Contractors can take some simple bookkeeping precautions to ensure their contractor limited company records are in order in the event that HMRC undertakes a Business Record Check (BRC). And far from being an administrative burden, these easy tasks are also good business practice that support a successful contracting career.
HMRC has a team of 120 specialists that intends to complete 20,000 BRC inspections each year. “They are looking for evidence that contractor businesses have a system in place for creating and maintaining good quality business records,” explains Paul Gough of contractor accountant Intouch Accounting.
“Contractors who either keep detailed paper records or are using a contractor accountant that provides an online system for recording, updating and maintaining business records should have little to fear from an investigation by HMRC,” he adds.
What are HMRC’s Business Record Checks?
According to Gough, HMRC’s Business Record Checks campaign is designed to ensure that the UK’s small to medium sized enterprises (SMEs), including contractor limited companies, are keeping good quality records that can be used to calculate taxes accurately.
But he warns that the penalties are steep for contractors who don’t comply: “HMRC initially justified its BRC campaign by claiming it wanted to help Britain’s businesses to keep better records. Those companies who were inspected as part of the campaign’s pilot and kept inadequate records were offered advice and guidance, but not fined, despite errors in 44% of cases and 12% judged as “seriously inadequate”.
“However, things are changing,” he continues. ”Companies keeping poor records now face fines of up to £3,000 and run the risk of subsequent VAT, employer compliance and other investigations.”
HMRC is mainly targeting new businesses, so Gough urges people who have recently become contractors to secure the services of a contractor accountant from the outset to ensure they create and maintain high quality records.
Best practice recordkeeping for contractors
“HMRC probably won’t be looking at a contractor’s VAT returns, payroll or paperwork such as tax returns and board minutes,” says Gough. “It is interested in prime accounting records on which tax returns, VAT and payroll are based.
“If the prime accounting records are a mess, it is very likely that the inspection will snowball into a VAT and Pay As You Earn (PAYE) compliance review, and possibly also an IR35 investigation.”
Gough’s good recordkeeping checklist is as follows:
- Invoices: record all invoices in a numbered list as they are issued to clients or agencies and keep copies. The copies can be hardcopies or in electronic form, such as PDFs
- Purchases: list and keep the supplier invoices for larger items such as computers and office equipment, but also record items such as accountancy fees, memberships, books and subscriptions. Electronic versions can be kept instead of hardcopies, but they must be legible
- Expenses: these include day-to-day expenses such as subsistence and travel. Keep all expenses receipts, either the originals or scans, and complete expenses forms regularly. If running a car or claiming mileage, keep a mileage log
- Petty cash: Few contractors run a petty cash book, but if the company has petty cash, run and routinely update a cashbook.
Gough says: “Contractors using a contractor accountant’s online system will find most of these processes are handled automatically. And if a contractor does keep scans of receipts and other records, they should maintain a regular backup, preferably off-site.”
Contractors who either keep detailed paper records or are using a contractor accountant that provides an online system for recording, updating and maintaining business records should have little to fear from an investigation by HMRC
Paul Gough, InTouch Accounting
He also stresses that contractors must retain all their business records for at least seven years: “Different taxes require taxpayers to keep records for longer or shorter periods. If a contractor retains everything for seven years, and this can mostly be done electronically, it will cover all eventualities.”
Business Record Checks: how the process works
Because HMRC is focusing on new businesses, the chances of established contractor limited companies coming under the spotlight is slim, as there are around 20,000 BRCs each year out of a pool of about 2m companies currently trading in the UK.
“Despite scare stories circulating in the media, HMRC can’t turn up at a contractor’s house and demand entry. They will send a letter first, which the contractor should bring to the attention of their accountant immediately,” explains Gough. “This is because in many cases, particularly if a contractor’s records are stored electronically, a contractor’s accountant will be able to deal with HMRC’s requirements via correspondence, so an actual visit might not be necessary.”
And if a visit is necessary, then most contractor accountants will be happy to host the meeting with HMRC at their offices, if the contractor is uncomfortable about inviting the taxman into their home. Having their accountant present at any meeting with HMRC can also minimise the chances of HMRC going on a ‘fishing expedition’, in which informal answers to seemingly innocuous questions could place a contractor at risk of an IR35 or full-blown tax investigation.
Gough concludes: “Creating and maintaining good quality business records is not an onerous task. So contractors should have few concerns, and little chance of a fine, if HMRC decides to investigate.”