Next time you’re enjoying the free champagne and expensive entertainment at a corporate event, take a moment to consider all may not be as it seems.
Although not invited to the party, the taxman may well be taking an unusually close interest in who is on the guest list.
Evidence emerged last week that the Inland Revenue’s south east division has been using cloak-and-dagger tactics to inspect companies’ spending on such events by hijacking client records held by corporate hospitality providers. It then uses the information to argue that companies are trying to write off disallowable expenditure when calculating tax liabilities.
The taxman’s approach is causing some disquiet among tax experts, who say it is underhand and that the Revenue may well be going beyond its legal powers.
Baker Tilly tax partner Chris Chadburn, himself a former district inspector, said: ‘This type of sting operation is highly dubious and companies throughout the UK should be aware of the threat.’
Internal Revenue documents, seen by Accountancy Age, revealed the south east district had been practising the technique with some success for nine months.
With its reassuringly colloquial acronym of SORTED – which stands for special operation reviewing targeted entertainment data – the project is designed to make sure companies attending events like hot air ballooning, medieval evenings and river boat trips are not claiming it as training which is allowable for tax purposes.
‘We are of the opinion that companies entertaining on any scale are likely to be generous towards their staff and directors and worthy of review,’ the document states.
‘We decided to operate these reviews in a low key manner, the object being to keep the interview as amicable and unofficial as possible.
‘The result of this approach puts the company representative at ease and they will frequently volunteer information about their clients and give us access to any records we request.’
Acting on local knowledge, information in the Yellow Pages or tip-offs from national insurance and VAT inspectors, taxmen have arranged meetings with corporate hospitality or event management organisations, pretending to undertake routine PAYE audits.
Unaware of the threat, companies have volunteered client information and allowed access to client sales records.
Taxmen then passed this information to colleagues handling companies’ tax affairs, providing them with ammunition to attempt to disallow entertainment expenditure or to pick up benefits charges on employees or directors.
And the Revenue has gleaned information to target these companies by checking sales invoices – even though ‘it is doubtful under Regulation 55 whether we have a legal right to look at sales invoices’, the document says.
‘The Inland Revenue has no right to obtain this kind of information when inspecting PAYE or NIC records. The Revenue is relying on the ignorance and goodwill of companies to obtain details about their clients activities,’ Chadburn added.
‘I believe many of these activities involve genuine business expenditure and it is inequitable of the Inland Revenue to try and reclassify them as staff freebies.’
The Inland Revenue has defended its practices saying that if it finds an expense that is dressed up as something else, then it is clearly avoidance.
But the taxman’s interest in large events doesn’t end with corporate hospitality.
In August last year residents of south west England who were hoping to cash in on the four million extra tourists in Devon and Cornwall for the eclipse had the taxman breathing down their necks.v Revenue officials trawled accommodation adverts to spot undeclared money-making. And earlier in the summer tax officers took a closer than usual look at the Wimbledon tennis tournament when local offices launched a crackdown on nearby residents cashing in and not declaring tournament-related income on their tax returns.
Officers trawled temporary accommodation adverts and cruised streets to spot evidence of undeclared money-making.
Residents renting out driveways as temporary car parks are among those believed to have been targeted.
Alistair Kendrick, tax director at Ernst & Young, warned at the time that the Revenue is ‘alive’ to money-making possibilities arising from big sports tournaments.
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