I wonder whether anyone can assist me with one of my client's query. I suspect she can't claim this expense unless she has at least records of this expense on her bank statements.
She uses cotton wool and tissues when she runs one of her classes. She knows roughly how much she has used since starting the business and the cost per pack but she hasn't kept receipts for the vast majority of the purchases.
Has she just paid cash for them? Or are there any bank statements, credit card statements, or does she order it in bulk from a supplier? If its a supplier then you can ring up and get copy invoices. I suspect its the first one, just paid for them in cash.
Hello Liga Someone on here once said to me - no receipt then it hasnt happened! The taxman is very keen when it comes to keeping proper records without the need to rely on someones rough calculations and memory, Im afraid. Unless as Amanda says - you can get copy invoices, then she needs to take this as a lesson learnt - keep ALL of your receipts, no matter how small as if they relate to the business then they can be used. Relying on the Bank statement isnt enough neither, because this document only shows where the spend was made, rather than what was bought and therefore whether or not it was an actual business expense, although for the odd one you might, although this could be challenged if you had an HMRC inspection. You dont say what her classes are but you still have to ask - are cotton wool and tissues real business expenses - they may well be but you need to be sure. She shouldnt make that mistake again.
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Joanne
Winner of Bookkeeper of the Year 2015, 2016 & 2017
Thoughts are my own/not to be regarded as official advice,which should be sought from a suitably qualified Accountant.
You should check out answers with reference to the legal position
I should have trade marked it, lol. Completely concur with your answer Joanne.
Liga,
Always consider every justification that one makes in including anything in the books as though one is sitting opposit an inspector justifying it to them and if you couldn't argue the case with them (which one day you may need to) then it doesn't go in the books.
kind regards,
Shaun.
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Shaun
Responses are not meant as a substitute for professional advice. Answers are intended as outline only the advice of a qualified professional with access to all relevant information should be sought before acting on any response given.
Didn't stop me calling the third wife the name of the second one though, lol.
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Shaun
Responses are not meant as a substitute for professional advice. Answers are intended as outline only the advice of a qualified professional with access to all relevant information should be sought before acting on any response given.
Just to be the fly in the ointment, I'd say that if it happened, then there should be no difficulty in claiming it.
If I said I did the 100 metres in nine seconds, then (as unlikely as it is) demonstrated it, you'd have to believe me. The same way with this class. If she can show in the balance of probabilities that she used the tissues and cotton wool for teaching purposes, then the Inspector would have to believe her.
Can you let us know the turnover of the business and the costs involved in the estimate. This has a bearing on whether it is likely to be challenged.
I'm with Tim on this. You have no reason to disbelieve your client so why would you exclude expenses that have been made. Obviously you need to explain to the client the need for retaining all receipts and that it could potentially be a problem should there be an investigation but I am guessing there would have to be a warehouse full of tissues to make a false claim worth the hassle, but really if it is a sundry item that may save a few quid in tax and seems a likely expense then claim it (not vat though). You need to have a certain degree of pragmatism to do this job in my opinion.
I was thinking along the same lines too. If cotton-wool & tissues are a necessary part of her lessons (or even reasonably necessary), the Inspector must accept that a reasonable (that word again!) amount of those materials was used. I think the issue would be quantifying what was "reasonable" and equating that with the amounts claimed. Likewise with the cost.
but have you never found that the more pragmatic that you become the more that the client attempts to push that?
Whilst as you argue materialarity could be considered a factor, materialarity is both quantitative and qualitative in that immaterial items taken in agregate may be material and also taken individually may be indicative of the client not giving expenses in general their proper consideration in the belief that its immaterial so it doesn't matter.
In common parlance, to go easy on the clients for the little things makes a rod for our own backs.
How long do you think it would be before clients are putting a daily paper through the books as a pen because there's no receipt and it's not material right? Wrong, it would be qualitatively material even if not material in financial terms as it gives evidence of the character of the person.
I've come accross inspectors at both extremes of the spectrum but I always enveavor to prepare the books for the one's at the extreme that will pick up on the packet of polo's at a service station.
Its seldom that one is happy with everything in the books but by attempting to push the client to dot every i and cross every t they are less likely to start making our lives more difficult by conciously not asking for receipts or mixing allowable and non allowable expenses.
I fully agree that we have to live with the occassional mistake from our client. I just don't want clients to believe that the mistakes are acceptable.
As I occassionally lie to my clients "If everything in your books is evidenced then you have absolutely nothing to worry about" (emphasis on the word lie there).
kind regards,
Shaun.
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Shaun
Responses are not meant as a substitute for professional advice. Answers are intended as outline only the advice of a qualified professional with access to all relevant information should be sought before acting on any response given.
The tissues etc have the quality that they have been used in the business whereas the pen and polos haven't.
Pragmatism for me comes at the beginning where I want the client to see what I can do - and let them know what they must do in return. The majority of the time, they'd know they should have kept invoices but what they might not know is that a contemporaneous record is almost as good.
"Here are daily transaction sheets/spreadsheet/ledger, headed with types of income and expenditure. Fill it in as often as humanly possible and religiously keep bills, receipts and EVERYTHING in this here folder." If they then enter sweets and newspapers in their books, then to a sensible extent, I have to rely on it even where they've lost the invoice. Obviously a swimming pool in the back garden going through the books would be more verifiable and the missing invoice larger.
The problem, in these cases has already happened and commercially, if we don't make the best of it we risk driving word of mouth clientele away.
Assist the client to get the aggregate materiality improved but, yes some try to push it and you deal with them accordingly. The lines in the sand are : sensible cash account and having enough to live off. If they pull the wool over my eyes after those two tests, then that's their look out. I've got them out of a hole at the beginning and given the means to keep themselves safe.
