In Hong Kong, there are still many industries applying large amounts of cash to settle labour wages or suppliers’ invoices, such as renovation contractors, small restaurants, transportation logistics, etc.

The Inland Revenue Department has a regulation on keeping proper business books and records, requiring all taxpayers (including salaried employees and landlords) to keep “appropriate” financial records for seven years in order to provide information for tax assessment purposes at any time.

The word “appropriate” mentioned above is a relatively vague term. There is a difference between the way large companies and small businesses keeping “appropriate” financial records, but it does not mean that small business owners need to do this work well.

For example, for cash expenses, the above industries can use a daily logbook to record official receipt, payee name, ID number, contact information, nature of expenses, etc. as “appropriate” records. Do not pay without no record, otherwise the boss will only find trouble for himself.

A few years ago, our firm handled a case where the client was a medium-sized courier service provider who had to handle a large amount of mails and parcels every day. Over 50% of the employees were part-time, including housewives. Therefore, the company had to pay the part-time employees in cash every day, but the accountant was neglectful and the boss was too busy to pay attention. Eventually, when the Inland Revenue Department asked for information, the company was unable to provide “appropriate” records of expenditure, consequently the tax officers made an estimated assessment of profits for the past six years, requiring a total tax payment of about HKD 2 million!

The director of the company was introduced to our firm by a friend and we accepted the appointment as their tax representative. During the initial inquiry into their business processes, we discovered a major cash expenditure loophole and immediately designed a set of “internal control rules” for the company to follow as soon as possible. Using several months of data as a foundation, we adjusted the company’s gross profit margin and calculated the business income for the past six years using this updated “correct” gross margin. Finally, the tax officers accepted the proposal to close the case and completed the investigation within a year. The total amount of taxes and fines was approximately $700,000 and the owner was able to bear this amount. Do not use “don’t understand,” “too busy,” or “thought” as reasons for defense. The tax officers simply will not listen to you.