It’s a Friday evening and you’re in the pub, enjoying a well-deserved drink with a couple of friends after a long, hard week’s work. In walks your friend Rob. Grinning from ear to ear, he produces a wad of twenty-pound notes and treats you all to a round. He’s just got a huge tax refund, he tells you, and on Wednesday, he is off to Spain for a fortnight’s holiday with the family.
You know Rob charges the same daily rate as you, but your tax refund was a lot less than his. How can that be right? Has he got a better accountant than you?
It’s not unusual for accountants to receive calls from their clients saying their friend has had a higher tax refund than them, or their friend’s tax bill is lower, or their friend claims for expenses they didn’t think were allowable. There are several reasons why this situation might arise.
Inaccurate Tax Returns
Your friend could be paying less tax because he has been filing incorrect figures for some years.
When tax returns are filed, the expenses are summarised into broad categories and the Revenue will not know what has been claimed unless they raise an enquiry into the return. If the Revenue believes deliberate errors have made, they can investigate tax returns filed within the last twenty years. The underpaid tax (and significant penalties) would become immediately payable and potentially lead to bankruptcy.
Your friend might tell you his business pays for certain expenses, or he think he is claiming for types of expenses because he gives the information to his accountant. However, he is likely to be unaware of how his accountant actually treats the expenses in the tax return. The expense could appear in his accounts but is added back (ie removed) when the tax calculation is made. Alternately, his accountant simply ignores expenses which are not tax deductible.
Your friend may have more business expenses. His vehicle might be at a higher cost, or he might have to spend more on tools, materials and insurance. He may have bought a new van or other expensive equipment. Even though all of these expenses would reduce the tax bill, your friend’s profit after tax would be less than yours.
Legal Structure of the Business
Different expense rules exist for limited companies compared to sole-trade businesses. Examples are the use of home as office allowances, travel costs and charity donations. What can be claimed in one business, cannot be claimed in the other and vice versa.
Someone might not pay any personal tax if they operate their business through a limited company. While the individual seems lucky not to pay any tax, it is their company that is footing the tax bill instead.
Accountancy Fees Deducted From Tax Refund
Some accountants typically deduct our fee from your tax refund before forwarding the remainder to you. This might make your tax refund appear lower than your friends.
Your friend might be behind in filing tax returns or paying tax. Even though he has not paid as much tax as you, it might be that he should have done! By being late, he is incurring late payment penalties and interest.
If you have any concerns about how much tax you are paying, please feel free to contact Southside Accountants in Wimbledon. Here is a video telling a little more about us: