Comments from ACCA to HM Revenue and Customs (HMRC), February 2011.
Historically the approach of the tax authorities in the UK, especially in the former HM Customs and Excise, has been to protect the Exchequer directly. Officers of the Crown charged with ensuring compliance with tax law have confined themselves to breaches of the clear and specific provisions relating to the calculation and application of the taxing statutes to income, gains and transactions as they occur. Extending the role of HMRC officers to embrace regulatory enforcement of bureaucratic requirements goes beyond the traditional common law approach into the territory of more clearly codified civil legal regimes. Academic arguments as to the relative philosophical merits of the two approaches aside, the simple practical fact of the matter is that UK revenue officers have neither the skills nor the time to undertake this new policing role.
A further complication arises from the lack of clear record keeping requirements in the underlying tax legislation. For VAT, SI 1995/2518 s31 requires tax payers simply to retain their 'business and accounting records' with no further statutory gloss. For the new checks to be an effective way to improve the record keeping of small business in the UK there would need to be a shared understanding of what 'business records' are. However, the mere fact that HMRC consider there to be a problem with insufficient records being kept suggests that this common understanding does not yet exist.
If businesses do not yet understand where HMRC want them to be, the stick is the wrong tool to get them there. Use of the carrot to encourage the desired behaviours would give business a clear steer as to where they need to go. Simply telling them they haven't got it right yet is not on its own enough. Chasing defaulters with a big stick will probably move them from where they are, but not necessarily in the right direction. Giving them an incentive to move to the right place would not only present a more constructive image to small business, but would more importantly ensure that those businesses who are motivated to change do so in the desired way.
In the current climate, ACCA has doubts that any incentive program from HMRC could be properly formed or would be properly received. Budgetary and moral considerations rule out financial rewards for good record keeping. The promise of lighter touch regulation for businesses willing and able to demonstrate to HMRC their ability to maintain adequate (or better) records would be controversial and regarded with suspicion by the target audience. The target population are at best ambivalent to authority and bureaucracy, and more so where they perceive the authority in question to have as its main purpose in life the removal of their money. Years of cuts to front line staff and highly public failures on the part of HMRC record keeping behind the scenes have combined to devastate the trust that business has in HMRC's ability to fairly and competently deal with its affairs. Small business simply would not believe firstly that HMRC is competent to judge the quality of records keeping, secondly that it would have the skills to recognise the differing levels of records suitable for particular types of business and distinguish fairly between them and thirdly (and perhaps most fundamentally) that HMRC could be trusted to operate the system in the longer term interests of business and the economy, rather than view it simply as an opportunity to inspect records with a view to discovering and punishing perceived infractions. ACCA has no doubt of the good intentions of those proposing this policy, nor of the need to improve the stock of business information in the UK. However the structure of the UK constitutional administration is such that HMRC has never been a regulator of business practices. Now is not the time to introduce that role. HMRC does not have the resources to train its officers adequately to do what would be a difficult job in the most supportive of environments. The combination of direct economic pressure on small business and the perception of HMRC as a failing institution with no empathy for private sector concerns and considerations will make that job impossible.
Do we need to go further than what is available from the factsheet and the evaluation tool; and if so, what else is needed?
The factsheet provides a general overview of the sort of timeframe documents should be retained for. However, it is neither complete nor strictly accurate, and contains guidance which appears inconsistent with HMRC's own manuals (eg Compliance Handbook at CH14530 and 14600). For example, based on the leaflet, a sole trader who undertook a transaction in May 2005 might think (on the basis of the Factsheet) that records could safely be shredded in August of 2011, whereas the Compliance Handbook confirms that they should be retained until April 2012. In certain cases, the records may even need to be kept for longer (see the 'HMRC website' for examples of 'When you may need to retain records for more than six years' by clicking on the link in the External Links section below). The leaflet however does not point out that some records may need to be kept for more than six years.
HMRC should not rely upon the fact that there are links in the Factsheet to other resources as a justification for penalising behaviour which complies with the Factsheet, but not the referred material. Small businesses and startups are under incredible financial pressures and in many cases will only be able to spare the time to investigate 'red tape' at weekends or in the evenings after a full days work. While this cannot be an excuse for failure to comply with the law, HMRC should be sympathetic to their situation, particularly as a taxpayer could reasonably point to the factsheet and defend a six-year rolling record retention policy. As a practical point, simply suggesting retention of records for seven years 'to be on the safe side' with a footnote or reference to other materials clarifying the relevance of accounting and tax period ends would resolve the main issue.
