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HMRC internal manual

Compliance Operational Guidance

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HM Revenue & Customs
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Supporting Guidance: business records checks: critical definitions: examples for adequate records of receipts

Please note the examples below are for Business Records Checks purposes only, and should not be used outside this context.

Example 1 - Domestic Oven Cleaner - Angela

Scenario Details
   
Facts Angela is a self employed domestic oven cleaner who makes visits to householders. She charges a set price, regardless of the size of the oven to be cleaned. She visits on an appointment basis only. She does not keep a separate business bank account and does not regularly bank her takings. She maintains an appointments diary which details the name of the customer, the address visited and the make of the oven cleaned. At the year end she calculates her takings by listing out all the appointments made and then applying the standard charge.
     
  Facts -Analysis In this scenario the records kept by Angela are adequate for the purposes of ensuring that income is completely recorded. The particular nature of Angela’s business and customer base is such that all appointments are pre-booked and it is unlikely that there will be any passing trade which falls outside this process for recording income.
     
  Alternative Scenario 1 If during the visits Angela also did ad hoc work for cash such as freezer defrosting or sundry household cleaning, then there would be income received that was not recorded through the combination of the diary/price list. She would need to maintain a further record over and above the appointments diary so that this income could be quantified for later inclusion in the return. If no such record was maintained the records would then be inadequate.
     
  Alternative Scenario 2 If the work done by Angela was not a set price, and she varied her charges dependent upon the size of the oven cleaned, then a diary alone would not be sufficient. Angela would need a record to show how much she charged for each job if her records were to be considered adequate.
 

Example 2 - Window Cleaner - Bernard

Scenario Details
   
Facts Bernard is a self employed office window cleaner. He cleans the windows of several different offices belonging to local businesses.
All customers send a bank transfer to Bernard’s personal bank account each week. His record of income is his monthly bank statement.    
  Analysis The remittances for the takings all go to the bank account. The summarising of the information from his bank statements will ensure that this income is completely recorded and will be adequate for tax purposes.
  Alternative Scenario 1 Bernard receives income by way of cash and bank transfers. His established practice was to place each day’s total cash takings (for example not having used the cash to fund either drawings or expenses) into the overnight safe at the bank whilst he was en route home. His record of income is his bank statement. All his business expenses and private drawings were subsequently funded by amounts paid out of the bank account.

In this situation, the records would be adequate as the bank account would provide a complete record of cash takings.

     
  Alternative Scenario 2 Bernard receives income by way of cash and bank transfers. He does not bank all of his cash takings and uses this to fund some of his business and personal expenses. His record of income is his bank statement.
In this situation the records would be inadequate as the bank account does not give a complete record of his income.

Example 3 - Landlord - Cecil

Scenario Details
   
Facts Cecil owns a block of 12 flats. Cecil has a separate business bank account. Tenants pay their monthly rent in advance on the first day of each month. All remittances from customers are paid directly into this account by BACS transfers. During the course of the year Cecil does not write up any books at all. At the year end he collates all the bank statements and from these summarises the receipts to ascertain his income.
Analysis Although Cecil does not directly maintain any specific books for income during the course of the accounting period, he has in place a system for ensuring that all the income goes into a specific bank account. This bank account will in itself provide an adequate record of his income. A key factor here is that the customers settle their accounts through bank payments. There is minimal scope for income not to be identified and therefore the approach is adequate - notwithstanding the absence of any books written up during the course of the year.
Alternative Scenario Cecil has some tenants who do not have bank accounts and instead pay in cash, the tenants’ payments sometimes being on account when their cash flow is tight. Some of the receipts will not be flowing through the bank account. The records would be adequate if Cecil then kept a supplementary record such as a rent book, to record the rental paid in cash. The records would be inadequate if there were no such record.

Tenancy agreements often provide details of rates charged and periods of occupancy. Although these do not always exist, it is likely that where they do, they may provide an adequate record for the customer.

 

Example 4 - Gardener - Derek

Scenario Details
   
Facts Derek does gardening work for a number of private individuals. Nearly all customers pay in cash. He uses a receipt book and issues a receipt to all customers which details the date the work was done and the amount charged for his services. He keeps a copy of each receipt that he has issued and this is his record of income.
     
