Every now and then, something lands on my desk that makes me stop, blink twice, and wonder whether I’m looking at bookkeeping or someone’s Christmas shopping list.
This one nearly had me spitting out my tea (drunk from my new Hal Robson-Kanu Euro 2016 Cruyff turn mug)!
It involved a £2,000 Louis Vuitton bag.
Apparently, it was a tool bag.
I wish I was joking.
We took on a new client recently and, as part of reviewing the bookkeeping, we started spotting the usual higher-risk areas. Motor costs. Travel. Meals. Clothing. Staff perks.
Then up popped the Louis Vuitton hold-all.
The explanation was that it was bought for quality and durability and used to carry tools. Fair enough in theory. Businesses can buy good quality equipment. They do not always have to buy the cheapest option on the shelf.
But that isn’t the real question.
The real question is this:
If HMRC looked at it, would they believe it was bought wholly and exclusively for the business?
That is where the problem starts.
Because HMRC don’t just look at one transaction in isolation. They look at the pattern.
This bag was bought about two weeks before Christmas. On the same weekend, there was also a very expensive Saturday night meal put through as travel and subsistence.
And there were also designer clothing purchases on that trip. The explanation there was that the company logo would be added, so that made them allowable.
However (and it’s a big however), putting a logo on ordinary clothing does not magically turn it into tax-deductible uniform.
And when you put together a luxury bag, designer clothes, weekend meals and Christmas timing, you can see how HMRC might start asking awkward questions.
This matters even more now because HMRC are getting far more data than they used to. Under Making Tax Digital, the VAT return is no longer just a few boxes on a form. The underlying bookkeeping matters more and more, because every transaction is sitting there in Xero or whatever software is being used.
HMRC are increasingly using data, automation and AI to look for odd patterns and unusual items.
And guess which areas tend to attract attention?
- Travel and subsistence.
- Entertaining.
- Sundry expenses.
- Repairs and maintenance.
- Staff perks.
- Clothing.
- High-value items that look personal.
In other words, exactly the sort of things that were appearing here.
That’s why a good accountant does more than just type numbers into software and hit submit. Our job is to challenge things that do not look right and protect the client before HMRC ever get involved.
We are absolutely there to support our clients and help them save tax, but we need to save tax properly. We’ll happily guide you and make sure you claim the tax reliefs you can, including allowable perks or meals…but also guide you away from the ones you can’t claim!
In this case, the client dug in.
We had to tell them that we could no longer work with them.
Not because of one bag, but because of what it represented.
Here is the simple lesson.
If you are trying to justify an expense because it is expensive, nice, might have a logo added later, or you think you can probably explain it if anybody asks… you may already be on dangerous ground.
The better question is:
Would HMRC see this as a genuine business cost, or personal spending hiding under a business hat?
There were plenty of other things in this case too – lots of “travel and subsistence” in restaurants in Liverpool, and thousands of pounds of “perks” with no Benefit in Kind tax declared.
And also claiming full tax and VAT relief on two vans and four expensive “pool” cars…shared between only three people!
But that’s a story for another day.
Cheers
Jon