Also, tax inspectors are far from stupid. They've seen it all before; your brilliant scheme for side-tracking cash from the company has only been done five hundred times before - this week!
They are absolutely expert at looking through your books and picking up the tracks of your dis-honesty. They can ask some very awkward questions if you are totally honest; those questions become very hard to answer if you have been defrauding them. If you are honest (and they know if you are, or not) they will give you the benefit of the doubt over the odd genuine mistake they find in your books, but if they suspect that you are not playing fair, they will take your business apart line by line - it will then be up to YOU (not them) to prove that each item of expenditure going back to the year dot is genuine, and not a forgery on your part.
They particularly love small companies with a high cash turnover; I can't imagine why, but they seem to think that the proprietors of such companies will be tempted to side-track some of that cash into their own pockets! As if they would!
They use some pretty devious methods of catching you out as well.
I knew a man who ran a fish and chip shop; hardly the sort of business to attract a tax inspector, you might think, but that's just where you (and he) would be wrong. This sort of business is a prime target! This particular chip shop was very busy and popular and the owner was side-tracking about five hundred pounds every week into his back pocket. The tax people became suspicious when they did a routine inspection.
What aroused their suspicions? Well the owner had a wife who did not go out to work, and three children to support. He also had a new, good quality car, a brand-new caravan, and had recently returned from an expensive two week holiday. Nothing suspicious about this except that he claimed to be paying himself one hundred pounds a week; clearly only just enough to live on (if that), and certainly not enough to support his standard of living.
The inspectors mounted a three week watch on his premises and counted all the customers going in and out. They then raided the shop and checked the books; sure enough, only about half of the money had been entered. This man had been operating in this manner (getting greedier year by year) for over ten years. He had a lot of explaining to do, and a very, very large tax bill to pay. In cases like this, the Revenue tell YOU what they think you have stolen over the time period, and it is up to you to pay it, or prove conclusively that you have stolen less than this amount!
You may think that this man was small fry (if you'll pardon the pun) but look at it from the viewpoint of the Revenue. If they catch one man like this, then it makes ten thousand chip-shop owners around the country sit up and take notice. The increased tax revenue is far greater than they could get by catching one unique, large-scale tax fraudster, particularly as the latter villain will be an expert and far harder to catch and convict. One man like this can tie up a whole tax investigation team for years, whereas our chip-shop friend was a sitting target. Just for the record, chip-shop owners are not known to be any less honest than other business people!
Two other examples should amuse you: One chap was running a mail-order business from home, selling widgets. He received about ten percent of his money in cash, despite the fact that his advertisement stated that customers should not send cash through the post. He pocketed ALL of the cash and didn't put a single penny through the books. His first tax inspection proved his undoing, because he found it impossible to convince the inspector that not one single person over a two year period, had sent him a five pound note instead of a cheque or postal-order. The tax inspector estimated that twenty-five percent of people had done so (even though it was only ten percent), and our friend had to pay up! He would have been far cleverer if he had put some of the cash through, but even this won't save you as my next example shows:
Another chap running a mail-order business thought that tax-inspectors had the brains of chimpanzees, and that his master plan could outwit them all. His business received substantial amounts of cash from customers replying to mail-order advertisements. He processed about half of this cash in the normal way, the other half he side-tracked out of the business.
He went to great lengths to cover his tracks, eradicating the customers from his records once he had sent the goods, even keeping separate post-books. He dutifully banked the legitimate cash so that he could show the Revenue what a good boy he was being. He was duly inspected, and all seemed to be in order.
Unknown to our friend however, the inspector had noticed that there were one or two funny things about the books.
First of all, the amount of cash banked was always about the same for three weeks out of four, regardless of the fact that the total income fluctuated week to week. In the fourth week (the last week of the month) the cash was always somewhat less. (This was because our friend started to get a bit short of money towards the end of each month, so he would take a little more out.)
Over the next few weeks, the tax office sent twenty fictitious orders for items advertised by our friend; in each case, the order was sent with cash. The addresses used were those of various clerks working at the tax office. All of the goods duly arrived, so the orders had obviously been processed by our friend, who was then duly raided! Surprise, surprise, only about six of the orders were shown on his books; no less than fourteen were missing! Fourteen out of twenty is seventy percent (he had been particularly greedy that month) and so the Revenue ordered him to pay tax on the missing seventy percent of cash sales since the start of his business!
In all of these matters, the tax inspector is looking for the correct proportions in the business. Despite the silly stories which circulate, they are not really interested in whether you claim three pounds a week or ten pounds a week to pay a cleaner, or even if the cleaner ever gets the money. They ARE interested in the proportion of petty cash which goes through the business in relation to the business as a whole. They ARE interested in how much you pay yourself, and are quite entitled to ask (and often do), how you manage on the money you claim to be paying yourself.
My advice is to play it absolutely one hundred percent honestly, anything else is just not worth the problems; you have more important things to do.
I hope that you will forgive my little excursion into morals; always a tricky subject at the best of times. My intention was to pass on my experience over many years of running businesses, small and large.