But my friend claims that as a tax expense…

Usually asserted to an accountant in an attempt to justify a claim for tax relief on a dubious expense, in most cases the statement is either wrong or misleading. Here are some possible explanations.

The friend includes the expense when giving his records to his accountant, but the accountant, realising that the item is not tax deductible, removes it. This is not always brought to the client’s attention, so he thinks he is getting tax relief when he is not.

The rules for claiming tax expenses for sole traders, employees and limited companies are all different. They can also vary across different types of business, and according to the individual circumstances of the taxpayer. This is particularly the case with motor and travel expenses. Unless two people are in exactly the same situation, there will be some expenses that one person can claim that the other cannot.

A claim that “the tax man agreed an expense” can mean two different things. On the one hand, the expense could have been included in a tax return which was filed electronically, it was processed without any human intervention as there was nothing that looked unusual about it, and an acknowledgement was duly issued by the computer. Alternatively, it could mean that the expense was reviewed by a tax inspector, perhaps one or two questions were asked about it, and then it was approved.

There is a world of difference between the two scenarios. Receiving a notice from HMRC confirming that a tax return has been received and processed does NOT mean that any aspect of it has been approved.

The friend has prepared his own tax return, filed it online, and within a few minutes had an acknowledgement to say that it had been successfully received. It is probably full of mistakes, but as long as it looks half-sensible it will be processed by the computer. After a week or two the friend has heard nothing further, so assumes that the return has been reviewed and approved, and that is the year settled.

The truth of the matter is that the tax office have a long time in which they can enquire into a tax return, and if they find any problems they can go back 6 years to investigate. This can involve the taxpayer in a long, invasive and expensive tax enquiry, at the end of which they may be faced with a large tax bill for underpayments, penalties and interest. People tend to be less keen to tell others when they have this sort of experience with the tax man.