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HMRC internal manual

Compliance Operational Guidance

Supporting Guidance: business records checks: critical definitions: examples for adequate records of expenses

Please note the four examples below are for Business Records Checks purposes only, and should not be used outside this context.

Example 1 - Musician - Frank

Scenario Details
Facts Frank is a self employed session musician living in Wembley and playing at shows in various theatres in London. He has good records of income and it is possible to match the income with the various shows at which he has performed.

Frank also keeps invoices and receipts for all of his purchases and most of his expenses. However, Frank has not kept a specific record of his travelling costs. His diary shows details of which performances he has played at each day.

He uses his diary to calculate his travel expenses at the year end. He claims the zone rate that would have been charged to his unregistered Oyster Card - distinguishing between peak and off peak times of travel.    
  Analysis Frank’s estimate of travel costs could be validly confirmed without there being vouchers present. The cost of his travel within London could be reliably measured by use of standard rates for Oyster Cards and travel between the different zones. This approach would also be proportionate to the amount of cost likely to be involved.
  Alternative Scenario 1 Frank also performs at a number of venues around the country, travelling to and from the shows by train. He has extended the approach he uses for journeys within London. He looks up the open return fare on National Rail Enquiries and then intends to claim this as an expense.

In this alternative scenario, the records are inadequate. Though there is no doubt that the journeys have been made, Frank will not be able to demonstrate the actual fares paid. Given the potential variability in fares charged - open return, peak/off peak for example - the use of a standardised charge may not reflect the actual amount he has expended.

As Frank has a record of the actual journeys made it is likely that a reasonable estimate can be made of expenditure. The actual amount of the expenditure should be validated by having the underlying vouchers available (or bank/credit card statements) to ensure that the records are adequate.


Example 2 - IT consultant - Georgina

Scenario Details
Facts Georgina is an IT consultant and spends a considerable portion of her time travelling - with travel sometimes being abroad to overseas clients in Europe. Her brother lives in Paris and her old school friend lives in Berlin. Georgina often takes the opportunity to mix business with pleasure, arranging her business trips to coincide with her visits to her family and friends. This leads to costs in both airfares and hotels which are settled in a foreign currency using a credit card in the name of the business. At the year end Georgina lists out all the travel and accommodation costs incurred on the credit card statements and records these in her books. The total amount is claimed as an expense. She cannot remember which trips she took which had a dual business and private purpose.
Analysis This approach will ensure that the business expenses are completely recorded. However, the business records are inadequate as Georgina cannot distinguish between which expenses should be apportioned between personal and business purposes.

Georgina would need to ensure that the method of recording enabled the amounts expended to distinguish between allowable business expenses and unallowable expenditure. This would need to be done by keeping a record of the purpose of each of the trips. Annotation of the credit card statements may suffice; alternatively a note in her diary may be appropriate.


Example 3 - Bakery - Diane

Scenario Details
Facts Diane runs a bakery and purchases her raw materials from a local cash and carry. She also buys alcoholic beverages and pet food whilst she is at the cash and carry as this outlet enables her to acquire these items more cheaply than in a High Street shop. She records all of her invoices and receipts in a cash book and retains the purchase invoices in a file. However, she does not distinguish items purchased for use in the bakery from those that are for her private use. There is no system for distinguishing the private goods from business purchases.

During the Business Records visit it is ascertained that at the year end Diane’s accountant analyses the cash and carry invoices, which provide a clear description of the goods purchased, and calculates how much she has spent on non bakery products. These private items are thus appropriately treated when drawing up the accounts and tax return.

  Analysis Though there is no system at all for distinguishing the private element in the expenditure from the business costs, Diane’s records will, in the context of this particular trade, be adequate. The specific nature of her trade means that the private items are readily distinguishable from the information on the invoices from the business expenses and a procedure is in place to treat these correctly when drawing up the accounts at the year end.

Example 4 - Corner Shop - Tom

Scenario Details
Facts Tom runs a corner shop selling groceries and confectionary. He buys his stock from the cash and carry. Each week he also buys items at the cash and carry for his personal consumption. These items are charged on his normal business invoice. He records all of his invoices and receipts in a cash book and retains the purchase invoices in a file. At the year end he uses the totals in his cash book as the basis for claiming his expenditure.
  Analysis The records are inadequate. Some of the purchases do not relate to business expenditure and there is no mechanism for analysing the cash book and identifying items of a private nature. This is because the items purchased by Tom are also sold in his store and there is no ready method of distinguishing private purchases from business purchases.
  Alternative Scenario On returning from the cash and carry, Tom notes on the face of the invoice those goods which are for private consumption. The items marked as private will be adjusted when subsequently preparing the VAT and Income Tax returns. The records would then be adequate as this annotation would enable the identification of the matters in which the expenditure has taken place.
Though Tom has got adequate records, for his subsequent return to also be accurate, the items annotated as private expenses would also need to be correctly treated, for example, as either drawings or disallowed expenses.