As the board is quiet and we have had a few discussions on all forms of tax recently, here is part of my story of how the tax man 'beat himself'.

As some of you will know, I have dealt in various collectibles for some years, in addition to being a CPA (although the only CPA work I do now is tax returns/advice for friends etc).

About 5 years ago, shortly before Germany joined the european exchange rate mechanism, the deutsch mark was at an all time low against the pound. At that time, private individuals could 'import' unlimited goods from other EU contries exempt from duty or sales tax.

I had an interest in model railways. I had not been able to import these 'as a business' from Germany or Japan where they are manufactured in sufficient quantity to make it equitable to re-sell. I received an offer from a wholesaler in Germany who was selling up. I had done business with him before as a retail customer. The price of the deutsche mark and the discount I was offered meant I could obtain the goods at about half their re-sale value and therefore 20% cheaper than other commercial retailers in the UK.

I bought around $100,000 worth of stock as a 'private individual'. I then started a business and the new business 'bought' the stock from me at cost - SUCCESSFUL ARGUMENT #1 - I HAD NOT BOUGHT THE GOODS WITH THE INTENTION TO RE-SELL. SUBSEQUENT EVENTS (SEE THE EXTENSION BUILDING BELOW) HAD MEANT I COULD NOT AFFORD TO KEEP THEM FOR PERSONAL USE.

At this same time, for other reasons, we were having a substantial extension built to our house.
I submitted that as I was now starting a model railway business, I needed a lot of space to store the stock, and that a proportion of the building costs be charged to this new business ($35,000). - SUCCESSFUL ARGUMENT #2 - AN ASSESSOR VISITED AND CONCLUDED MY SPACE REQUIREMENTS AND COSTS WERE JUSTIFIED - HE ALSO ACCEPTED THE FACT THAT UNDER THE 'HAZY' TAX LAWS I HAD THE CHOICE TO EITHER TAKE ON THE COSTS OF THE BUILDING AS A BUSINESS EXPENSE, OR, CHARGE THE BUSINESS A 'FAIR RENT' FOR THEIR USE. HOWEVER, A PORTION OF THE HOUSE WOULD BECOME AN ASSET OF THE BUSINESS FOR LATER TAX PURPOSES.

Being that Germany joined the exchange rate mechanism and subsequently abolished their currency soon afterwards, coupled with the decision that we were going to sell the house for profit when the work was finished anyway, it would not have been possible for this line of business to be more than a 'one-off' Upon the sale of the house and my notification of a change of address, sure enough I was notified within DAYS there would be a further investigation. The conclusion of this was that I would have to repay the 'building costs' claimed before plus a relevant proportion of the profit on the house sale. - SUCCESSFUL ARGUMENT #3 - I ARGUED UNDER AN ANCIENT TAX LAW THAT STATED I WAS ENTITLED TO USE UP TO 1/6TH OF THE FLOOR SPACE IN MY PLACE OF RESIDENCE FOR BUSINESS PURPOSES, BEFORE IT BECOMES A 'COMMERCIAL SPACE'. THE TAX MAN WAS VERY PI**ED.

Investigation into all my business interests commenced. Every last piece of paperwork, stock and my computer were taken away as 'evidence'. Their excuse in obtaining a warrant was that I had been unable to demonstrate where I got the money to pay for the building extension. Although it was finally proved and conceded that I had won a substantial amount by gambling, they were still not happy and looked at every last item. They were only able to come up with two things they were not happy about:

My 'businesses' owned several safes and a substantial amount of computer equipment. I had regarded these items as either having a 'useful life' or being of 'some resale value' for a maximum of 3 years and had started to charge depreciation accordingly. The tax man argued that these were capital assets, and that no depreciation could be charged. Rather, I could merely offset my annual capital allowance against them, on the basis of a 25% reducing balance of the cost each year. After a quick calculation, I accepted the decision, and then in the next breathe I informed him that I hadn't actually used any of my capital allowances in the years concerned so I would therefore be writing the lot off. - SUCCESSFUL ARGUMENT #4 - ALTHOUGH, AT THE TIME OF THE BUSINESS CEASING, THE COMPUTING EQUIPMENT AND SAFES HAD SUBSTANTIAL 'MARKET VALUE', I SUCCESSFULLY ARGUED THAT THEIR VALUE FOR TAX PURPOSES WAS NOT THEIR CURRENT 'REPLACEMENT COST' BUT THE NET PROCEEDS IF I WAS TO SELL THEM. I DEMONSTRATED THAT AS THE COMPUTER EQUIPMENT WOULD BE CONSIDERED OBSOLETE, AND THE SAFES WOULD COST MORE MONEY TO MOVE (BY COMMERCIAL CRANE AND TRUCK) THEN OVERALL THEY WOULD NETT £ZERO. I WON THE POINT AND CONSEQUENTLY PURCHASED THE ASSETS FROM THE 'CLOSED' BUSINESS FOR £1.

The Coup De Grace was the fact that the winning of the above arguments (which would not even have occurred had the tax man not poked his nose in anyway) meant that a 'loss' of $30,000 to the business on the building work, plus a write off of $15,000 of book value on the capital assets, meant that I had actually made a loss that year!

The tax laws allow you to offset any business losses against 'business related profits' for the previous 3 years. As a 'sole trader' it was easy to argue that all my different business earnings fell into this category.

IN SUMMARY - The tax man had been expecting to collect $30,000 from me in that year. I had been prepared to pay about half that amount. The tax man got nosey, screwed up, and ended up PAYING ME $3,000. Not only that, but he also had to pay interest on te refund and compensation for the time that I claimed I could not earn money while my computer was 'impounded' as a simple request to 'let me copy a few files from the computer before it was taken away' was refused.

TO THE TAX LAWYERS, BUSINESSMEN AND CPA'S on the board... What would I have got away with in the US???

REMEMBER THIS - although he is 'obliged' to, the tax man will not necessarily inform you of all your entitlements to claim or offset - thats is for you to find out, determine or argue. However, be damn sure he will try to charge you on every bit of income he can lay his eyes on, and even try to assess you on some that he cant!