Tax Enquiry Question

System
System Posts: 100,537 🤖 Admin 🤖
edited June 9 in General accounting discussion
I have a client who is under investigation by HMRC for his 2004/2005 Return (he is a persistent late payer). During that year he deposited £8,000 from a private loan into the business but cannot prove this. Obviously the "tax man" wants to class this as earnings. However, the "tax man" is also asking that similar amounts be charged against the past 3 years' Tax Returns. How can my client argue that this was a one off?

Comments

  • System
    System Posts: 100,537 🤖 Admin 🤖
    Re:Tax Enquiry Question

    Get written confirmation from whoever lent him the money. If it was a friend/family member get them to provide a copy of their bank statement showing the funds coming out as well for a watertight defence.

    Providing your client is telling the truth, it shouldn't be too hard to prove.
  • System
    System Posts: 100,537 🤖 Admin 🤖
    Re:Tax Enquiry Question

    Thanks. That is exactly what I told my client. However, he claims that the person who lent him the "cash" does not want to be named. I have now written to my client telling him to get written documentary evidence or he could face this extra tax liability in this and previous years. Is this how you would handle this?
  • System
    System Posts: 100,537 🤖 Admin 🤖
    Re:Tax Enquiry Question

    I think that is a good way to handle it. At the end of the day, you can only advise your client of the best way to respond to an enquiry for a quick and equitable conclusion.

    It is then for your client to weigh up the pros and cons of revealing further details as to the source of the loan.

    I would also suggest playing hard ball with HMRC and tell them that the £8,000 was a loan and that is the end of it.

    If they go to the commissioners then that is probably the time to have a long hard chat with your client about the cost of keeping his friend's anonymity.
  • System
    System Posts: 100,537 🤖 Admin 🤖
    Re:Tax Enquiry Question

    Sorry to be a bit naive here, but if he holds the firm line that it was a loan, but he is not prepared to divulge the lender, what happens if he asks for it to go to appeal and commissioners. Does he really stand any chance of winning?
  • System
    System Posts: 100,537 🤖 Admin 🤖
    Re:Tax Enquiry Question

    Well that's the stage at which he needs to consider his case in more detail.

    If he is absolutely not prepared to give any details of the lender then his chances will depend largely on what other evidence he can provide that the £8k was not trading income.

    Perhaps look at his work pattern around that time. Did he already raise a significant number of invoices around that time that would suggest the £8k wouldn't have been for work? Is £8k an amount similar to the size of jobs he does? Has he made any repayments of the loan since?

    It is possible that he could persuade the commissioners that is was a loan without giving full details but why take the risk?

    I think the chances of HMRC then looking into the lenders affairs as a consequence are pretty slim.
  • System
    System Posts: 100,537 🤖 Admin 🤖
    Re:Tax Enquiry Question

    Work pattern. Yes thanks. His invoices range from £400 to £5,000 generally, so that maybe a good place to start, plus the timing with workload. Thanks again, I will check this out.

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