But for those who see this as an ideal opportunity to pile on their expenses, forget a few jobs they have been paid for or simply to look in despair at the empty file where their receipts and books should be and make a good guess - beware. Your bluff might be called.
The Inland Revenue investigates about one in 50 sets of accounts each year, including the simple accounts demanded of those earning less than pounds 15,000 per year.
This involves producing substantial documentation to back up the figures declared. If you need duplicate bank statements it can be an expensive business.
Take my friend. He was a student who worked part-time as a journalist to supplement his income and in the tax year 1992/3 earned about pounds 6,000. He kept a record of all his earnings and some relevant receipts, and spent a day at the end of the year totting up his accounts. He completed his tax return, claiming less than a third of his earnings as expenses, posted it and felt righteous and smug.
But not for long. He soon received a letter from his local tax office demanding full accounts, with bank statements to back up his declared earnings and receipts for his expenses. Luckily he had kept his statements, and set about trying to work out where every deposit into his account originated.
He was interviewed by his tax officer who, reassured that she wasn't being cheated, was very helpful. She went through his expenses meticulously, but as well as refusing or reducing some, also pointed out expenses he should have claimed but had not.
Overall, the investigation proved a positive exercise, for him as well as the Inland Revenue. But it could have been a very different story and he was aware that the 'nice' tax inspector would have been a lot less nice if his accounts and the evidence of his bank accounts had been widely at odds. If there is evidence of negligence or fraudulent behaviour, the Inland Revenue can reassess your tax for the past 20 years.
The Inland Revenue does not do spot checks on tax returns. However, it will investigate accounts if there is any suspicion that something is amiss. Examples of circumstances that will get a tax inspector looking twice include: Profits lower than similar businesses in the area.
Profits too low to live on.
Unusually high business expenses.
New funds put into the business without explanation.
Savings that have grown faster than expected.
Information from elsewhere that does not agree with your tax return, for example from a bank about interest credited to your account.
Sending in your tax return or accounts late.
Failing to tell the Inland Revenue when you start in business and become liable for tax.
If you are self-employed, earn less than pounds 15,000, and wish to save the expense of using an accountant:
Tell the Inland Revenue as soon as you start in business.
Ask your local tax office for all relevant leaflets and read them thoroughly. The Inland Revenue is making a real effort to be more taxpayer-friendly and should happily answer any queries.
Agree at the outset what will be considered a legitimate expense and then keep appropriate receipts. A lot of the 'tricks' accountants use to reduce taxable income amount to no more than knowing what is an allowable deduction. The Inland Revenue will help establish this.
Keep all relevant documentation including: bank and credit card statements, receipts including gas, electricity and phone bills if you are working from home, and invoices. If in doubt, keep it.
Try to maintain simple accounts, updated weekly, recording receipts and expenses.
Keep a note of the source of all deposits into your bank account in case you need to explain the non-taxable ones.Reuse content