When cost of scam is tax deductible
April 2017: The Croydon Tax Discussion Group recently heard about a case where the cost of an invoice fraud was allowable for corporation tax, but the answer would have been different if a director had been involved.
A member of the Tax Discussion Group raised an issue regarding the tax consequences of payments made to a third party that were part of an invoice fraud scam. The issue involved a company’s administrator, who had been contacted by a fraudster, claiming that the company had a substantial invoice due for settlement that had been overlooked by the company. The amount due was more than £15,000. The fraudster explained that the payment needed to be made to debt collection agents rather than the company.
The administrator forwarded the monies demanded as he was anxious to avoid court proceedings for the monies.
The company then determined that the arrangements were part of an invoice fraud arrangement. But the issue here, for the Tax Discussion Group, was whether the payment would be an allowable deduction in the company’s corporation tax return.
The member was able to confirm that:
- the payments were made in good faith;
- the police had been notified; and
- no staff were believed to be involved in the transaction.
Hence it was agreed that the payments would be allowable for corporation tax.
This conclusion would be different if a director had been involved in the arrangements to extract monies from the company using false invoices. In such cases the amounts would not be allowable tax deductions.
Each month (with the exception of July & August) the Tax Discussion Groups in Croydon & South East London meet to discuss client tax issues on a no-names basis. These meetings are free to attend and normally cover over a dozen tax issues raised by those attending.