Failing to keep good financial records could mean losing out on thousands of pounds of business expenses and paying more tax, according to the latest tax tribunal ruling.
The First Tier Tribunal heard an appeal by business consultant and quantity surveyor Gerald Bianchi relating to nearly £40,000 of expenses included in the accounts of two companies he ran.
Bianchi included them in his self-assessment tax return for 2005-06, but was challenged about them by HM Revenue & Customs (HMRC). A tax inspector demanded Bianchi hand over all the documents and other records proving the money had been spent.
Bianchi could only offer eight handwritten receipts showing the movement of funds between himself and the companies.
HMRC ruled he could not claim the money as a deduction against tax because he could not show the money was spent for business purposes.
Bianchi appealed the decision, but the tribunal ruled against him and dismissed the appeal.
The tribunal went back to the ‘wholly and exclusively rule’ which is the measure laid down in law as to whether an expense is allowed for inclusion in tax accounts.
The rule says any expense has to be wholly and exclusively spent for a business purpose or must have a part that is measurable as a business expense.
In Bianchi’s case, he claimed £32,050 cost of sales and r £7,096 of miscellaneous business expenses for travel, advertising and promotion and legal costs for the two companies. But could not show how the money was spent with receipts or other documents.
Bianchi argued that he could not provide the paperwork for two reasons – he was away travelling at the time the expenses were incurred and could not be expected to keep track of every receipt and that the expenses had been included in his company accounts.
The tribunal disagreed and declared he had a duty as a taxpayer to keep good financial records and that his second argument was irrelevant as it did not prove how the money was spent.
This case is the latest in a spate of similar cases over recent months that have all had the same conclusion.
Landlords should note that cash-in-hand payments to contractors who do not provide receipts are sometimes significant outgoings.
If HMRC requests the supporting documentation and none is provided, landlords can expect to have these payments disallowed from their tax returns.
This is interesting as the tribunal used the ‘wholly and exclusively rule’ regarding business expenses but in the most recent budget if a landlord has a loan to purchase a property that is ‘wholly and exclusively’ for the purchase of that property for their business them the relief will be limited, Is this not one rule when it suits and the same rule when it doesn’t?