Business News
What does HMRC specifically look for in financial reporting?
Directors Private Expenditure
There can often be situations where a company will meet the cost of certain private items for its Director; this is particularly the case with small to medium sized businesses, such as road tax or car insurance.
Your bookkeeper should be especially careful with these types of expenditure as they should be included within the Director’s current account and not charged against profit.
In some cases the additional tax charge may be minimal, but in others such as large one-off debits to the profit and loss, the additional tax charge and appropriate interest could be sizeable if the person preparing the financial records has not assessed the overheads properly.
Directors Reports
Currently, legislation requires that a full copy of the financial statements should be sent to HMRC and under the Companies Act, the Directors of a company are required to include a full Directors Report with the statements.
HMRC can, and often does, reject a set of financial statements if they do not include a Directors Report.
For companies classed as ‘small’, the Directors Report will normally just outline the principal activity of the company during the accounting period in question, together with the details of the Directors who have served on the board during that period.
For larger companies, much more information is required within the Directors Report, such as business reviews and the disclosure of creditor days.
P11D Benefits
Any enquiries into a company tax return will usually involve the tax man asking for a breakdown of various accounts. In some cases, these enquiries could reveal benefits being provided to employees that have not been recorded on the form P11D, e.g. fuel or meals.
VAT Returns
Companies that use computerised accounting systems such as SAGE can often use the incorrect VAT code in terms of classifying expenses between zero-rated VAT and VAT exempt.
It is often the case that items which are beyond the reach of VAT will be processed as zero-rated.
Whilst this does not have any direct effect on the amount of VAT payable or refundable to HMRC, what it does overstate is the net values of sales and purchases. Such occurrences could well be classed as a mis-declaration in the event of a compliance review by the tax man.
Audit Exemption
Whilst HMRC do not directly deal with Company House issues, in a number of cases businesses have claimed exemption from audit even though they are not entitled to it.
Claiming exemption from audit when not entitled is classed as a breach of the Companies Act and will not go unnoticed.
Audit exemption is normally based on the ‘two out of three’ size limits test – turnover, balance sheet total and number of employees. The test is used to decide whether a company is classed as ‘small’ and therefore exempt from audit.
If one of the three limits is exceeded then the company will normally be audited; similarly if the business is a member of medium sized group or larger company holding.
Research and Development Costs
Research expenditure should be written off to the profit and loss account as and when they are incurred.
Development expenditure can be capitalised if some strict criteria are met – technical feasibility, intention to complete, sufficient resources, etc.
In some circumstances, companies write off expenditure that the eagle eyed HMRC accountants consider to be classed as development. Again, if HMRC deem the items to be written off, additional penalties and tax could be applied.
HMRC Assistance
HMRC’s new compliance regime now means that is more important for the financial statements of an incorporate or unincorporated entity right from the offset to avoid penalties and interest being levied against it.
HMRC recently launched a new range of toolkits which are designed to highlight the most common hotspots, the primary objective being to reduce the number of errors and direct their attention towards those who deliberately fail to pay the correct tax.
It remains to be seen exactly how they will dish out the new penalties, but rest assured, those who wilfully underpay could face investigation and in turn penalties.
