Experts question legality of move to penalise small firms over tax records

TAX experts are questioning the legality of HM Revenue and Customs’ plan to fine small business owners up to £3,000 if their records are not up to date.

HMRC is forging ahead with a controversial programme to inspect the tax records of small businesses despite facing a barrage of criticism since a pilot was first announced in March.This week HMRC said it would quadruple the amount of staff on the project from 30 to 120.

Anthony Thomas, president of the Chartered Institute of Taxation (CIOT), said that while efforts to improve record keeping by business were to be welcomed, he continues to have serious concerns about some aspects of the programme. He said: “HMRC has still not provided any satisfactorily clear reasoning to justify its belief that it can charge penalties in-year before the return goes in. In our view it is questionable whether HMRC has the power to do that.”

CIOT is also unhappy about HMRC’s handling of the process of expanding the checks programme, saying it has begun rolling it out before providing evidence that the trials have been cost-effective.

HMRC insists it has the power to levy penalties for record-keeping under the Tax Management Act.

However, it said no businesses have so far been fined, despite pilot business records checks finding that around 44 per cent of businesses had “issues” with their record-keeping, while around 12 per cent of those visited had “seriously inadequate” records.

HMRC plans to complete up to 12,000 checks by the end of this financial year, with 20,000 provisionally planned for 2012/13. Initially, it says it will only levy a penalty in the most extreme cases of poor record-keeping. In the longer-term, it intends to issue penalties of up to £3,000 where serious inadequacies are found.

Neil Whyte, a tax specialist and partner at accountancy firm PKF, said the system was unfair on the smallest businesses, whose records were only the starting point in the preparation of their tax return.

“Their accountant will assist them in ensuring all relevant information and data is ready at the time the tax return is produced,” he said. “However, at the time of HMRC’s inspection these records may not be completely up to date but this does not necessarily indicate an issue.”

Colin Borland, head of the Federation of Small Businesses in Scotland, said that if businesses received guidance rather than fines the checks could be a positive move, but in their current form they were creating alarm among many small business.