5. You get the expenses they allow / you negotiate

When tax inspectors open a case they look at your expenses and say, “That’s not allowable, that needs to be reduced to 80 percent. And do you get personal enjoyment from this? OK well we will have to reduce that…” When your expenses are eroded your profits shoot up – et voila – HMRC gets a result.

In my case I put in expenses of just under £4,000. Every item was questioned from newspapers and magazines (valid research for a journalist) to my office rent. After a year I was told I’d be allowed just £1,000 of that figure – an unrealistic reduction. I dug my heels in and stuck to my guns; the figure went up to £2,500 and then to £3,000.

Stephen Camm* former Inland Revenue investigator and now head of tax investigations at Price Waterhouse Coopers says this is typical. “In investigative cases there has always been a strong element of negotiation, and it’s likely that the officer saw the offer of £1,000 as a starting figure. Tax investigations are like sport, you need to know the rules: if you play Lacrosse without knowing the basics you are going to get hurt.”

On AccountingWeb accountant Louise says, “I have a friend who recently told me about an investigation she had a few years ago… An inspector had claimed that deductions for motoring were too high, and that a proportion of the expenses for their van should have been disallowed as private.

“My friend and her husband were running a cleaning business, and had a van for work, and a car for private use, so they didn’t use the van for private purposes as it was always full of cleaning materials, buckets, ladders etc. Despite having always employed a qualified accountant, he advised them to just agree to the inspectors demands… as it would be easier all round, and she was unwell at the time so didn’t need the added hassle of taking on her accountant as well as the tax man.

“Unfortunately, by the time the inspector had gone back 6 years, added penalties, interest and the like, they had to re-mortgage their home to pay the final demand. All because they received poor advice – after all, if the van really was 100% business use, which she is adamant that it was, they should have stuck to their guns.”**

*This quote is taken from Nick Morgan’s interview with Stephen Camm for The Sunday Times

** This anecdote comes from Accounting Web and can be read in it’s original context here.