The move was condemned by Conservative backbenchers and business
groups who warned it risked bankrupting some businesses and harming
the already depressed economy.
They said it went against a pledge by ministers to cut red tape
for companies during the recession and added the arbitrary nature
of the unannounced checks amounted to "harassment". "Despite the
worsening economy, HMRC is launching this scheme regardless of the
consequences," said John Walker, national chairman of the
Federation of Small Businesses.
"We have spoken to HMRC and expressed our concerns about this a
number of times. But as far as they and ministers are concerned it
is a policy aim to make this happen.
"There is a huge difference between the rhetoric of the
Government about helping small businesses and what it is doing in
reality." Under the plans, up to 20,000 small businesses including
restaurants, builders, manufacturers and IT companies will face
spot checks on their record keeping.
They will be expected to show receipts for income and
expenditure dating back years to back up their tax returns. Those
who are unable to do so will face fines of up to £3,000 which
business leaders warn could be enough to push some firms into
insolvency.
During a pilot exercise last year, 12 per cent of the businesses
examined were judged to have record-keeping practices that were
significantly sub-standard. If the same percentage was found to be
at fault in the full checks total fines could reach £15m. While
inspectors have room for leniency, the federation says that revenue
officials take a far tougher line with firms unable to employ
high-powered accountants to argue their case than with large
companies.
The plan is also causing considerable unease among Conservative
backbenchers – who believe it undermines David Cameron and George
Osborne's pledges to support small businesses.
Priti Patel, the Conservative MP for Witham, said around 80 per
cent of her constituents worked in small and medium-sized
enterprises and she had dealt with numerous examples of what she
described as "harassment" by HMRC.
"This is the persecution of small businesses at a time when they
are already facing a very, very hard time," she said.
"The attitude of HMRC to small businesses is frankly disgraceful
when they are blatantly doing deals with large firms which have
allowed them to escape millions of pounds in tax liabilities. It
seems as though HMRC sees small businesses as low-lying fruit to
meet their targets. That kind of persecution is outrageous."
Anne-Marie Morris, the Conservative MP for Newton Abbot, a
member of the all-party group on micro-businesses, said she was
increasingly concerned about HMRC's attitude to small
businesses.
"There used to be a different ethos at the revenue where they
would look on minor errors sympathetically, but that appears to no
longer be the case, and very small businesses are being treated in
the same way as larger ones with better resources.
"It is simply not practical for a company employing just a few
people to spend huge sections of their day on administration as
well as getting their firm off the ground. This is particularly
true when you're coming out of a recession."
Last night a spokesman for HMRC said the plans would be subject
to a review following problems with the pilot project and played
down the threat of fines. "Following consultation with
representative bodies, HMRC has started a detailed review of the
business records checks project," they said.
"HMRC recognises that the pilots have caused considerable
concern to the tax profession, and that the project would have
benefited from more detailed consultation with tax professionals at
an earlier stage.
"In the light of these concerns, HMRC will undertake a review of
the project, in consultation with the professional and
representative bodies.
"The purpose of the review is to consider the overall aims of
business records checks, examine whether the current approach is
the best way of achieving the policy objectives, and identify what
changes are needed to ensure that the objectives are achieved.
"In the meantime, HMRC will continue with a limited number of
business records check pilots, and the results will be evaluated as
part of the review."
But the shadow Business Secretary Chuka Umunna said: "As the
Public Accounts Committee has highlighted recently, there are real
concerns over the way HMRC has reached settlements with some large
firms, as well as the accountability and transparency of its
decision-making.
"The committee said that HMRC has left itself open to suspicion
that relationships with some companies are 'too cosy' and that
small firms had not been given the same service as larger firms.
These concerns must be addressed immediately to restore trust.
"It is crucial that HMRC act in a fair and proportionate way
with both large and small firms, particularly given the pressures
which many businesses are facing at present. It needs to work
alongside small firms, most of which do not have a dedicated
finance officer, in helping ensure they meet their tax obligations
in full."
Small business praise... big business favours
Recently there has been a deluge of political rhetoric about
the importance of small business, while the Revenue has been
accused of letting the big boys off lightly...
"There are a range of bodies responsible for inspection (of
small businesses). And they need to undergo this cultural change
too. They need to understand their job is to make your life easier,
not harder." - Nick Clegg, October 2011
"We want to make the UK the best place to start, finance and
grow a business." - George Osborne, September 2011
* The Permanent Secretary of HMRC, David Hartnett, supervised
and signed off a deal that saved Goldman Sachs around £10m in tax.
The revelation only came to light after a whistle-blower exposed
the "sweetheart" deal.
* Vodafone settled a long-running dispute with the revenue by
paying £1.25bn, but a Commons committee heard allegations the tax
bill should have been £6bn or more. The committee suspect there may
be other questionable deals among £25bn of outstanding tax
disputes.
* A review of the Pay as You Earn system for collecting tax
concluded nearly six million people had been paying the wrong
amount, with about 1.4 million facing demands for, on average,
almost £1,500 each.
Case study: 'This is an extra burden I could really do
without'
Daniel Price set up his personalised baby gifts company
My1styears.com in 2010 from a tiny office that housed his small
workforce as well as equipment. Six months later he expanded into
a separate distribution centre in Mill Hill, north London
"This move by the tax man is very unfair on small firms because
it's going to send the cost of doing business through the roof.
"We only have four directors and employ six staff and do
everything we can to follow the tax office's rules, but this is
just an extra burden that will be a lot more work for us. It will
also take up more of our time, which is certainly going to be a
hindrance to growth.
"There's more stress involved too – the ultimate fine might not
be huge but it would affect our bottom line. We're providing jobs
and paying tax to the UK economy at a time when everyone is
struggling, but the government doesn't seem to appreciate that.
"Meanwhile big corporates like Goldman Sachs and Vodafone can
spend money on avoiding tax. David Cameron spoke today about the UK
seeing more start ups to boost growth – but that's difficult when
we've got all these burdens imposed on us.
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