Given the current fiscal climate it is perhaps not surprising then that HMRC is pressing ahead with its plans to introduce unannounced compliance spot checks on the SME sector.

Over the next six months, HMRC will be trialling a new single compliance process - which will cover enquiries across a range of different taxes - across ten areas within the UK. Subject to the results it will then be rolled out county-wide. The spot checks are expected to see some 50,000 small businesses visited and face the threat of fines of up to £3,000 on those whose records do not meet minimum standards.

With the threat of fines looming it is now more important than ever that small business owners are pro-active in getting their books in order, especially as poor record keeping is also one of the top five reasons why small businesses fail.

So what do you need to do to ready yourself for a potential spot check from the HMRC? In the words of HMRC "You must keep records of all your business transactions." 

While sole traders and partnerships with a turnover of less than £15 million are no longer required to submit their accounts along with their tax return, as all the required information will be captured in the ‘Standard Accounts Information' (SAI) part of the return, this is by no means a ‘get out' clause. If HMRC have any queries with the tax return, they can ask to see all your associated records and documentation, including all issued and received invoices and receipts.

The types of records you need to keep will vary depending on the type of small business you are, for example if you have employees and also whether you are VAT registered.  It is worth noting that if HMRC find that you have not kept all the required records, or you have not been keeping records for long enough, you could find yourself facing a fine. 

While there are a number of online resources available to support you on the specific types of records you should keep, a quick check list should include:

  • A cash book
  • A petty cash book
  • A sales and purchase ledger
  • A wages book
  • Invoices and receipts both issued and received
  • Electronic records of sales or till rolls
  • Details of items not rung through the till
  • Details of incidental or miscellaneous income - for example rent for accommodation owned by the business
  • Hire purchase and leasing details
  • An inventory of stock on hand at the end of the accounting year
  • Bank and building society statements, pass books, cheque stubs and paying-in slips which include details of business transactions
  • Details of any money taken out of the business personal use
  • Details of any private money brought into or taken from the business

Ultimately, getting into and maintaining good bookkeeping habits is crucial to both passing an HMRC spot check and running a successful business. As well as setting aside dedicated time each week to review and update your books, small business owners should make sure this time is spent in the most constructive way, for example by using financial management software to automate and streamline the process. This will not only to help you track your expenses in real-time and manage cash flow but mean that should the HMRC knock on your door you can quickly and efficiently be accountable for your record keeping.

Diana Flier, Compliance Expert, Intuit UK