Case study: The Inspector Calls.
Handling a tax investigation.
Practising accountants frequently find that Tax Inspectors wish to enquire further into a client's affairs. These enquiries range from merely asking a question to clarify some point or other to a full blown investigation where the Inspector wishes to examine the accounting records of the client and meet shortly thereafter.
There are many reasons why a client should be selected for further investigation. They may be in possession of information that is not consistent with the accounting records - for instance, the client may have been advertising extensively in the local press but the turnover or profits recorded in the accounts do not appear to justify such expenditure. Then again, an anonymous allegation made to the Inspector may put him on the alert.
This case study related to a butcher - sadly, like many butchers, he is no longer trading. However, several years before he ceased trading, his accountant received a formal letter from his local Inspector which indicated that a full investigation was to be undertaken.
After ascertaining from the client and re-examining the accounting records and being satisfied that there was nothing untoward, the records were delivered to the Inspector. Shortly thereafter, there was a meeting with the Inspector at which the accountant was also present. Much of the first meeting was spent discussing the accounting records and practical aspects of the business - buying of carcasses and preparing them, pricing policy, drawings and so on.
At the second meeting, the client was asked by the Inspector if there was anything he wished to add following the first meeting. On hearing no, the Inspector concentrated on the gross profit margins - it subsequently transpired that a number of butchering operations had been targeted in this particular region and that the client gross margins were lower than the others. Further, the Inspector added that members of his staff had purchased meat from the client on a number of occasions and found that his selling prices were similar to others.
The Inspector then sought to reach a settlement, involving additional income tax, interest and penalties. After this meeting with the Inspector, the accountant discussed how it was possible for the gross profit margins to be lower than other butchers. The answer, which was accepted by the Inspector, was that the butcher sold primarily to a very local community as had his father before him. Most of his customers were regular shoppers and he regularly gave them additional cuts of meat; the additional egg or two and so on. Obviously, strangers - which would include the Revenue employees in this case - do not enjoy this benefit. The accountant advised his client to keep a record of his gifts to his customers for a period of time and this was duly submitted to the Inspector, showing how the free gifts to his customers affected his margins.
Although in this case, the outcome was positive for the client, much time was spent on this investigation and this was unsettling for him and his family.