For legal reasons you have to keep records for your business and for any other income you get, so you can fill in your tax return and show that the figures are right.
You’ll need to keep at least:
- Invoices for sales and purchases
- Teceipts for business expenses
- Bank records
Good records will keep the tax authorities at bay while also saving you time and help you run your business more efficiently.
What triggers HMRC to check your returns?
If HM Revenue & Customs (HMRC) has reason to suspect a self-assessment, Corporation Tax return or VAT return is incorrect, they will carry out a compliance check. Generally, something will have triggered a check.
Example 1: When figures entered on a return appear to be wrong.
Example 2: When a small business suddenly makes a very large claim for VAT or one with a large turnover declares a very small amount of tax. The only way HMRC can find out whether the return is correct is by carrying out a check.
If the check shows that there is nothing wrong, HMRC will bring it quickly to an end. If the check shows that something is wrong, HMRC will work with the taxpayer and their accountant (if one is in place) to put things right. If any tax has been overpaid, it will be repaid with any interest that is due. But interest may be charged on tax that is underpaid.
HMRC may also issue an assessment or amend the relevant return, depending on the type of tax involved, to collect any unpaid tax. In some instances, an error that relates to one tax will mean that another tax also has to be corrected.
Example: an error in charging excise duty on goods sold generally means the VAT charged on the sale may also be wrong.
Appealing against HMRC’s decision
You can ask for a review of, or appeal against, most of HMRC’s decisions. The decision notice issued by HMRC explains what you can appeal and what you can’t. In most cases, your appeal will be settled by reaching an agreement with HMRC. But if you can’t agree, you can ask for either of the following:
- A review by HMRC
- Your appeal to be heard by an independent tribunal.
HMRC has also carried out checks on how businesses keep their records. If HMRC decides to look at your business records they will usually contact you by telephone. Businesses need to keep records to complete their tax returns correctly and pay the right amount of tax at the right time to avoid interest and penalties.
When they call you they will ask questions to help them work out if you are keeping the business records you need to meet your legal responsibilities. The call should last 10-15 minutes.
From the replies you give, the HMRC officer when on the call with you:
- Will assess whether you’re likely to be able to submit an accurate tax return from your records;
- Will tell you, and will confirm it in writing, if no further action will be taken at this stage;
- May feel you could do with some additional help and support and pass your details to HMRC’s Business Education and Support Team who will contact you with information about self-help guidance and training;
- May decide you are at risk of keeping inadequate records in which case you would need a face to face visit;
- May pass your details to the visiting booking team who will contact you to arrange a suitable date and time for the visit, confirming that in writing.
…and the consequences?
The consequence of a compliance check or a business records check may be your business having to pay additional tax as well as facing penalties.
Records to keep for VAT
Every business registered for VAT is required to maintain financial records that comply with the guidelines provided by HMRC. Similarly, it is a requirement of the Companies Act that every company should keep proper accounting records of money received and paid, of all sales and purchases, and of assets and liabilities.
Records to keep for employers
HMRC requires every business that employs staff to keep proper records for Pay As You Earn (PAYE) and for the calculation of tax liabilities. In some types of business, additional records have to be kept to satisfy government requirements.
You must collect and keep records of:
- What you pay your employees and the deductions you make
- Reports and payments you make to HM Revenue and Customs (HMRC)
Your records must show you’ve reported accurately, and you need to keep them for three years from the end of the tax year they relate to. HMRC may check your records to make sure you’re paying the right amount of tax.
If you don’t keep full records, HMRC may estimate what you have to pay and charge you a penalty of up to £3,000.
With the introduction of Real Time Information (RTI) employers must advise HMRC of their payroll at the same time as making payment to employees.
Many smaller employers are now reaching their staging date for Auto-enrolment for employee pensions. This requires employers and employees to pay the minimum pension contributions into an approved pension scheme. Employers will be required to keep appropriate records of contributions deducted and payments made.
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© ICAEW 2016. ICAEW will not be liable for any reliance you place on the information in this material. You should seek independent advice.