Don and Lynne Corrigan own and run a small hotel and restaurant in Devon. They have lived near by with their two children since buying the business about 15 years ago. Due to long hours, much of the family's time has been spent at the hotel, taking meals and entertaining family and friends there. Don also plays the generous host and often treats regular customers to the occasional free drink, regarding this as business entertaining.
The Inland Revenue has recently made a random inquiry into Don and Lynne's latest self-assessment return. The inspector has identified that many of the goods and services provided for friends and relatives, together with the free drinks for favoured customers, have been charged to the business.
As a result, the inspector has carried out a "business economics exercise", from which he has estimated that the business income in the year of review has been under-declared by £50,000. Also, on the basis of his findings, the inspector proposes seeking tax on similar under-declared income for each of the previous 15 years. The potential amount of tax at stake is about £175,000. With interest and a penalty to be added, the total amount potentially payable by the Corrigans is about £245,000. There could also be substantial VAT implications.