One of the aims of compliance checks is to improve record keeping, which HMRC consider to be a primary cause of incorrect tax returns.  The checks are also intended to ensure that taxpayers are meeting their statutory obligations with regard to record keeping.

Although they can use their information powers to ask to see non-statutory records, if they exist, the inspection powers contained in Finance Act 2008, Sch. 36 can only be used to inspect statutory records.  Schedule 36, para 10 states that:

‘An officer of Revenue and Customs may enter a person’s business premises and inspect business documents that are on the premises, if the inspection is reasonably required for the purpose of checking that person’s tax position.’

The definition of ‘business assets’, which can also be inspected using the powers in para. 10, specifically excludes documents and the definition of business documents states that:

‘“business documents” means documents (or copies of documents)

  • that relate to the carrying on of a business by any person, and
  • that form part of any person’s statutory records’.

The records that a taxpayer is required to keep by statute may be specific or non-specific.

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Electronic Records

The requirement to retain records and documents includes any information however recorded whether in paper records or electronically.  An electronic record includes information, included scanned documents, held on:

  • a computer
  • a service
  • a memory stick
  • CD or DVD
  • Floppy disk
  • Magnetic tape

There are some records that must be retained in their original format.

Keeping and preserving records both electronically and in their original format will covered in more detail in the division dealing with Examination of Business Records when that division has been updated to reflect the new provisions in Finance Act 2008, Sch. 37.

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Failure to Keep Records

Except for PAYE/NIC’s and the Construction Industry Scheme, there are penalties for failing to maintain proper records and for failing to retain them for the prescribed period.  The failure may also lead to a penalty for inaccuracy in the taxpayer’s tax returns.

If poor records are discovered in the course of a pre-return compliance check, the officer will advise the taxpayer on how to improve their records to avoid being charged a penalty.  A note will be made of the inadequacies in the records and the advice given to improve them.  The record keeping will be checked again at a future compliance check and a penalty may be charged if the record keeping has not improved.

If the compliance check shows that tax has been lost due to poor record keeping a penalty for inaccuracy in the taxpayer’s tax returns may be due as well as a penalty for poor records at that stage and to suspend the penalty for inaccuracy.  In that case, they will warn the taxpayer that a failure to improve the records will result in a penalty for failing to keep proper records, on top of which the suspended penalty for inaccuracy will also become due.  The position will be checked again at the end of the period of suspension and if there is no improvement both penalties will become chargeable.

The penalty for concealing or destroying records required by an information notice is the standard failure penalty and is subject to the defence of reasonable excuse.  If the information notice was approved by the tribunal, it is a criminal offence to conceal or destroy them.

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Non-Specified Records

TMA 1970, s. 12B sets out general record-keeping obligations for income tax, corporation tax and capital gains tax.  The main requirement is that the taxpayer should keep such records as may be required for the purpose of making and delivering a correct and complete return.

Taxpayers carrying on a trade, profession or business are required by s. 12B(3) to keep a record of:

  • all amounts received and expended in the course of the trade, profession or business and the matters in respect of which the receipts and expenditure take place; and
  • in the case of a trade involving dealing in goods, all sales and purchases of goods made in the course of the trade; and
  • all supporting documents relating to such items

The ‘supporting documents relating to such items

The ‘supporting documents’ including accounts, books, deeds, contracts, vouchers and receipts.

Although the record-keeping requirement is more detailed for taxpayers carrying on a trade, profession or business, the provisions remain general in that they do not specify what those records should be. This is left flexible because of the wide range of business and on-business taxpayers it has to cover.

In the course of a compliance check, HMRC will want to establish the full range of business activities to check that the records are adequate for the purposes of accurately recording all aspects of them.  They will look closely at the possibility of any ancillary income arising within the business – for example from the sale of scrap or waste.  Where income is received in cash, they will want to be sure that the records reflect the full amount and follow the trail from the time of receipt until it is spent or banked.

Finance Act 2008, Sch. 37 will be covered in more detail in the Examination of Business Records division when that division has been amended for the new provisions.

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Reviewing Records

An officer will examine the statutory records as part of their preparation for carrying out a compliance check.  The aim of the examination will be to establish how the system is said to operate and how it operates in practice.  In this way the officer will be able to assess the risk of tax not being accounted for correctly.

For compliance checks on businesses the officer will consider what records they want to see.  This will depend on whether they intend to carry out:

  • A post-return check – when they will want to examine the records for the period covered by the return; or
  • A pre-return check – when they will want to examine the current records.

The officer will consider the likely business activities and the possible sources of income.  This will enable them to decide what records they want to see and to check if they capture all the information needed to make a complete and correct tax return.  The officer can check the statutory records at the business premises.

Where records do not relate to a business, HMRC can only ask to see them after the end of the tax year. Non-business records only become statutory records after the end of the tax year they relate to – they are usually things like interest certificates that are provided after the end of the year.  The officer cannot inspect non-business records at the taxpayer’s private residence.

HMRC have the power to check computer systems although they must not operate the computer themselves, download any applications or remove the computer.  They can, however, call on expert assistance from HMRC’s resources such as Data Handling Specialist or the Large Business Service (LBS) Audit Service to help them with their examination of electronic records.

While generally a printed copy of a document held electronically may be accepted as sufficient by HMRC, they can make a written request for the production of the original electronic document or an electronic copy.

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Specified Records

Where taxpayers are discharging a liability other than their own, some of the records that are required are specified by legislation.  In the case of VAT and PAYE liability to tax is determined during the course of the accounting period so the statutory provisions are specific as to the records that must be kept of the transactions giving rise to that liability.

For example, reg. 97 of the Income Tax (Pay As You Earn) Regulations 2003 (SI 2003/2682) specifies that the records that must be kept and made available for inspection are:

a) all wages sheets, deductions working sheets, documents completed under reg. 46 (Form P46) (other than those which the employer has sent to the Inland Revenue), and other documents and records relating to:

  • the calculation of the PAYE income of the employees
  • relevant payments to the employees, or
  • the deduction of tax from, or accounting for tax in respect of, such payments, and

(b) all documents and records relating to any information which an employer is required to provide to the Inland Revenue under reg. 85 (Forms P11D and P9D).

Traders who are registered for VAT must, by law, keep a VAT account.  They must also keep business and accounting records but it is left to them to decide what is required for their particular business.

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