I have real concerns - HMRC - lost records

english21

I own and operate a small Limited business that I started from scratch in 2003. Annual sales last year were £1.1m.

I have always had my accounts produced by my accountant and filed with both Companies House and HMRC by the appropriate time each year.

Two weeks ago ALL of the supporting paperwork literally went up in smoke!! Our garden shed where all of the paperwork was stored burnt down.

That's all the invoice books, purchase invoices, cash receipts etc. Up until week commencing the 24th May of this year the business was operated without an accounting paackage. We were a manual paperwork business.

So I am left with a situation where as a small business owner, excempt from audit under the Small Business Act, with accounts filed each year, with no paperwork to prove the accounts are correct.

I am not under investigation, but what happens if at some point in the future I am?

Do I inform them now what's happened?

What are the implications of not having the records?

Anybody with any experience or knowledge in this area, please advise.

Rainey_LB

A few years ago my OH van was stolen, at the time he was a sole trader and had a lot of paperwork and receipts in the van which we needed to claim for, as we could prove the van was stolen (from the police reference number and insurance claim etc) HMRC were very good about the whole situation and accepted estimates for the period, just had to forward copies of the insurance claim and police report etc with the self assessment.

It's not on the same scale as your loss, but things like this happen, we also couldn't find a previous years tax return one year so I contacted them and they sent us a copy (it did later turn up, filed in the wrong year!).

roger196

Has your accountant kept any records. Did he perform any from of audit. What are his qualifications and how credible is he ( don't answer this in public but HMRC have a pretty good idea of which accountants are worth believing). Did you complete VAT returns. A copy of these could be obtained from HMRC. If you ask them you put them on alert....
Ask your accountant how he will be qualifying the accounts.
I am assuming this is the first time your records have gone up in smoke.

english21

The accounts weren't audited, as a Limited company below a certain level of turnover is excempt. (Not sure of the actual figure but it's a few £million.)

The accounts are then produced by my accountant based on information that I supply them, and advise them to be true. It's my legal responsibility as a Co. Director to do this, BUT the accountants DO NOT audit the data supplied.

So, if I state that my sales are £1,000,000 they take that as true.

My point is this, if HMRC want to now audit my accounts, only the final accounts are available, based on all info and receipts supplied to my accountants. They are reputable, efficient and been around for years. They are Chartered and everything is by the book.

I think that the records are lost to support the accounts is not ideal, but as the fire was attended by the fire brigade, and accidents do happen, I think that it should be OK?

Any other thoughts gratefully received.

Pennywise

You have to look at the big picture as to how HMRC operate - hopefully your accountant will give you some proper advice about it - they're who you should be asking as they know your affairs. But definitely don't even think of telling HMRC what's happened - you're putting your head above the parapit and they're likely to see you as an easy target.

But, basically, the chances are very slim that you're going to be subject to an enquiry or investigation. There are two main routes to an investigation:-

HMRC visit a tiny proportion of businesses to check their basic compliance such as VAT and PAYE - they "risk assess" and will only visit businesses whose returns look "out of kilter" with others in that industry, or vary widely from one return to another, or are in "high risk" industries such as those dealing in cash (shops, market traders, pubs, takeaways etc). As each month passes, your less likely to have a problem as when they eventual call, you'll have some returns with supporting paperwork to show them - say in a years time!

HMRC also select some businesses based upon their submitted annual accounts and tax returns - sometimes randomly, other times because of intelligence they hold, sometimes because your returns look "strange" compared with other similar business or prior returns. This is more of a problem as it's going to be another year at least before you have a full "year" of returns and accounts supported fully by prime records, but again, in 2 years time, you'll have a return that's clean.

With passage of time, HMRC will have properly supported returns and won't have reason to look back to earlier years (as long as they find nothing in the later years!) So basically, keep your head down and watch as time passes - with each passing day, you're less likely to have to face the consequences of the lost records.

If the worst does happen and you get a compliance visit or investigation into a year for which your records have been destroyed, you have to face it head on. Firstly, make full disclosure to HMRC as soon as they make contact with you - give them a copy of the fire brigade incident report to prove it. What happens next will depend on how the tax inspector views your submitted returns and any intelligence he has, such as percentages out of line with industry standards, appearance of taking too much/too little out for drawings, etc. Some reliance may be placed on your accountant - i.e. if they saw your basic records, i.e. invoices etc., the tax inspector may accept a degree of comfort from them. Almost certainly, HMRC will expect some form of reconstruction of the lost paperwork, i.e. expect you to obtain copy bank statements, copies of invoices from major customers/suppliers, etc - you'd be surprised how much can be reconstructed when you have to! At the end of the day, the tax inspector has to have grounds for claiming that there's underdeclared profits - if your percentages stack up, if your living standards stack up, if comparisons with other similar buinesses stack up, if he can get some assurance from your accountant, etc., then he doesn't have such grounds and shouldn't raise additional assessments. Your main worry is where your numbers don't make sense, i.e. lower margins or higher overheads than comparable businesses - declared low profits with an above average lifestyle, accountants only seeing your computer printouts, not the underlying paperwork, etc etc., then you could be in trouble!

But, as I started this thread, talk it all over with your accountant - you need them 100% on board and committed to help you whatever happens.

english21

Many thanks Pennywise for your detailed and informative answer. It's really refreshing that you took the time to answer my concerns, and advise me to the options and possible ramifications of what could happen concerning lost records.

Cheers.

tyllwyd

Did your bank statements get destroyed as well? Would it be worth checking with your bank how many years statements they can provide just in case it would be worth ordering paper copies of the statements now, rather than waiting for a few years when it might be more difficult to get hold of them.