Recently I was asked to prepare a quick list of ten common tax mistakes that business owners should avoid. The length of the article in question didn’t allow me to expand very much on the mistakes I listed.
This is probably the closest I have come to writing about tax matters for over ten years. I shared an outline of the article on Linkedin and invited further suggestions. By and large there was agreement as to my ten points but I have added further examples and commentary below with thanks to the many people who kindly contributed to the discussion thread.
1 – Assumptions
Don’t assume you know how the tax rules will work. Many tax rules, rates and reliefs change each year – sometimes more often. They can be influenced by cases going through the tribunals and courts, by HMRC policy changes and by Government announcements.
Common incorrect assumptions include:
- You have to set up a company if you start a business and you have to trade through a company if you have set one up. – In fact you could just keep the company dormant (and protecting the business name) until you need to operate through a company. In the meantime any initial losses can generate tax refunds by being offset against other sources of income. If a start-up business run through a company makes a loss there is no prospect of a tax refund; instead the company simply pays less tax when it eventually starts to make a profit. Clients tend to prefer tax refunds and do not understand why their corporation tax bills increase suddenly once brought forward losses have been used up.
- Thinking that tax is charged on the profit figures shown on a spreadsheet or in an online bookkeeping system, without any adjustments.
- Owner manager directors assuming they are self employed.
- And some of them assume they don’t need to file personal tax returns regardless of how they extract money from their company – and then there’s all of the related incorrect assumptions around cash extraction too!
2 – My pal in the pub says…
Accountants need to be robust and confident in your advice to people who are tempted to rely on amateurs – no matter how knowledgeable they claim to be. Their tax affairs and circumstances could be quite different.
Common ‘tricks’ shared by my ‘pal in the pub’ include:
- calling drawings ‘wages’ and claiming a deduction for these against taxable profits.
- using the company credit card for personal expenses and ‘putting these through the business’ as no one checks
- find an accountant who doesn’t ask difficult questions and lets you keep cash takings out of the business
- most of the assumptions listed earlier in this bog post
Pals in the pub also tend to perpetuate a longstanding incorrect assumption that just because HMRC haven’t challenged anything that they are happy all is fine. This is not a reliable approach to adopt. Our tax system operates on a ‘process now, check later’ approach.
Firstly, HMRC can start an enquiry at any time up to a year after the return was filed – even if they have accepted tax payments or made tax repayments based on the figures in a submitted return.
Additionally, HMRC can go back and re-open earlier years if they later find you’ve been making mistakes. Yes, I know there are limitations here under the ‘discovery’ rules but these won’t always protect people who have been getting things wrong – other than when these are very obvious on the face of the tax return – which is rare.
Accountants also need to confident in your explanation of the “too good to be true test” for anything that smells like a “tax planning” scheme. If it seems too good to be true – it probably is. Getting involved can be a very expensive mistake and cause serious damage to the reputation of a business, the business owner and potentially the accountant too.
3 – Treating your accountant as a tax expert
Some are. Some aren’t. But they should know where to turn if you have a tax problem they aren’t familiar with.
All decent accountants will be aware of what they don’t know and will be willing to admit when a specialist should become involved. This is exactly the same approach followed by local GPs when a patient needs specialist expertise to assist with diagnosis, resolution or an operation.
Tax experts who are members of my Tax Advice Network have also told me tales of how clients have lost out when accountants missed opportunities to claim tax reliefs which could have boosted cash flow. In particular, capital allowances for embedded fixtures in buildings such as HVAC and lighting, the full qualifying coasts of which are not as obvious as single items of plant & machinery. Also, R&D reliefs which are available for a wider range of activities than is commonly assumed.
4 – Letting the tax tail wag the commercial dog
Tax may be an expense to be managed when there are alternative ways to structure a transaction. But you don’t sell a business because it might be tax efficient to do so if this isn’t also a good commercial decision.
One of the standard mantras throughout my 25 year career as a tax adviser was to never put the tax consequences ahead of making the right commercial decisions. Some tax reliefs and rules are designed to influence behaviour. That’s fine. But if, for example, an electric car isn’t the right solution for a client, don’t try to persuade the client they should get one just because it’s more tax efficient.
Perhaps the most common mistake made for tax purposes was when accountants encouraged clients to start new businesses through a limited company “to save tax”. These days the hoped for tax benefits are much more marginal. But there are so many other factors to consider and, as we have seen, the tax benefits can disappear. Another reason why advice should be focused on the commercial realities rather than only on the immediate tax consequences.
5 – Last minute-itus
My warning here was intended to encourage business owners to supply their accounting and tax paperwork on a more timely basis to minimise the risk of the mistakes that arise when accountants are rushed.
In the past this was exemplified by those business owners who turned up at the last minute with a shoe-box or a carrier bag of receipts. Such clients evidently believed their accountant to be a magician – and many accountants did not want to disappoint, so rushed to get everything done. Goodness knows how many mistakes were made in the process.
Equally, all too often people leave it to the last minute (or too late) to get good tax advice. This was quite common years ago when I was in practice. Plenty of audit partners only involved a tax partner at the last minute and expected a simple sign-off even when the circumstances warranted more of a review and consideration of how best to keep tax liabilities to a minimum.
Sometimes business people confuse filling dates with payment dates and this can be another reason for the last minute rush ahead of filing deadlines.
Also relevant here is the failure to produce sufficient contemporaneous evidence and documentation regarding transactions, expenses and motives. This can all be so important when it comes to persuading HMRC (and the Tribunals and Courts) as to the facts and evidencing intentions that determine the correct tax treatment. This can also be especially important when intentions and actions can be viewed in different ways.
6 – Letting a tax problem fester / Hiding from the truth
Take advice asap. Things will only get worse if you don’t and then you may not have enough time to resolve things effectively and in your best interests.
If you get a letter from HMRC take advice sooner rather than later.
7 – Failing to charge VAT – or charging too much
This isn’t just about failing to register when necessary. But failing to charge VAT when you are registered or charging it at the wrong rates.
8 – Disguising employees
There are frequent media reports about large businesses that have tried to keep people off their payroll to save tax (National Insurance actually). And there are frequent tax cases that address the issue as often the rules can be quite complicated. But there are some basic ‘no-no’s. It’s not ok to simply treat an employee as self employed because they are registered to file a self assessment tax return. They may be self employed as regards some of the way they work with some people while, at the same time being a part-time employee in an employed role.
9 – Mixing up business and personal expenses
A good accountant will help you to avoid making this mistake. If you get it wrong HMRC have extensive powers of ‘discovery’ which allow them to re-open your tax returns and collect the tax you evaded by claiming tax relief for personal stuff.
10 – Hiding cash takings
A good accountant will help you to avoid making this mistake too. Again, if you get it wrong HMRC have extensive powers of ‘discovery’ which allow them to re-open your tax returns and collect the tax you evaded by failing to declare all of your takings/sales.
Well, that’s my list. Anything else I have missed or that you explain in more convincing tones? Do let me know!
You can get links to each of my new blog posts in weekly Magic of Success emails. These also contain other shorter, quick and simple practical tips and ideas for accountants and tax advisers who want to be more successful. You can join the thousands who get this each week by signing up here now>>>>