Tax Investigation Case Study


Not just another kitchen sink drama

The issue

The accounts of a trader were under tax investigation by the local tax office. He had recently begun selling and fitting kitchens using recycled materials, including pine dressers and cupboards, and the new website he had created to support the new service displayed some very impressive photographic results of his work.

The problem

The tax inspector (as part of her tax investigation into the accounts which had been submitted for the new business) had looked at the website and used the photographs to produce a costing exercise. It showed that, even based on a reasonable assumption that only four kitchens had been sold and fitted during the period, a far higher profit than that which had been declared would have been generated.
She had therefore begun an investigation into the business’s and the trader’s financial affairs. Forensic Accounting Services was instructed to assist the trader in the enquiry.

What we did

Having reviewed the papers and met with the inspector we quickly established that the key to the investigation were the photographs on the trader’s website. We interviewed the trader who explained that he had not actually sold or fitted any kitchens during the period but had used photographs from books and magazines to give the impression on his website that he had experience of fitting luxury kitchens. With the trader’s help we therefore set about trying to find copies of the photographs he had used and identify their sources. In that process, he recalled that he had used a number of photographs from magazines that his wife read so we focused our search on them and, having obtained back copies from a number of home improvement magazines, eventually traced the photographs.

The Tax Investigation outcome

We presented the photographs and magazines to the inspector together with an explanation of how the trader had created his website and some information which showed that the fittings shown in the photographs were of a far higher standard than those he intended to sell and fit. The inspector accepted our findings and the investigation was closed without significant adjustment to the original taxable trading results.

[Note: this is a perfect illustration of how a successful forensic investigation does not necessarily always have to rely on the availability or review of financial records.]