Keep the costs low!

During a tax investigation an inspector can and most likely will open his enquiries to include personal bank and building society accounts, so how do you prevent the costs rising too much?

Unproven Income

The taxman will believe that any unidentified savings from your personal accounts are hidden business income that you are trying to hide from his eyes.

An informal loan agreement may also have repercussions in the future, if there is no legal documentation on the loan and then in later years you are paid back little by little the taxman will pick up on these receipts and without proof of the original loan there's little you can do.

Evidence!

Fortunately if you are wise enough to keep your back statements and the person you loaned the money to is also wise enough to do the same then you are able to perhaps prove what the money was for.

Wasted Time, Money and Energy!

Even if it all comes out all ok, you will still have a hefty sum to pay just for clearing your name, not only have you lost out on your money but also time and energy which could be better spent on running the business instead. So what can be done to keep time and money at a minimum?

Verbal Evidence

Usually any verbal explanations for unidentified banking are to do with cash savings, gambling loans or gifts. The taxman's handbook states that such claims 'may sometimes be true' which means the taxman is not likely to believe you without any reasonable proof. His compliance manager will also review the matter and deal with each case on its merits.

Documented Evidence

Any evidence that you give before the review must be an original document and not photocopies or scanned copies. If you need to proceed to a tax tribunal you will be the one with responsibility of getting the evidence, not the taxman. As long as you have the right details on paper there should be little problem.

Remember!

It is a good idea to check your bank statements regularly to make sure you can prove all credit entries, just in case.

It is a good idea to log unusual sources of income on some sort of table or chart at the time they occur or when you are completing an annual tax return, not only will this make it easier for you to find the evidence needed, but once you back it up with that evidence you're set for the taxman. (An example of a chart is below).