In an ideal world, small business would be given an extra hour in every day to deal with regulatory compliance. As this is beyond the gift of HMRC, the next best thing would be genuine understanding from officers inspecting small business records of the difficulties faced by small business owners, and an appreciation that even making the time to read the Factsheet, let alone any further materials, will impose a cost in terms of time taken from building the business.
RE: the categories and responses at 4.11 above the right categories and the right responses? if not, what should the categories and/or responses be?
The categories appear broadly reasonable, and we are encouraged to see (in the context of this document at least) HMRC acknowledge that the function of records is more important than the form.
Is the outline proposition at 4.13 above a reasonable basis for drawing up guidelines as to what should constitute significant record-keeping failure? and if not, why not? what alternative basis would be reasonable for drawing up guidelines as to what should constitute significant record-keeping failure?
The outline proposition at 4.13 is far too brief to constitute a 'reasonable basis' for drawing up guidelines. Any attempts to set a monetary or numeric value on the quantum of errors which are to be deemed 'significant' will displace the professional judgement which is key to a fair system. Guidelines must be just that, they should not become fixed rules and limits.
We hope that matters have improved since the Farthings Steak House case ([1996] STC (SCD) 381) case, but examples such as the more recent case of Stephen Ho ([2010] UKFTT 387(TC)) do nothing to allay the fears of those who maintain that not all HMRC officers have the experience or skills to deal appropriately with small businesses. The answer must not be to replace discretion with arbitrary limits. However slow and expensive HMRC may find the process to be, the only solution is for officers to be appropriately trained before they are actively used to enforce the proposed penalties.
What amount of penalty is needed at a minimum to encourage those with significantly poor records to bring their record-keeping up to standard, and to deter a potential 'for £x it's worth it' mentality?
There is some force in the argument that businesses should not be given a 'free go' at record keeping. However, the structure of the UK tax enquiry and appeals system means that many businesses would effectively get this through the current investigation process in any event. If HMRC is genuine in its desire to encourage, rather than hinder, small business then there should be a commitment for the foreseeable future that (save in the most serious cases of clear intention to mislead with a view to underpaying tax) a warning will be given when the first indications of poor records keeping are perceived by HMRC.
Should the penalty tariff for significant record-keeping failures be the same for all? If not, on what criteria might a workable penalty differential [within the statutory maximum of £3,000] be based?
When considering the minimum level of penalty needed to discourage deliberate laxity, the relative profitability of different businesses becomes relevant. The current proposals would allow for a situation where penalties might be applied even where no loss to the Exchequer has yet been identified. For many small businesses, a penalty calculated in thousands of pounds could impose significant hardship not just on the trader but on their family and employees as well.
How can the interaction between the penalties for the very separate offences of failure to maintain statutory records and making an inaccurate return best be managed and articulated?
HMRC should proceed on the basis that 'the punishment should fit the crime'. Where failure to keep statutory records results in a loss to the Exchequer, there will be two routes to penalise the taxpayer for their transgressions and a clear indicator of the level of penalty that should be appropriate. A single penalty should be charged at the appropriate level; the precise statutory basis is likely to be of little concern to the affected business.
If the failure to keep statutory records does not result in an identifiable loss to the Exchequer then the appropriate 'punishment' will be less easy to quantify, but in the short term (and certainly until business has had a chance to understand what HMRC expect to be kept) the emphasis should be on encouragement and education.
Does this seem a good way to encourage the desired change in behaviour, and if not, why not?
Are there any other or better ways to encourage the desired change in behaviour?
Business records could usefully be improved. It is not practicable for HMRC to encourage that improvement through incentives. It is not sensible for HMRC to try to drive that improvement through sanctions. The logical conclusion should be that government should seek and alternative means to implement its policy. HMRC does not have to be the body encumbered with this Herculean task. Sending HMRC officers out to penalise small businesses is not a constructive way to build the relationship with the tax paying community. It is a sad reflection on where we have got to that sending tax inspectors out to reward small businesses would be viewed with such cynicism and distrust as to be at best wasted and at worst counter productive. Nonetheless, that is the position we are in, and moving to a better place will be a long slow process which would be better started from somewhere else. That being impossible, we should at least set off in the right direction, and the proposals in this consultation document are not going the right way.
