A precious metal trader handled subcontracting and import/export businesses. His annual turnover was about HK$100 millions. The firm’s financial statements revealed a gross profit margin of 3-5% and hence, the net profit of the firm was around a few millions a year.
The subcontracting base was located inside an industrial building in Kowloon, having a net area of around 300m². The factory had hired 10+ workers who were mostly employed under apprenticeships. The boss was the master. This company’s owner was quite mean in paying remunerations and welfares to the workers, although they were often asked to work overtime. Unfortunately, the workers’ pays were always deducted with minor and unreasonable causes raised by the boss. This had often created anger and disputes between the employer and the employees.
One day, an event happened. An apprentice, who had worked for the company for five years, had made certain mistakes in processing some precious metallic products. The mistakes led to late delivery to an overseas customer which had resulted in claims and penalties. The boss definitely raged at this apprentice who was told to have a large deduction on his wages so as to compensate part of the losses sustained by the company. This undoubtedly arouse fights between the two and the boss sacked the apprentice immediately. The case was brought in front of the Labour Tribunal to resolve the complaint by the apprentice.
After leaving the company, this employee still felt unsettled because the ex-boss was really a crappy person. He then took a revenge to write an informant letter with certain evidences to the Inland Revenue notifying the Department that the ex-employer was suspected to have evaded taxes. After certain internal procedures carried out by the Department, the tax authority had then determined to conduct tax investigation on the trading company’s affairs.
The proprietor himself knowingly had hidden profits. For annual tax reporting purpose, he merely gathered some data and asked a non-practising firm to submit the tax returns on his behalf. The submissions were basically not the truth. A month after the proprietor was informed of the investigation, an experienced professional accountant was appointed to handle the problems for him.
The tax investigation was long and tedious. Disregarding the details, we consider that there is one important point worth mentioning here. The trading company had large amounts of precious metallic “wastes” which could be sold at about 10% of the open market value of the original raw materials. These wastage sales had not been recorded in the company’s books and cash cheques received were deposited into the personal bank account of the proprietor. Simply to say, this tax payer had actually under reported his income exceeding HK$10 million a year!
To close the case, this tax payer was taxed and fined up to HK$16 million. This was considered right and just. Please remember that proceeds from sales of wastages are also business income which must not be regarded as “private pocket monies” not relevant for tax reporting. Moreover, be good to others is doing your own good!