Just for the record

The inadequacy and weakness of accounting and tax records is assuming greater prominence with HMRC (the tax office). In July this year HMRC published its response to a consultation document issued at the end of last year which was concerned chiefly with how best HMRC might implement a programme of Business Records Checks (BRCs) with penalties for significant record keeping failures.

The problem, is spelled out by HMRC: “poor record keeping is a problem in around 40% of all SME [small and medium enterprises] cases (circa 5 million) …this is responsible for a loss of tax in up to 2 million SME cases annually…The loss of tax through poor record keeping, particularly in the current economic climate, cannot continue and HMRC is, therefore, determined to use the powers at its disposal to improve business record keeping and so reduce the loss to the Exchequer that stems from poor business records.”

The language used by HMRC may suggest that its focus is on business and that it does not affect the arts sector, but to my mind this would create a false impression. Our tax system operates on the basis that ‘ignorance of the rules is no excuse’: penalties for compliance breaches may be mitigated and time to pay liabilities discussed, but any tax and statutory interest owing will be due for collection.

HMRC considers that the test of whether business records fulfill the statutory requirements for direct taxes is essentially one of whether the records kept are ‘capable’ of being turned into a correct and complete return of tax liability. They do not think that a lack of technical ability nor a lack of ‘neatness’ is necessarily a bar to fulfilling those obligations. The top three identified errors made by businesses were:

• Understated sales

• Overstated expenses

• Incorrectly claimed private expenditure.

One interesting key aspect of a BRC is that the Finance Act 2008 included a power to inspect business records before the return has been made to HMRC. In the words of HMRC: “BRC are designed to enable HMRC to inspect the adequacy of a business’ records keeping by means of a quicker pre-return check, in order to reduce the burdens on business that would be associated with a subsequent in-depth enquiry post return.” HMRC has stated that it will be checking business records in up to 50,000 cases annually, beginning in the second half of 2011, and imposing penalties for significant record keeping failures. The HMRC position seems to be that it will give businesses a year to enable them to make the necessary improvements to their record keeping.

As a guide, the basic sets of financial records that should be kept include a detailed cash book, sales ledger, purchase ledger, wage books and PAYE records. PAYE records are needed so that the Employer Annual Returns can be filed and provide evidence to support the entries made on it. Where charities operate the Gift Aid scheme, they will need to keep records to show how much has been received from each donor who has made a declaration. Charities must keep sufficient records to show that their tax reclaims are accurate. They must keep records that enable them to show an audit trail linking each donation to an identifiable donor who has given a valid Gift Aid declaration, and that all the other conditions for the tax relief are satisfied (provision of benefits, for example).

The form of records to be kept will depend on the size of the charity, the number of donors and the kind of systems used. The general rule is that all business owners must maintain financial records and retain them as a general rule for a minimum of six years. However, for an employer, you need to keep Pay As You Earn (PAYE) records for three years (in addition to your current year) and for a personal (non-business) tax return, they only need to be kept for 22 months from the end of the tax year to which they relate. There are no rules about the format you must use to record your figures – those kept on paper are just as valid as those stored on computer.

Record keeping is not just about compliance, it is the backbone of any (management) information system. Bear in mind the ‘four S’ approach:

S is for…system – spend time setting up a system which you stick to.

S is for…separate – treat the organisation as separate to you as the individual.

S is for…security – minimise the number of people involved in your financial record-keeping and control access to those records.

S is for… storage – keep a regular and safe back-up of computerised and paper records.