What will constitute a reasonable period of time to allow those whose record-keeping is sub-standard to make the necessary changes to their record-keeping?
The length of time needed to remedy sub-standard records will depend on how much needs to be done, the capacity of the taxpayer to do it, and crucially when they become aware of the standards they should be applying. Clearly the most effective way for them to become aware of the necessary approach to record keeping would be to have their current shortcomings explained to them in the form of a report, such as they might receive from HMRC after a Business Records Check, such as the 'test and learn' basis discussed below. Failing that, a publicity campaign, supported by professional advisers, running for at least one year should raise awareness in the business community of the proposed new approach to penalties for regulatory as well as fiscal infractions.
Would it be useful to begin BRCS on this 'test and learn' basis?
Yes. However, for this to be seen as a positive experience by the business rather than a negative one it will need to improve the financial position of the business as well as HMRC. Imposition of penalties would destroy that perception, as would compulsory visits by HMRC. To avoid alienating the small business community still further, HMRC would need to explain clearly to businesses that the aim of the 'test and learn' period is to improve performance for both HMRC and business.
How might HMRC best work with agents in bringing details of these changes to their clients?
Early and open communication with representative bodies of tax agents is key to effective and successful publicity. It is clearly in the interests of agents as well as taxpayers and HMRC to improve the standard of record keeping in small business.
As part of the process of engaging with agents HMRC should also address the concerns of agents around the Business Records Checks process. Specific concerns raised by our members include:
Failure to record money in or out - how can a Business Records Check identify something that isn't there? Surely this would have to turn into an enquiry?
Presumably our working papers will form part of the Business Records - so these will open for inspection?
What if we identify 'missing income' when preparing the accounts - will this lead to our clients being fined even though we have investigated and rectified any shortcomings?
How is the accountant to deal with inadequate records supplied to prepare accounts and tax returns? If the trader is unable or unwilling to action advice to improve records can they not act for him? Will there a requirement to report on failings found or risk reputational damage by association?
How might HMRC best bring details of these changes to the wider audience, especially unrepresented SMES?
Given that ACCA does not believe the checks should begin in earnest for a period of at least 12 months there is time for HMRC to incorporate appropriate messaging and publicity materials into its own communications with small business. In addition HMRC should investigate campaigns on television and in the national press, as well as local newspapers and trade journals. In view of the target population, publicity on the internet is likely to prove relatively effective, both on the official websites that small businesses can be expected to visit or refer to and also on 'social media' channels such as Facebook, Twitter and LinkedIn.
Are there issues other than those referred to above that ought to be taken into account, and if so, what are they?
ACCA remains concerned that in the current difficult operating environment for small business HMRC will do further damage to its reputation by taking upon itself the role of statutory regulator as well as tax collector. HMRC needs to work on rebuilding the trust of small business, which has been so badly damaged in recent years.
Do you have any comments on the assessment of compliance costs?
The assessment of compliance costs seems implausibly low. Dividing the total cost by the number of expected visits results in an average cost of just £54, yet HMRC have estimated that each visit will take half a day to complete. The figures seem to suggest that HMRC think that around 4.5 hours of time will suffice to deal with the visit, presumably being an hour of preparation and then the half day lost to the actual visit. We doubt that this will be accurate. In many cases the business will want to consult with their professional adviser about the visit. £54 is unlikely even to cover the professional fees incurred in this initial consultation, let alone any further support required. There also seems to be no allowance for dealing with any follow up work.
Basing the business's internal cost on 'an hourly rate for accounts and wages clerks, book-keepers, other financial clerks, sole traders' totally fails to take into account the fact that for many small businesses the individuals undertaking the role of accounts and wages clerk will also be undertaking the role of managing director, chief sales executive and product development officer. HMRC will presumably want to perform the checks during the working day. In practice many small businesses expect to deal with tax, bookkeeping and the like outside business hours. Diverting business resources for half a business day is likely to have further knock on effects beyond the simple productive time lost. The use of the current average costs is misleading and should be reassessed.