When it comes to retail businesses in neighboring district there are a lot of tax investigation cases that can be shared with you. One of these cases is particularly interesting and worth introducing to everyone.

There was a flour master who came from Mainland China more than 20 years ago. Because of his excellent skills and the fact that his shop was located in a densely populated residential area in Hung Hom, business was booming. A family of seven (with five children) was busy from 7:30 in the morning until 7:30 in the evening and they were making money nearly tiringly.

The master’s family lived in the back of the shop and used the attic for the children to sleep, eat and study, and they also help sell noodles and collect money. The whole family only took three days off during Chinese New Year.

Even earning substantial profits, the owner never reported his income honestly and only hired a tax accounting clerk to prepare the annual accounts and tax returns. After more than a decade of effort, the small business owner became a big business owner and successtully bought the shop and more than a dozen residential properties with a total cost of about HK$50 million, without a mortgage.

After the Inland Revenue Department conducted a follow-up investigation of this case, it was not difficult to find a major problem, and the owner was questioned and prepared for an in-depth investigation. The taxpayer, after being introduced by a friend, found our firm to help with the problem.

The details of the investigation and how to negotiate with the tax officers will not be detailed here. But there is one thing that is worth telling the public, which is the issue of “living expenses”. The more living expenses, the more it shows that the taxpayer needs a higher income to meet these expenses, which can be inferred that the taxpayer is hiding more income, which eventually constitutes more tax and related fines that need to be paid. How did the owner of this noodle shop calculate his “living expenses” based on estimates from the past 6 years? The IRD initially estimated it to be $500,000 per year, but our client responded with an estimate of $200,000 per year. However, the final settlement was only $100,000 per year. This low figure might seem surprising, but it could be achieved if the client provides sufficient information and reasoning to support his estimate, and the tax representative argues their case effectively. Ultimately, an understanding and agreement with the tax officers might be reasonably made. You might appreciate that just the “living expenses”, calculated over 6 years, we were able to save our client a substantial amount of tax and penalty, approximately $700,000.