One of the things that is often overlooked when a new business opportunity is embarked upon is the issue of any corporate or personal tax that might have to be paid as you go along. The penalties for getting your tax administration wrong can be quite severe so it pays to do a little research before you start a new business.

My first thought is to scare you a little in respect of problems that can occur if you neglect your annual tax return. I am a fraud investigator by trade and often have to deal with proceeds of crime hearings when a criminal has been convicted of some crime. Let me describe one unfortunate case I happened upon recently.

A sole trader bought and sold second hand cars. He was quite good at it and made a reasonable living. At some point he became aware that he should be paying value added tax (VAT) as he had exceeded the threshold for this particular revenue. So he registered for VAT and employed a friend who was also a bookkeeper to file his quarterly returns, at which time he would pay over around £5,000 in VAT to HMRC.

All well and good. However as he traded in cash, very successfully as it happens, he had no credit rating and he encountered a problem when he came to try to obtain a mortgage to buy a house. A sharp mortgage broker helped him to get his mortgage by being a little creative when filling out the application form. Even though the trader intended paying his monthly installments out of his business earnings, he was convicted of mortgage fraud and went to prison!

As he also had a minor offence of handling illegally imported DVDs – this allowed the authorities to assume that he had a criminal lifestyle. This meant that they could confiscate everything he owned – and ask for even more! If the businessman could not pay his confiscation order (he plainly had not enough assets) he would have a default sentence of 3 or 4 years to serve (with no time off for good behaviour). Normally a person in such a position can mount a defence to show that his business and income were all legitimate (even if there were digressions of a few pounds for the DVDs and – let us face it, nothing was gained from the mortgage fraud which wasn’t even his fault).

At this stage the businessman was unable to present his accounting records to explain his business as he dealt with cash – and it emerged that he had not paid any income tax for several years – because he thought the VAT was enough!

So we have a naive businessman who hasn’t really done any harm – has not received any appropriate advice and now finds himself with a bankruptcy order against him and another few years to stay in jail. When he gets out he will still owe the authorities around £200,000. All this was because he did not keep proper records and pay a total of around £30,000 tax over a few years.

Now we are not going to start a businesses with loans from dodgy brokers and we are probably not intending to dable in a few illegally imported DVDs. But we should take this story as a lesson to keep proper accounting records and ensure that our tax affairs are straight.

It is so easy to start a business and in the early days when you are not making a profit you might not need to think of the tax you will have to pay when you do. But remember, you future tax bill can be reduced by all the costs you are incurring now – so keep good records, register with the tax man and ensure you have the correct advice about all your obligations. It is easy to get free checklists from organisations such as Business Link.