TaxPersonal TaxExamination of business records

Examination of business records

Whether investigating a pre self-assessment period or performing a full self-assessment enquiry, it is likely that the Inspector will wish to review the underlying books and records of a business. Support is often provided to an Inspector by qualified accountants working within the Inland Revenue. This leads to a greater understanding of accounting systems, and enables the Inland Revenue to draw relevant and useful information from these reviews.

When will the review be undertaken

For pre-self assessment periods, under the 1977 Agreement between the Inland Revenue and the Consultative Committee of Accounting Bodies, a review should only be requested in the early stages under exceptional circumstances.

Under self-assessment, a full enquiry will generally involve a comprehensive review of the underlying records’. In contrast to the previous regime, this would normally take place at the beginning of an enquiry.

Why does the Inland Revenue want to review the records?

A records review will normally be performed in order for the Inland Revenue to:

a) identify how the business works;

b) identify how the recording system works;

c) identify whether that recording system reflects accurately all business transactions;

d) follow up particular grounds for dissatisfaction;

e) if there are errors or omissions in the recording system, to either quantify them, or obtain information to compute profits in some other way, such as Business economics models.

Is the Inland Revenue entitled to review the records?

Click here for details of the Inland Revenue’s formal powers, or here for information concerning the provision of private financial information.

Where should the review take place?

The Inspector would generally prefer to undertake the review at the business premises. This helps the Inland Revenue by:

a) giving access to the people responsible for maintaining the records;

b) often giving access to all records kept, including those that the Revenue is not entitled to;

c) enabling the Inspector to view the business operation and premises, which is only possible by invitation or with a warrant;

d) aiding the understanding of the recording system by observing its relationship to the operational activities;

e) allowing the Inspector to informally speak to other employees;

f) allowing the Inspector to look at the computerised financial recording system in operation.

For those under investigation having Inland Revenue officers on site, possibly for several days, may have a detrimental effect upon the smooth operation of the business. Potential problems arising might include:

a) disruption to staff;

b) unauthorised staff knowing that the business is under investigation;

c) customers/clients knowing that the business is under investigation;

d) giving the Revenue access to unauthorised staff;

e) giving the Revenue access to records/information to which they are not entitled.

The Inland Revenue cannot insist upon visiting the business premises unless a warrant is held. It may be better to send/deliver the relevant records to the Inland Revenue, or to arrange for the review to be carried out at the taxation advisor’s offices. Bear in mind, though, that the Inspector may see this as a sign that there is something to hide, so each situation should be considered on its own merits.

If the records are too voluminous to transport, then there may be no choice but to allow the review to be carried out at the business premises. The following precautions may help to manage the situation effectively:

i) ask the Inspector in advance for a detailed list of records that are required for review, so that they can be sought out in advance;

ii) if problems/errors are foreseen, consider the need for a prior review by business personnel or taxation advisors, with a view to making a disclosure to the Inland Revenue should any irregularities be discovered;

iii) if possible, ensure the Inland Revenue officers have the use of a room that is isolated from non-authorised employees;

iv) ensure that only authorised employees answer questions from, or even come into contact with the Inland Revenue officers;

v) consider not giving direct access to a photocopier; allocate a member of staff to do any photocopying required so that full details/additional copies may be taken of any documents the Inland Revenue officers take away with them.

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