  Analysis Derek has adequate records. The copy of the receipts he issues gives a complete record of his income.
     
  Alternative Scenario 1 Derek only issues receipts to customers who are not in when he finishes the work. He collects the cash from customers who are home when he has completed his work and posts a receipt through the letterbox of those customers who are not. He keeps a copy of each receipt that he issues and this is his record of income.
Derek’s records are inadequate. The copy receipts do not give a complete record of his income as the cash sales are missing.    
  Alternative Scenario 2 Derek counts the cash he has on hand at the end of the week and this net figure is used as the basis of his business records. He knows that he uses some of the cash he receives to pay for various materials in the course of the work for example weed killer, fertiliser, soil. These materials are paid for from the cash receipts. Receipts for these business expenses are retained. At the year end he intends to total up the receipts for materials and record them as both an expense and income.

In this scenario the business records are adequate. The key issue here is that the cash expenditure is added to the figure of income. This ensures that there is a complete record of income.

If Derek also took cash for his own personal use he would need to keep an additional record to show this, so that his record of income was complete.

 

Example 5 - Market Trader - Harry

Scenario Details
   
Facts Harry runs a market stall. He also keeps all of his income in a money belt during the day. Nothing is taken from the belt and at the end of the day the entire contents in the money belt are banked in an overnight safe deposit as he makes his way home. At the year end Harry computes his takings by adding up all the daily bankings.
     
  Analysis Harry’s records are adequate.
     
  Alternative Scenario 1 Each day Harry takes £5 money from the belt to buy his lunch and refreshments. No record is made of these cash withdrawals. When preparing the return at the year end an adjustment is made to add to the banked takings £5 x number of working days and a comparable adjustment can be seen in the workings or the previous period’s return. The business records would be adequate as there is an appropriate methodology to measure total receipts.
     
  Alternative Scenario 2 Harry takes varying amounts out of the money belt, for example to pay for birthday presents and other shopping. No record is made of these amounts that have been withdrawn. Given that the amounts he spends vary, the methodology described in alternative scenario 1 would not be capable of addressing the situation. The records are not adequate.
 

Example 6 - Retailer - Evelyn

Scenario Details
   
Facts Evelyn runs a small shop selling electrical goods. All takings for the sales of goods are rung through a till that she bought when the shop opened. As she is so busy at the counter and in the store room she has no time to write up any books during the course of the year. However, at the close of each day she prints off a ‘Z’ reading from the till and compares this reading with the cash in the drawer. She notes any discrepancies found on the ‘Z’ reading. These dated readings are stored in a box and added up at the year end to provide a figure to be returned for takings. Evelyn does not regularly bank the money, instead using the cash on hand to pay for her day to day expenses. If and when there is a larger amount of cash on hand than is sensible to keep in the shop she will go to the bank and pay into her private account whatever is on hand at that date. At the end of the year Evelyn adds up the ‘Z’ readings for the year to calculate her takings. If there are discrepancies between the figure in the till and the ‘Z’ reading, she takes the higher figure, ‘just to be on the safe side’.
     
  Analysis Evelyn’s records are adequate. She has an established process for capturing details of the income. The sequence of annotated till rolls will provide a complete and continuous record of what the business has taken in. Because the total takings are already being recorded via the till rolls, there is no requirement for any separate record of drawings in respect of the amounts paid into her private account.
     
  Alternative scenario Some goods are also brought in for repair. These goods are then sent to Timothy, a local electrical repairer. She collects the money from customers for these repairs, putting them into a cash box. Timothy calls round when collecting/returning goods he has worked on and is paid 90% of the amount in the cash box. Evelyn retains 10% of the cash received by way of commission.

In order for the record of receipts to be complete there needs to be a process for recording the 10% Evelyn receives in respect of repairs. This could include ringing the 10% retained through the till at the time that Timothy collects his funds, or alternatively, a separate receipts book for the repair transactions which is at a later stage incorporated into the process of preparing the return.