Understanding the good books…..

It seems that our friends at HMRC are using a trial scheme aimed at looking into whether SMEs are keeping adequate books and records to investigate other potential tax misdemeanours. A report in the Telegraph claims that far from being a pilot scheme designed to test out the checking process HMRC staff are already threatening to delve into the tax affairs of those it suspects of wrongdoing.

Naturally HMRC deny that this is the case. However the fact remains that once the pilot scheme is over HMRC will almost certainly be knocking on the door of tens of thousands of small businesses to check their accounting is up to scratch, and will no doubt seek to extract suitable penalties in cases where inadequate books and records have led to underpayment of tax.

Is this a cause for alarm? Hmm, that depends doesn’t it? If you have been keeping proper books and records you should have nothing to worry about, right? Well up to a point m’lud, up to a point.

It has been a constant source of amazement to me how poor some of the bookkeeping and accounting that I come across has been. As a part time finance director I normally start to get involved in a company some time after it has started to trade, and much of my initial work often involves unpicking a number of historical accounting and bookkeeping errors, in order to ensure that meaningful management information is available and that a clean compliant set of books exist should an opportunity to raise further funds or sell the business arise.

Well that’s understandable I hear you say. Entrepreneurs are rarely interested in bookkeeping and accounts. They are interested in finance (or raising it), they like cash and they have a reasonable idea of profit and pricing of their key products, but tidy books are not normally high on their list of priorities.

And yet that is not always the case. Many of these businesses have used bookkeepers and accountants from the start and they are still in a mess. To be fair, it is often the case that the management of the business simply do not listen to what their accounts team is telling them. However I think there is another key reason why problems arise in this area.

Bookkeeping is more than just maintaining books and records. Good bookkeeping and accounting requires an understanding of what those books and records are actually saying about how the business is performing and where it is going. Many businesses have their accounts prepared by people who simply do not have the ability to provide this support and advice.

Whilst it is clear that HMRC’s reasons for pushing this compliance review are tax revenue driven, there could be a positive side to all this. Ultimately it is in everybody’s interest to improve financial record keeping and reporting. Businesses that have good financial records and management reporting systems have a much better chance of survival. The benefits of doing so will go beyond keeping HMRC happy and off of your back.