But the local tax office said...

Quite often we meet people who have been doing their own accounts and tax returns and have finally decided the job is too big for them. We've written before about the problems posed by the do-it-yourself tax return approach, but this week we met someone with another twist to the tale.

A couple were running a guest house in sunny North Devon. Various issues with their previous submissions came up as we talked.

One was especially interesting.

The problem

"I record each guest breakfast as costing £10. I don't keep track of what they actually cost. I don't have to."

"Why not?"

"Keeping all those receipts seemed a lot of work, so I spoke to someone at the Barnstaple tax office. He asked me how much I thought the breakfasts cost. I said 'ten pounds' and he said 'put that down then'. It must be okay. The tax man said so."

It's tempting to accept this reasoning. Tempting, but wrong.

Why it's a problem

There are lots of Tax Tribunal cases where people have followed the advice offered by someone from their local tax office, only to find that when HMRC enquired into their tax return that they did not agree with the advice that had been offered. Take the case of Louise Stones.

It's easy to see that in an example like this, HMRC would not simply accept a round sum of £10 per person for breakfast. It's hard to see how such a charge could be justified.

The worst case scenario

So what would happen if HMRC successfully challenged this figure?

As well as having to pay the tax due (plus interest), the tax payer could end up with penalties of up to 70% of the tax at stake.

The level of penalty charged would depend on how negligent you thought to be and how deliberate the error was.

The solution

Keep a record of what advice you were offered and by whom. It might not stop you having to pay the extra tax if HMRC disagrees, but showing you acted on the advice of one of their officers could show the error wasn't negligent or deliberate and reduce the potential penalties to zero.

Or, use a qualified accountant. We like to offer our clients the certainty that we’ve taken all the steps we can to reduce their tax liability –  and the amount we advise them is all the tax they will now have to pay.

Wouldn't that be better?

Pay Less Tax - Summer 2013

It may be grey and wet outside, but you can find the Summer 2013 edition of our Pay Less Tax newsletter on our website.

This edition has lots of interesting ideas that should be relevant to your business. Some of them are ones that we’ve been discussing a lot with businesses lately, including whether a business should trade as a limited company, what’s the most tax efficient remuneration for company directors, and whether the VAT Flat Rate Scheme could help your business keep a little more from its gross income.

Other issues looked at this time include making use of your Annual Exemption for Capital Gains Tax.

Why not check it out?

The dangers of doing it yourself

Here at Accountancy Edge we often find that people who have completed their own tax return could have paid significantly less tax if they had professional advice. However, we also find people who have paid significantly less tax than was actually due.

So why is this a problem?

If HM Revenue enquires into such a tax return and finds that additional tax is due, not only does the tax become payable with interest, but penalties of up to 70% of the tax at stake can be charged.

So doing your own tax return to save a few hundred pounds could easily end up costing you far more.

That's we advise every tax payer in the self-assessment system to seek appropriate professional advice. At least then you can be happy that you've paid the right amount in tax.