin burdens are increased by the rule changes and your business is under pressure because the economy is faltering.

From an HMRC staff point of view, morale is at an all-time low, due to massive job cuts, and your job may depend on you making a "good" recovery of tax during an inquiry. There will be a temptation to gather information that, strictly speaking, they don't have a right to. This approach is colloquially known as a "fishing expedition" and it is used to gather enough evidence to raise "Discovery" assessments for periods that have already become closed to HMRC inquiry.

The extension of HMRC powers facilitates this aggressive approach. For example, HMRC's staff now have the power to enter your home or business premises with minimal prior notification and, in certain circumstances, without any notification. If you are an employee who has been given permission to work at home, for example, then the taxman could come knocking.

It is also a multi-agency approach, so you could find yourself facing a VAT, PAYE, income tax and corporation tax inquiry all at once. If HMRC discover that you have not been keeping "proper" records, then you, as a business owner, could be issued with a fine. This could include, for example, that the cash book has not been completed for that week. HMRC's new regime demands that accounting records must now be kept up to date on a regular, if not daily basis.

HMRC's response to any accusations of heavy-handedness has been to say this change in powers was at the taxpayer's request. HMRC directly asked their "customers" during their review of the tax compliance regime in 2006/7 whether they needed more "real-time" guidance. I suspect that those responding didn't envisage the system we now have, however.

Problems with complying under the new compliance regime are being exacerbated by the introduction of a new penalty regime.

So who is likely to be targeted? Those considered a risk because of poor compliance. Certain sectors, such as retail, cash trades and construction, are likely to receive special scrutiny. The construction industry has already seen an increased use of new penalties for failures under the CIS regime.

I would argue that the reality for most small businesses at the moment is that the bank decides what records you keep and when. If the bank is satisfied with the robustness of your accounting systems, then why can't HMRC?

Having said that, if HMRC is using minor breaches of the rules to issue discovery assessments for prior periods, it would be wise to follow form, rather than risk an inquiry that could cost thousands in professional fees, as well as time away from your business.

So what can be done to prepare for a possible inspection? First of all, it is important you have been seen to ask for advice before completing a return or record, otherwise penalties can be that much greater. Secondly, work with your professional adviser to ensure your accounting and record-keeping systems are efficient. You may even consider outsourcing your bookkeeping and/or payroll function. Thirdly, consider taking out tax inquiry insurance, which would cover the considerable costs of preparing a case against a HMRC investigation. Lastly, talk on a regular basis with all of your professional advisers.

The message is very clear from HMRC – they will stamp out what they consider to be the poor record-keepers and the consequent loss of tax. Will you be an April Tax Fool, or will you be prepared?

&149 Scott Hallesy is a tax strategist at Condies, the chartered accountants and business advisers with offices in Dunfermline and Edinburgh; www.condie.co.uk

This article is for general guidance only. Condies and Scotsman Publications will not be held liable for any losses resulting from acting or not acting on the advice given in this article.