Yes agreed that we need to educate our clients and if we feel they are pulling a fast one it doesn't sit well and we can express this and maybe get the client to put something in writing (again materiality may be the issue here) but I cannot go with "no receipt then it hasn't happened!" as a mantra because it is very likely it did happen and we act for our clients. In the event of hmrc seeing things differently and we believe the expense to be true we robustly challenge that decision.
I'm actually less draconian than I come accross but I do sometimes feel as though our main role is to protect clients from themselves.
There's an old saying "If you want dog start out by asking for a horse".
Its the same with clients. If you want acceptable documentation start out by asking for perfection.
On a linked note, sure that you already know this but sure that others reading this may not.
There are actually three stages to a clients mentality when they try it on
- Incentive
- Opportunity
- Rationalisation of actions.
The incentive would be to keep more income.
Rationalisation is where the client justifies their actions with something like "I earned it" or "the government would just waste it".
The only part that we have any control over is restricting the clients opportunity.
And thats where we need to decide whether the clients best interests are more money now or less risk of fines later (you knew that if you stuck with it the post would eventually link back to the subject matter didn't you, lol).
We always have to remember that we are independant service providers to our clients. We work with them, not for them.
A small but I feel very important distinction that many clients do not fully comprehend.
Years ago I always used to hate the way that my accountant spoke in a somewhat detatched and aloof manner and took that as not caring about my business.
The more that I do this the more that I realise why accountants need to be detatched so that they are not seen to be subservient to the businesses that they service. Doesn't mean at all that they don't care. It just makes their position clear. Much more so than many who almost become extensions of the businesses that they service creating advocacy, familiararity and self interest threats to their objectivity.
Maybe that realisation is one of the steps that you go through to becoming an accountant like realising that the mistakes in the questions in Kaplan study texts are actually there on purpose (#1) and HMRC will give you any answer that you want if you phone up enough times and speak to someone different each time.
Hope that your having a good day Tim, nice to get a bit of theoretical discussion into threads occassionally.
all the best,
Shaun.
#1 how much more do you learn and deeper the knowledge goes when you cannot get your answers the same as the stock ones so you rework a question many times, get frustrated and then spot that the issue is not yours... I always used to think that they were Kaplan problems but when they publish correction sheets just before the exam and then the next version of the text, sometimes with slightly adjusted figures has the same fault in it. You realise that these mistakes were quite intentional.
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Shaun
Responses are not meant as a substitute for professional advice. Answers are intended as outline only the advice of a qualified professional with access to all relevant information should be sought before acting on any response given.
But Shaun, we do act for our clients and it is our job to legally do the best we can for them and although we all know that receipts should be kept it is not illegal to misplace them and therefore we should always include legitimate expenses incurred unless we have reason to disbelieve them, do you not think?
Yes it is good to have a nice discussion and I hope I don't come across too shrill. I'm not like that at all and just limbering up for a Revenue letter I want to get off today lol.
Wish I was more aloof sometimes but it just goes to show how personal experiences make us the way we are, professional and otherwise.
But Shaun, we do act for our clients and it is our job to legally do the best we can for them and although we all know that receipts should be kept it is not illegal to misplace them and therefore we should always include legitimate expenses incurred unless we have reason to disbelieve them, do you not think?
Agreed, it's enshrined in our professional memberships that we put a clients interests before our own even where that costs us money.
I translate that as ensuring that the clients stay out of jail, do not get disbarred from directorships and that fines, surcharges and penalties are avoided.
Conversely on occassion some clients may translate that professional obligation as ensuring that we will ensure that we will enable them to play the system. Have private expenditure subsidised by their business and pay less tax by manipulation of the figures.
Sure that you yourself have been to dinner parties where as soon as others realise what you do for a living they want to know how they can manipulate their tax, what scams are good how can they put their new speed boat off against he company.
Of course, we try our best to ensure that our clients pay the right amount of tax and use all available allowances and reliefs that they may not have known about but I do not think that any of us can guarantee that they will pay less and clients may even end up in a situation where they are paying more by doing it correctly.
I can't see that line ever going on my sales literature though!
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Shaun
Responses are not meant as a substitute for professional advice. Answers are intended as outline only the advice of a qualified professional with access to all relevant information should be sought before acting on any response given.
When I sign my accountants report, it declares that I have prepared the statements based on the information and explanations provided by the client, and then they sign the balance sheet to agree that the accounts are a true and fair view.
If they haven't kept receipts, but they are telling me that they did spend the money, its not for me to decide whether its omitted. As long as I have explained to the client (in writing) that it might not hold water in an investigation, then it is their decision to include or not. After all, it is them that will be liable.
I personally feel that the more important issue is the paper trail that supports your advice and actions, so that they can never turn it into being your fault, further down the line.
Of course, I would also give written notice of the importance of keeping all the invoices, and perhaps offer a suggestion of a system by which they could more accurately track their records.
One assumes the OP will know the business activities to some extent, and have gut feelings about the client and their respectability. If there was any question that this person was actually trying to be fraudulent, rather than genuinely lapsy-daisy, then it would be better not to act at all.
We are there to act for the client and not do the job for HMRC.
As long as the client knows that it may be challenged should an enquiry occur and they take responsibility for the accounts by signing them as such then dont see a problem putting through reasonable expenses without receipts.
I take a pragmatic view. If someone has expenses of say £20k and they have £500 that isnt backed up by receipts but the expenditure seems reasonable to their line of business then I would put it through. If however someone as £20k of expenses and only £10k of receipts then would be more difficult to justify putting it through. But if client insists they have spent it then would put it through but put in writing the difficulty justifying to HMRC should an investigation occur.
After all we arent auditing them, only preparing their accounts based on the information and explanations supplied.
