Hard on the heels of recent moves by HMRC (Revenue and Customs) affecting several million PAYE taxpayers who had innocently believed that they’d already paid all their tax, only to find some unwelcome brown envelopes arriving in their post, come rumours from some tax specialists that the taxman’s next target will be small and medium businesses.
The logic seems impeccable. With the government about to announce the most swingeing public spending cuts in living memory, the other side of the ’public finance equation’ is obviously to collect all of the tax revenue that is due.
However, whereas the PAYE controversy was in one sense just a ’correction’ of previous errors, the current speculation concerns an apparently renewed determination by the Treasury to ensure that businesses are playing by the rules as far as their basic tax computations are concerned, particularly in areas such as VAT returns and end-of-year profit calculations.
The VAT inspector
Now, on reflection, those readers who’ve been in business for a long time might, however grudgingly, concede that they’ve seen a gradual decline in detailed scrutiny by various tax offices over that time.
For example, anyone who ran a forecourt back in the 1980s or 1990s was quite used to seeing a VAT inspector on site every 18 months or so. Those visits typically took at least half a day, and usually involved a quite detailed comparison of the business bank account and sales and purchase records against the quarterly returns submitted since the last inspection.
If all were generally okay at that level, the visit would conclude with what became almost a ritual dance between the inspector and the proprietor, revolving around small items of expenditure that may have been wholly for business purposes (or not). Namely private phone bills, motor expenses, ’staff lunches’, food stock written-off and consumed on site, etc.
In most cases it was deemed safest to let the inspector score a minor victory on something pretty small so that honour could be satisfied, and then take them for a bite to eat at the nearest hostelry before they could stumble on something more interesting.
Although few will openly admit it now, many accountants took a similar approach to the annual tax submissions for their clients: they would provide a lot of detail in those expense categories which were known to particularly interest tax inspectors (motor expenses, legal and professional fees and the dreaded miscellaneous expenses); agree to some small disallowance demanded by the inspector in one of those areas, and the rest would probably go through without too much more scrutiny.
Over time the VAT visits became less frequent, and many forecourts haven’t seen a VAT Inspector in any official capacity for years.
In some respects a parallel story developed with annual accounts. Generally they seemed to be accepted without requests for further explanation or information unless the Revenue was already suspicious of the trader’s activities, in which case they might just initiate a much deeper inquiry into almost everything.
Accountants spent hours preparing detailed analyses of various expenses only to find that in most cases the revenue didn’t want to discuss them. On both sides the story tended towards ’all or nothing’. Either the basic information supplied by the taxpayer was accepted without further query, or it went to the other extreme and a costly examination of all the figures ensued.
There may well be impeccable logic to having HMRC pay a bit closer scrutiny to the accounts and tax returns of all businesses, with the intention of collecting more tax for the Exchequer.
It’s quite possible that some businesses have fallen into sloppy habits as far as their accounting and record-keeping procedures are concerned, since the chances of anyone ’official’ turning up and demanding to see the books have been pretty slim over the past few years.
Add to that the absence of any kind of financial audit for most small and medium businesses, as well as a tendency for many proprietors of such businesses to dispense with regular professional advice or even experienced bookkeeping staff as an economy measure, and there’s a good chance that their accounts and tax returns are slightly less than accurate.
However, as with all seemingly impeccable logic there’s always one big flaw.
The reason why the frequency of VAT inspections dwindled almost to insignificance, and the Revenue became increasingly relaxed about the quantity and quality of the information they received from thousands of small businesses over the last 10 or 15 years, was simply cost. Such attention required trained, experienced people at HMRC who were able to spend at least half a day per client out in the real world for a VAT visit.
Successive governments have demanded ’efficiency’ meaning fewer staff dealing with more cases, so the priority switched to larger targets that could potentially produce greater financial returns.
Given that the Chancellor is expected to announce yet further cuts in civil service numbers, and assuming that it’s inconceivable for any Conservative Chancellor to announce something as radical as extending financial audit requirements to smaller businesses, it’s extremely difficult to see how the Treasury might expect to toughen-up compliance with tax measures. Still, you never know.
It might just be prudent for some businesses out there to tidy up their accounting and administration, seeking professional help if they don’t know how just in case...before more brown HMRC envelopes drop through the letterbox!