The Finance Act 2008 brings together a number of issues that are going to affect your future relationship with H M Revenue & Customs.
In the past regular visits have been restricted to a VAT audit and possibly a payroll check. Additionally inspectors may have picked up on areas of concern in your annual tax return and launched a formal aspect, or full enquiry into your affairs.
The Finance Act 2008 takes this whole process to a new level!
In future you will be penalised if HMR&C believe you have not taken reasonable care in preparing any information (accounting or otherwise) that underpins any return made to them. It is likely that any under-declared tax that is discovered will be subject to a penalty approaching 30%, and if HMR&C can prove negligence or fraud this could rise to 100%.
The way in which these errors will be discovered are set out in changes to HMR&C's legal powers to investigate your returns. It is envisaged that an officer of HMR&C might begin a compliance check in respect of any of the relevant taxes for one or more of a number of purposes. These include checking that:
- a tax return, amendment to a return or claim is correct;
- statutory record keeping requirements are being met;
- tax has not been underpaid or over-claimed; or
- any issues concerning possible tax avoidance are considered.
Accordingly you can expect that future visits by tax officers will take an interest in the care that has been taken to keep proper accounting records. In particular how these records affect your VAT and payroll returns.
Access to information.
HMRC have included changes to the law in the Finance Bill 2008 that would give them rights regarding access to records that underpin your returns.
Accordingly there is to be no right to appeal against HMRC seeing records.
Another interesting development recognises the use of computers in storing relevant data. HMRC are quoted as saying:
"An authorised person may, at any reasonable time, obtain access to, and inspect and check the operation of, any computer and any associated apparatus or material which is or has been used in connection with a relevant document."
This would provide officers of HMRC access to any computer which has been used in connection with the accounting records (including supporting documents) required of the taxpayer. This is a new development, as normally taxpayers would expect HMRC to have access to the records themselves, but not the computers on which the records have been prepared or maintained. The practical implications of this are significant.
You may want to ensure that no critical business information is kept on the same computer as the accounting records, so that risk of breach of confidentiality, or even business disruption, is kept to a minimum should HMRC require access to the computer during the course of an enquiry.
Visits will be made in-year to check that the record keeping provisions are being complied with during the accounting period, and given the significant concern expressed about the quality of accounting records by HMRC and the impact on tax take, this is likely to be the main HMRC compliance contact that small businesses will have in the coming years.
What to do?
For most businesses the new rules will have effect for accounting years ending 31 March 2009. Therefore the records that you are presently updating for this period of account may be open to inspection. Can we suggest you contact us if you are interested in a formal review of your accounting and related administration systems, in order to minimise any possible financial consequences of future HMR&C visits.
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