Books and Records
Bloomsbury Professional Online
Extract from “HMRC Investigations Handbook 2017/18”
A person must keep all such records as may be requisite for the purpose of enabling him to make and deliver a correct and complete return (TMA 1970, s 12B(1); FA 1998, Sch 18, para 21(1)). In the case of a person carrying on a business, such records must include records of the following (TMA 1970, s 12B(3); FA 1998, Sch 18, para 21(5)):
- 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.
The impending introduction of ‘making tax digital’ is likely to add to existing obligations in many cases.
The records must be retained until the fifth anniversary of 31 January following the end of the tax year (the first anniversary for non-business records) or, if later, the completion of any HMRC enquiry. In the case of a company, the records must be kept for six years after the end of the accounting period (or the close of any HMRC enquiry, if later).
It is a question of fact what records ‘may be requisite’ for the purpose of delivering a correct and complete return. Unless and until it is demonstrated that the return is not correct and complete, there is a strong inference that the records that were in fact kept satisfy the statutory obligation as they have enabled the statutory objective to be achieved.
Comments in the course of an enquiry that the HMRC officer considers the business records to be inadequate should be approached in the context of this statutory requirement. The records a taxpayer needs to keep are those that he considers appropriate, not those which the officer considers appropriate.
The HMRC officer has no real knowledge of either the needs of the business or the abilities of its staff. Records that a person finds easy to keep are likely to be more accurate than more complex records that he finds difficult to complete. It is possible that HMRC officers may expect records to be kept that are inappropriate to the circumstances of the particular business.
For example, if cheques received are entered into a cash book and copied from there to a paying-in book, and the bankings agree with the cash book, it is hard to see any justification for keeping the paying-in book, as that is not the prime record but is something prepared simply for the bank. Even if the paying-in book is completed first, it is difficult to see why it should form part of the records under s 12B once it is ascertained that the bankings agree with the cash book (although in that case it may be a supporting document).
Similarly, cheque book stubs are unlikely to come within s 12B if they are not the prime document.
HMRC will generally expect owners of cash-based businesses to retain till rolls, and may consider that failure to do so breaches statutory record-keeping requirements. However, in Newell t/a Tanya’s Takeaway v Revenue and Customs Comrs  UKFTT 742 (TC), the taxpayers invariably transferred the information from their till rolls to a Simplex book each day. The First-tier Tribunal considered that the taxpayers had generally met their statutory obligations by doing so (by contrast, see Dosanjh v Revenue and Customs Comrs  UKFTT 973 (TC)).
HMRC officers sometimes contend that the use of estimates breaches the requirement of s 12B. If the starting point for taxable profits is accounts prepared in accordance with GAAP (generally accepted accounting practice) and if GAAP permits estimates, that contention cannot be right provided that the estimate can be justified under GAAP. Accounts that satisfy GAAP also satisfy the test of being correct and complete (subject to any adjustments required by law).
Of course, if HMRC amends a taxpayer’s return it is then up to him to justify any estimate used, but that is a different obligation from the record-keeping requirement.
For PAYE purposes, employers are required to keep specified records. For VAT, income tax, capital gains tax and corporation tax the requirement is for taxable persons to keep adequate business and accounting records. Adequate does not mean excessive or prescriptive – it means keeping records to be sure that the right profit, loss, tax declaration or claim is made.
There are penalties for failure to keep appropriate records. One of the key elements in the current framework is the ability to inspect records before a return is submitted if such inspection is reasonably required to check a tax position. The basic requirements in relation to record keeping have not changed, but rules have been aligned on how things are kept. HMRC’s powers include: a generic requirement in primary legislation, the power to make regulations by secondary legislation, where necessary, to specify additional records, and published non-statutory HMRC guidance as to what is likely to meet the generic requirement, tailored to business, non-business and particular cases such as capital gains.
Where there has been a failure to comply with statutory record keeping requirements for self-assessment tax return purposes, HMRC indicates in its Enquiry Manual (at EM4650) that penalties will only be sought in the more ‘serious cases’ (eg where records have been destroyed deliberately to obstruct an enquiry, or where there has been a history of record keeping failures).